Economists are the only 'professionals' who can be wrong 100% of the time and not lose
their jobs
Inflation is just another way to fleece the sheeple
Thinking about inflation without considering the cost of oil (and energy in general) is deeply flawed.
Inflation via rising cost of oil is the main vehicle of lowering the standard of living in developed
countries. So we have the key channel of inflation via rising energy costs.
Also that are suggestions that stock market (supported by your 401K investments) functions as a new
channel where "excessive money supply" is consumed, creating a bubble. So when you buy 401K
investment in inflated stock market (and substantial part of 401K investors use cost averaging)
you essentially use "depreciated dollars" not that dissimilar to buying food with depreciated
marks in Weimar Germany. In a way stock market became real inflation outlet: saving of sheeple can
be confiscated
via a stock market crash like in 2001 and 2008.
At the same time labor became cheaper and cheaper. And this is a clear deflationary phenomenon. With
the current rate of unemployment, it is employees who hold all the cards in the job market.
Which is what neoliberalism is about: decimation of power of organized labour.
Taking into account instability, greed and recklessness of financial sector, which hold
the society by the throat by controlling the government nothing can stop Fed from printing money under some legitimate or illegitimate
pretexts to avoid repetition of 2008 with a new "fall" player instead of Lehman. My impression is that all
this talk about tightening is just "open mouse operations" -- a smoke screen for competitive devaluation
the Fed is engaged in. Japan is probably a very good model of the USA development decades ahead.
Oil prices increased despite recession and this alone suggests that inflation in a very fundamental
sense is up, not down, because at the end of the day there are natural limits of energy efficiency and
in some cases the current civilization of pretty close to them. And at end of day Fed is just a bunch
of mostly clueless careerists leaded by a man who deliberately did not noticed housing bubble (aka
Arsonist Ben) and
who was able to fit Greenspan Fed (which suggest absolute absence of spine).
In a way real money printing is done by OPEC, Russia, and other oil producing countries. Fed is just
a level of speculators on top of this with the US military machine as a supporting tool to ensure that
oil is traded in dollars. All those talks about renewable energy are just talks, as share of renewables
in total energy balance is pretty small and is expected to stay on the same level. So the current civilization
does depends on fossil fuels and can get into deep troubles as soon as it runs out of them. That means
that energy prices, especially oil prices reflect the real inflation that affects the society.
and high current oil prices depress economy to a stagflation status which is hidden by underreporting
inflation to squeeze positive GDP growth out of economic data. And this is a more fundamental
problem then just "number racket": nobody understand if capitalism works with negative economic growth.
It is an economic system that requires positive growth.
Rise of EROI means that the current life style needs to be drastically downsized and that what we
see in the USA outside top 1% (or probably top 20%). All those talk about stock market prices are pseudoscience
or worse as at the end of the day it is just different private currencies with floating rate of exchange
and their level means very little in the general situation for the civilization as we know it.
If you counting inflation then in "constant dollars" S&P500 was barely beating inflation from 1994
to 2013. The value of S&P should be multiplied by 0.62, to get the reading in 1993 dollars. That means
that most of S&P500 gains are due to inflation:
Year
Inflation
%
Cost of $1 item in 1993
dollars
Dollar value in 1993
dollars
1993
3
1
1
1994
2.6
1.026
0.974659
1995
2.8
1.054728
0.948112
1996
3
1.08637
0.920497
1997
2.3
1.111356
0.899801
1998
1.6
1.129138
0.885631
1999
2.2
1.153979
0.866567
2000
3.4
1.193214
0.838072
2001
2.8
1.226624
0.815245
2002
1.6
1.24625
0.802407
2003
2.3
1.274914
0.784367
2004
2.7
1.309337
0.763745
2005
3.4
1.353854
0.738632
2006
3.2
1.397178
0.715729
2007
2.8
1.436299
0.696234
2008
3.8
1.490878
0.670746
2009
-0.4
1.484914
0.673439
2010
1.6
1.508673
0.662834
2011
3.2
1.556951
0.642281
2012
2.1
1.589647
0.629071
Most professionals now think that the most probable scenario is "deflation and inflation; not
deflation, then inflation": both inflation and deflation are now compartmentalized.
There are clear signs of inflation in financial assets (stocks, bonds) and food prices in 2013. In
essence we can assume that there are two types inflation: asset price inflation (financial bubbles)
and consumer price inflation. Some authors think that asset price inflation (financial bubbles)
is more deadly for economy. Professor Charles Kindleberger analyzed episodes of high asset price inflation
and stable or declining wholesale and consumer prices indices in the US for 1927-1929, Japan 1985-89,
and Sweden 1985-89 and noted that central banks typically fail to intervene to arrest asset price
inflation, essentially for two reasons: central banks never undermine a stock market boom,
and they are concerned only with consumer price inflation.
This is an important observation. Rising stock market (asset price inflation) is an indicator of
unhealthy speculative economy. It is not a sign of a healthy economy as many people assume. Inflation
just found new channels in the era of computer and electronic stock exchanges.
So the amazing rise of S&P500 to 1650 in May 2013 might be not connected to the recovery. It might
well be a demonstration of asset price inflation. After all stocks can be considered to be private money
of public corporations (like Fed they can print them or buy them back) and stock price -- an exchange
rate of this currency to dollar. As such it is more of a harbinger of a new financial crisis, then sign
of a recovery. And this time the crisis can strike with double force as FED spend all their ammunition
, and are pinned against the wall by their own policies of helicopter money. They can do nothing
as they understand that they are in
zugzwang and any their
action is destructive.
Please note also the recent episode of "haircuts" (aka confiscation of assets) as a solution when
central bank is paralyzed. This might be another warning sign. A very interesting recent example
was the situation with Cyprus, when EU refuse bail-out without haircut and a significant portion of
deposits above $100K was simply confiscated.
That means that inflation can limited to some sectors such as financial assets and commodities which
are not reflected in a typical inflation indexes. In fact, during the the recent decade we have seen
a high level of inflation of prices of commodities like oil, copper, etc. Along with the deflation of
other assets, especially housing. FT Alphaville
has called it “compartflation.”. There is also a term
Biflation(Wikipedia)
Biflation (sometimes mixflation) is a state of the
economy where the processes of
inflation and
deflation occur simultaneously.[1]
The term was first introduced by Dr. F. Osborne Brown, a Senior Financial Analyst for the Phoenix
Investment Group.[2] During Biflation, there's a rise in the
price of commodity/earnings-based
assets (inflation) and a simultaneous fall in the price of debt-based assets (deflation).[3]
The price of all assets
are based on the demand for them versus the volume of money in circulation to buy them.
With biflation on the one hand, the economy is fueled by an over-abundance of
money injected into the economy
by central banks. Since
most essential commodity-based assets (food, energy, clothing) remain in high demand, the price for
them rises due to the increased volume of money chasing them. The increasing costs to purchase these
essential assets is the price-inflationary arm of Biflation.[4]
With biflation on the other hand, the economy is tempered by increasing
unemployment and decreasing
purchasing power. As
a result, a greater amount of money is directed toward buying essential items and directed away from
buying non-essential items. Debt-based assets (mega-houses, high-end automobiles and stocks) become
less essential and increasingly fall into lower demand. As a result, the prices for them fall due
to the decreased volume of money chasing them. The decreasing costs to purchase these non-essential
assets is the price-deflationary arm of biflation.
What is different this time is that expectation for a resumed growth might never materialize due
to "energy peak" unless some technological breakthrough happens. World bank estimate for 2013 for the
USA
Prospects for the Global Economy - The global outlook in summary, 2011-2015 is 1.9% which is close
to stagnation as accuracy of measuring of inflation is low (+/- 1%). But in any case this means slowdown
from 2012 (2.2%).
Confiscation is another danger. The principal difference is that inflation can be anticipated to
varying degrees. Expropriation of ordinary people's account holdings, something that hitherto only Nazis
and Communists have indulged in, but now Cyprus banks were forced to do however, cannot.
Peak energy is the most important constrain for further economic growth: unlike money, barrels of
oil can’t be printed out of thin air.Resources limitations tend to depress the standard of living
for majority of population. Growth of inequality due to recent rise of
power of financial elite exacerbate the trend. Price of many agricultural commodities strongly correlates
with the price of oil. Huge debt overhang is another important factor.
That means that
2006/08 Commodity Price Boom was essentially a huge spike of inflation (in which big banks and hedge
funds played a distinct role of enablers) that went almost undetected or what is more probably, was
suppressed. The dog does not bark if you muzzle him.
I think that the problem of inflation is essentially a political problem.
It is the issue of solvency of the ruling elite be it reckless nationalist of Zimbabwe
or patchwork of independent states with nationalists in power but with interdependent economies like
in case of dissolution of Soviet Union and Yugoslavia or the result of overborrowing and wasting/appropriation
by the elite of foreign loans. Which are very quickly transferred back to foreign banks. That
latter is a classic neocolonialism "development" scenario.
One way any serious crisis of ruling elite reveal itself is via inflation (or, in other words, when
the only option is running printing press at full speed no matter what the consequences are, because
the ruling elite run out of other options). Only with complete loss of political control this inflation
takes form of hyperinflation -- a collapse of currency. Without South/North split, the most plausible
scenario is a gradual deterioration of US fiscal position but sudden collapse of currency looks pretty
remote.
On the other hand as Jim Grant noted: “Deflation is a crisis of money
and credit, a symptom of which is falling prices.” In a way extremes meet, so deflation
can quickly turn into rampant inflation. And the first robin in such cases is rapid depreciation of
currency ("crisis of confidence") and only then rapid change in the bonds rates.
Huge deficits are like a ticking time bomb with a fuse of uncertain length.
When the bomb is ready to go off, it’s too late to react. But at the same time
many of government financial obligations are now adjusted for inflation (TIPs are one such example)
so you need probably need an actual collapse of governance to get such a result. The was the case of
ex USSR republics in 1991-2000, and might happen in case of breakup of the USA. At the same time
the amount of dollars in circulation in the world is huge and dollar remain the key currency in which
oil is prices. That creates inertia
That means that the monetary policy cannot be studied, or understood, in isolation from the overall
policies of the state, especially engagements in costly adventures like optional wars (read Iraq and
Afghanistan). Countries engaged in wars are generally more susceptible to the bouts of inflation. Empires
especially are prone to overextending themselves and succumbing to inflation.
Talks about Central banks independence make slight sense only during good times, but should not overshadow
the real picture: any Central Bank is an agent of state, the agent of the ruling elite. In tough
times all correlations became one. And Central Bank behaves as a puppet of central government it always
was. That's why most states monopolizes the supply of money within its own territory.
Monetary, fiscal, military, political, and economic issues are all intertwined. Military adventures
is probably the most common source of inflation as an informal coalition of groups with vested interests
in the continuous development and maintenance of weaponry constitute the important part of elite and
that naturally leads to attempts to use its power for pursuing the state interests outside of its borders
(war is a continuation of policy with other means). The U.S. military-industrial complex on an annual
basis accounts for 47% of the world's total arms expenditures. The
Military
budget of the United States for the 2009 fiscal year was more then half-trillion dollars. BTW in
the draft of his famous farewell address to the nation, Eisenhower initially used the term military-industrial-congressional
complex, which indicates the essential role that the United States Congress plays in supporting
and expanding the military-related industries.
While a war usually lead to inflation, the victory against major adversary can lead to disinflation.
For example, low inflation (and great stock market run) of 1991-2000 was at least partially connected
with the defeat of the USSR and subsequent looting of xUSSR states as well as extending dollar hegemony
to this area; this was once in a century event which added almost a billion consumers and allow western
corporation (financed mainly by US banks) to buy assets for pennies on a dollar. Dollarization of huge
region allowed Greenspan's Fed to pursue extremely loose monetary policy. Approximately in 2000 situation
changed and reckless policy of the Fed led to the collapse of housing bubble which was consciously inflated
since 2000 as there was no other alternatives to growth. The subsequent financial crisis in some ways
was similar with the situation in which Great Britain has found itself after the WWII when its empire
collapsed. It cost the USA political influence as
neoliberalism, the ideology that defeated
communism, was discredited. The latter cost the USA a part of its global influence; also penetration
on foreign market by US banks and global corporation became more difficult and probe with more risks
as recent
Prism
scandal suggests. Google, Yahoo, Microsoft and other leading US tech companies got under negative
light in foreign markets including such important markets as China and BRICS.
In some way we can view the current crisis not as a new event, but as a resumption of an old crisis
which started in late 80th just after the long holidays caused by collapse of the USSR.
Within the state monetary policy always serves the needs of the ruling elite. That's the primary,
albeit unstated, goal of Fed monetary policy. The real goal of Fed policy is first of all preservation
of the power of Wall Street Banks and achieving positive nominal GDP growth no matter what the costs
for the population. Similarly it is the primary goal of both state diplomacy and partially state military
operations ("war
is a racket"). If it also happens to enhance the standard of living of ordinary people (sheeple)
that's just a side effect. This idea can help understanding perspectives of increase of inflation in
the USA: they are connected with severe deterioration of the USA global position.
On the other hand the current debt crisis is the crisis of ruling elite which is disproportionally
represented by FIRE sector This factor and excessive greed of this part of the elite is a destabilizing
factor which might lead to high inflation in the future. But again, for hyperinflation a crisis of ruling
elite is not enough (especially if the current is a global currency), high inflation in xUSSR space
after the dissolution was connected with the collapse of ruling elite.
The advice that the Emperor Septimius Severus gave to his two sons distills the typical way of conducting
monetary policy: "live in harmony; enrich the troops; ignore everyone else."
You just need to change "troops" to "haves and have more" (which, of course, includes military
establishment and bankers) to make this quote very similar to one that was once uttered by world the
most famous dyslectic, George Bush II.
While the level of inflation is the result of demands of state (wars are usually inflationary events),
inflation like GDP is an aggregate metric which often camouflages several, often opposite trends. Like
GDP contains a lot of harmful for the society economic activity (junk GDP), inflation also can contain
some positive and some negative components (food inflation vs. stocks and financial assets inflation
aka Bernanke bubble).
Moreover inflation in one sector usually co-exists with deflation in some other sector. For example
in 2008 in the USA we saw coexistence of two opposite trends:
Deflation (cars, houses, computers, laptops, cameras, stocks, hotel prices, gas (Jan -
March, 2009)
Inflation (gas, heating costs, apartment rents, food, retail items such as clothing, transportation,
restaurant prices, car repairs, car parts, etc)
Some items changed direction and thus there is no single camp to which they belong. Gas
first became an inflationary item, then deflationary and now again inflationary item. Generally 1
cent increase of gas price means 1 billion a year loss for America consumer, so fluctuation of oil
price has effect bigger effect then Obama's stimulus.
In the inflation/deflation debate, I think what most people mean under the term "inflation" is their
own metric related to "personal cost of living". As such it depends on income and "propensity to consume".
Unemployed do not consume much if at all big ticket items and for them rising priced for those items
(for example new cars) are irrelevant. Based on
Japanese experience, we may well see deflation in big ticket and discretionary items (housing, autos,
boats etc..) with modest inflation in daily expenses (food, public transportation, etc) and, especially,
energy (although recent peak oil prices stimulated development of new fields which previously were uneconomical
to develop and as such new capacity will eventually come to the market and temporary depress prices).
In a long run inflation is correlated with the cost of energy and from this point of view the current
economic troubles for the USA started when energy costs started to rise (approximately in 1998). With
oil above $100 per barrel, many components of the infrastructure of modern world are unprofitable to
operate.For example the cost of transportation of goods
from China became the limited factor in outsourcing of production of "heavy, low cost" goods and, for
example, makes manufacturing of furniture in China significantly less attractive.That partially can be compensated by lowing the speed of the container ships to conserve
oil but this path has obvious limitations.
In any case, when discussing inflation you cannot put the fiat currency cart before the energy horse.
You cannot print oil which is the new gold ("black gold") of modern world. Oil is the real anchor of
fiat currencies and in this sense it is not the USA but Arab states who
are the issuers of world reserve currency.
Predicting inflation, especially short term, is notoriously difficult. Dollar may be a currency under
pressure but it can strengthen not weaken, if US economy proved to be less bad that other major economies.
Still one long trend -- growing price of gasoline -- is unmistakable due to depletion of oil reserves.
As price of gas should be factored in all modern activities the future belongs to inflation not deflation.
Note that the price of oil in late 2009 was hovering around $70 despite tremendous drop of economic
activity, almost collapse of some energy intensive areas of economy like construction and car manufacturing.
Still nobody knows what will happen in the USA the next year or the next decade, so all the posts
reproduced below are a mere speculation. But one thing is certain: inflation in the USA by-and-large
depends on the world outside the USA and that ties hands of Bernanke Fed (running printing presses too
fast can produce a "run from the dollar", which now the USA can't stop militarily as it did in Iraq).
There is also intricate dance between the dollar vs. euro as Europe is also in crisis and euro is the
only other major currency. The same is true for yen and Japan. For dollar to strengthen, the economic
situation in the USA should not be good, it just should be marginally better then in countries of Eurozone.
There are a lot of junk thinking and posting about inflation, generated by so called economists (with
the neoclassical economists being as close to agents of financial oligarchy as one can get) so beware
the disinformation in so called research papers and posts. Including this one. Here are some ideas distilled
from the posts below which look to me, as a programmer, more plausible then others:
CPI has serious flaws that make it almost unusable as a static measure of inflation(and
that means that TIPS are far from being a perfect protection from inflation), but still useful as
a trend as it does not take into account cost of medical services, underestimates cost of housing
(using owner equivalent rent) and allow for substitutions in food basket. There are also multiple
CPI indexes (see Common Misconceptions
about the Consumer Price Index Questions and Answers)
The headline CPI called All Items CPI for All Urban Consumers (CPI-U). All consumer
goods and services, including food and energy, are represented in the headline CPI.
Treasury Inflation-Protected Securities (TIPS) returns are based on the All Items CPI-U.
Core CPI -- All Items Less Food and Energy. The latter series, widely referred
to as the "core" CPI, is closely watched by many economic analysts and policymakers under
the belief that food and energy prices are volatile and are subject to price shocks that cannot
be damped through monetary policy. Individual income tax parameters and
CPI-W All Items CPI for Urban Wage Earners and Clerical Workers which is typically
less the CPI-U. It includes several groups with the most important being food and beverages (16.94%),
Housing 41.3%, and Transportation (17%). Social security and federal
retirement benefits are updated each year for inflation by the CPI-W
The economic policy of the US since 1982 has been to stimulate consumption and promote debt
based growth based on status of the dollar as a reserve currency. Resulting account deficit in
a long term is inflationary.
Existence of such agencies as Fannie and Freddie which are borrowing short and lending long
ensure that US government will think twice before unleashing inflation to cut the debt load.
Generally the whole housing sector will crash if 10 years rate goes to, say, 10%. The whole US
mortgage industry (and that means the whole banking sector) is addicted to low rates.
Several types of government bonds (TIPs) are indexed to inflation and that also makes the
solution of the current debt problem via inflation less attractive. Gold boom is another limiting
factor, as it implicitly undermines the status of dollar as world reserve currency.
There is no risk of hyperinflation except in case when state falls apart (Weimar republic,
former Soviet republics and Eastern European states after the dissolution of the USSR, Zimbabwe,
etc).
In the list below items in black are deflationary and items in red are inflationary:
Conventional oil production has peaked. "What
this means is that in a few years, if the money-printers and debt-incurrers can manage to prop up
zombie growth for a few more years, and this manages to bring on resumed high oil consumption, this
artificially stimulated growth will hit its head on an oil supply ceiling, and that’ll be the end
of exponential “growth” once and for all." Peak energy also means that assets like stocks backed
by the future production growth, and repayment of current debts, must decrease in real value.
We entered low growth period with
stagnant or negative GDP growth. This
is not a business cycle problem, but an absolute fossil energy supply peak (or more correctly plato).
Energy efficiency will gradually rise, especially in private transportation (Prius). Growth in aggregate
"GDP" as measured by actual economic activity has peaked as a result of the peaking of fossil energy
inputs and first of all oil.Drop on gas prices we experienced was temporary and caused
by "great recession"
Market.view Inflation or deflation (The Economist, Jul 27, 2008)
But what if the decline in the oil price is the result of a global
recession? That would hardly be positive for stock markets. And what if a falling
headline inflation rate gives the green light for the central banks to cut interest rates? Coupled
with the willingness of the authorities to rescue the banking system,
that would suggest a long-term inflationary bias in the economy and thus be bad news for Treasury
bonds.
“Investors should not be distracted or trapped into dismantling
portfolio inflation defences by either the current growth slowdown or by the vagaries of the
spot oil price,”
says Tim Bond, head of global asset allocation at Barclays Capital, in his latest note.
Tremendous debt overhang with no real reforms. Any nation can only generate a certain amount of income to support debt.
Printing money to cover debt interest, like Bernanke Fed does, cannot continue indefinitely.
The current elite, whether you call them banksters, financial oligarchy or plutocracy, still
trying to preserve the status quo and that leads to stagnation:
"More broadly, there is sophisticated window dressing in the pipeline
but no real reform on any issue central to (a) how the banking system operates, or (b) more broadly,
how hubris in finance led us into this crisis. The financial sector lobbies appear stronger than
ever. The administration ducked the early fights that set the tone (credit cards, bankruptcy, even
cap and trade); it’s hard to see them making much progress on anything – with the possible exception
of healthcare."
... ... ...
"The more radical change in the system is needed and that the administration so far is “window
dressing.” For the past thirty years the economy has overcompensated at the top and undercompensated
at the middle and working levels of society. The current crisis was largely created by this pattern
and will not resolve until the wealth created flows more evenly throughout society."
Despite rhetoric, real-life Washington including Obama and his administration
has tacitly acknowledged the degree to which our national economy has become dependent on the financial
sector (finance, insurance and real estate - or FIRE).
It will do whatever it takes to keep it afloat.While financial market stabilized,
it remains the Wild Wild West with derivatives, high frequency trading and other modern methods of
hacking the fiat monetary system practiced by large banks to fleece the sheeple. Banks generally
profit from crashes, so from that point of view stability (low inflation) is less probable (because
it is less profitable) then sliding into some extreme.
"I’m continually amazed that business is being conducted as if everything is OK.
There is no longer any economic logic behind the working of the financial
markets, the only thing keeping everything working is inertia. No real change has
occurred, no new system, guidelines or regulations to improve a broken system.
Psychology is a funny thing, somehow the people are made to believe that everything will be
fine, so it is, even though the ground under their feet is constantly shifting."
Debt burden via housing, credit cards, etc still remains a crushing burden for substantial
fraction of US households (house poor). Most of "house poor" have diminished assets and access
only to high and/or ultra-high interest credit, if any. High unemployment with no end in sight (remains
above 7% since 2008) deteriorate the situation even faster. This effect
is deflationary. Still consumption in the USA is first and foremost is
consumption of upper 10% so it is by definition very resilient to economic
shocks.
No one has offered a credible story for the next engine of growth —
an inventory bounce in Q3 2009 is not a recovery, and the stimulus is too small and only dribbling
out (even gas prices fluctuations have more impact then stimulus). In case of systemic
crisis you can'tspend your way out of this crisis. Like Greenspan's
policies directly led to the current crisis, excessive spending right now might lead to an even greater
crisis in the future.
I do not see stimulus spending as meaning, in any way, bailing out banks and other criminal
organizations. I see stimulus spending, done properly, as spending from the bottom up rather than
trying to feed trickle down (piss down is more accurate).
Spending must occur on infrastructure (Remember any bridge collapses recently? Want more?):
road and bridge REPAIR and maintenance (not new roads and bridges), NEW passenger rail track separate
from the crappy freight track it depends upon now, new/more passenger rail in municipalities and
across the nation to help get people out of cars, off the highways, and into more eco-friendly
and efficient means of travel, investment spending on alternative energy instead of continuing
with coal/oil, MORE funding for college education, etc.
Do NOT spend on billionaires, banks, and hedge funds. Screw them.
CUT military spending and quite most of our 750+ overseas military
bases. We'd save billions a year AND still be be spending more than any possible
opponent even if we cut "defense" spending (yeah, right, defense) by 50% for starters.
British exceptionalism did not die an easy death, and I suspect American exceptionalism will not
do so either.... Increase taxes back to what they were on the upper income levels BEFORE Bush/Cheney
came along. Then slowly ratchet them back up to where they were under Reagan, at least. They'd
STILL be rich, fat, dumb, greedy, and "happy" but they would be paying back into society rather
than leeching off of it as if they are some entitled aristocracy.
Anyway, I just don't understand the idea of "recovery". What will so-called "recovery" be based
upon? The service industry? Is everyone in the US who isn't in finance
supposed to become hotel maids, waiters/waitresses, butlers, Wal-Mart door greeters, and cashiers?
Precisely what is there in the USA to based an economy upon that doesn't merely require that everyone
borrow up to their necks (using, once again, their homes as ATMs) to buy stuff they cannot actually
afford nor need? What is the recovered economy to be based upon? See
Economic recovery and the perverse math of GDP reporting - Credit Writedowns
Artificially low yield creates carry trade which further depresses currency (yen experience).If people are borrowing dollars to buy other currencies to pay for foreign hard assets,
this can accelerate the devaluation of the dollar.
Since GDP is 70% consumer spending that means with continued unemployment, continued foreclosures,
will slightly depress GDP for several years... While in the USA rich consume the lion share and
that make consumption "recession proof", middle-class American consumer is spent. Middle class sustaining
jobs are disappearing (especially in IT). Also financial elite that appropriated most of the country
wealth during the last two decades is now under attack and even those "high power" consumers are
down, if only for political reasons. For "regular" middle-class American consumers it will take an
unusually long time for to rebuilt their balance sheets (and related confidence) to begin spending
again over the longer term.
USA overconsumption vs. China overproduction. The USA currently suffers from overconsumption
that was financed by debt and this means that attempts to sustain this overconsumption are more or
less doomed and threatens devaluation of the currency. China is suffering from overproduction, and
thus China situation is more close to the USA situation during Great Depression in a sense that it
needs to stimulate internal consumption and internal infrastructure build-up. This duality of overproduction
in China and overconsumption in the USA and other Western countries make them more interdependent,
but at the same time this is kind of "mutual suicide pact" which might keep inflation in check.
Is USA today more like Britain of 20th that the USA of 20th? The USA in the 1920s was
the world's biggest creditor, exporter, and manufacturer. This position is more or less analogous
to China's economic position now. That means that is we assume classic Keynesian approach it's China
who can more benefit from huge stimulus that can increase internal demand. But we need to remember
that an important factor for the USA recovery was WWII: at the end of WWII, productive capacity in
the next two biggest industrialized nations, Germany and Japan, had been destroyed. The US
had effectively no competition for its oversized industrial capacity.
Right now USA is in the position very similar to the position of Great Britain during Great Depression.
Like Britain the USA is the country with the world reserve currency. At the same time it is the country
that went into deindustrialization phase similar to war-ravaged Britain and France in 20th. Also
the USA possesses informal empire (see which make analogy with Britain even more close. In a new
book titled The Limits of Power: The End of American Exceptionalism,
Andrew Bacevich argues that although
many in this country are paying a heavy price for US domestic and foreign
policy decisions, millions of Americans simply continue to shop, spend and satisfy
their appetite for cheap oil, credit and the promise of freedom at home. Bacevich writes,
“As the American appetite for freedom has grown, so too has our penchant
for empire.”
Will any New New Deal be effective ? The New Deal did produce an impressive results
with its workfare, including the building of parks and roads, as well as the electrification of rural
America. Obama administration does not have a political will to emulate New Deal, but next administration
might have it (unless wrecking crew comes to power on the strength of tea party movement). You
need to buy quite a lot from China to build anything in the USA now. So it's unclear whom you
are stimulating. This time one of the obvious direction is restoration of (electrified) railway system
and public transportation system which was destroyed by auto lobby as well as efforts to produce
better hybrid, natural gas, or in areas with cheap electricity small numbers of electrical cars (the
grid capacity is insufficient to charge them in most areas if numbers are above 3-5% of total fleet).
Unfortunatly, the sharp drop in oil price in 2008 made those programs less attractive... You need
at least $4 gasoline to make such programs viable in the USA.
"Helicopter money" printed be the Fed The US budget deficit
will reach 10% of GDP next year. And if China and BRIC countries run huge stimulus program they will
deplete their foreign reserves which will join the money printed for the USA stimulus. Anyway inflation/hyperinflation
right now looks like bigger political and economic risk then deflation (note some consider hyperinflation
anything above 20% per annum; you do not need to get to Weimar scenarios for hyperinflation). See
FT Alphaville Marc Faber Hyperinflation coming to the USA Here Faber is slightly over the top.
Please note that hyper-inflation has very specific pre-conditions in foreign currency obligations
and a loss of tax revenue and productive resources. The last cases were Zimbabwe and xUSSR area after
the dissolution of the USSR. Both have had very specific set of socio-economic conditions.
Financial panics are natural consequences of financial excesses. As John Mill observed:
“Panics do not destroy capital; they merely reveal the extent to which it has been destroyed by its
betrayal into hopelessly unproductive works.” In addition what the media reports as a “flight to
quality”, looks more like looting of the developing economies and that might backfire with protectionist
measures.
Financial markets do whatever is necessary to hurt the largest amount of people.
While most people at the end of 2007 and beginning of 2008 tried to prepare to rampant inflation,
at the end of 2008 we have had instead clear (but probably temporary) deflationary trend... To be
more correct there is still deflation of assets like residential and commercial real estate (despite
attempt of re-inflation of stock market -- the major infrastructure project of Obama administration
;-) along with continued but weaker inflation in prices of goods.
Still I would agree with the idea that holding regular Treasury bonds is now extremely risky as there
are limits on buying of government debt and we might be close to this limit. Along with FED actions,
yields were pushed lower by "flight to quality" (or more correctly by looting emerging economies by
repatriation of speculative capital ;-). This process is closer to the end then to beginning and there
are inflows of capital back into emerging countries.
Quotes
""Morgan Stanley published a very interesting research report recently in which they made the
observation that nearly half of all US budget outlays are now effectively
indexed to inflation"
April 10, 2010 at 2-08 am
The Bank for International Settlements (BIS) in April 2010 report noted that
"total industrialized country public sector debt is now expected
to exceed 100% of GDP in 2011 – something that has never happened before in peacetime.
Rapidly ageing populations present a number of countries with the prospect of enormous future
costs that are not wholly recognized in current budget projections. As far as we know, there is
no definite and comprehensive account of the unfunded, contingent liabilities that governments
currently have accumulated.
Federal Reserve Bank of Philadelphia President Charles Plosser said on May 21, 2009 inflation
may rise to 2.5 percent in 2011. --[ And he was right, it was 3.2% -- NNB]
That exceeds the central bank officials' long-run preferred range of 1.7 percent to 2 percent and
contrasts with the concerns of some officials and economists that the economic slump may provoke
a broad decline in prices.
"Very little is written about what will happen when all the dollars, built up as foreign central
bank and private holdings, get spent. Indeed, we believe that not only will the dollars get spent,
but this spending will have massive inflationary implications for America." -Richard Benson
I am 100 percent sure that the U.S. will go into hyperinflation," Faber said. "The
problem with government debt growing so much is that when the time will come and the Fed should increase
interest rates, they will be very reluctant to do so and so inflation will start to accelerate.
May 2009, "FT
Alphaville Marc Faber Hyperinflation coming to the USA
One stark lesson from the ongoing financial and economic crisis is that so-called black swans
- large-impact, hard-to-predict and seemingly rare events - can occur more frequently than generally
believed. With policymakers around the world throwing massive conventional and unconventional monetary
and fiscal stimuli at their economies, we think that it is worth exploring the black swan event of
very high inflation or even hyperinflation.
While such an outcome is clearly not our main case,
the risk of hyperinflation cannot be dismissed very easily any longer, in our view.
We discuss the historical evidence, the conditions that can lead to very high or hyperinflation,
and whether and how it might happen again.
20210413 : U.S. Treasury yields slip despite surge in inflation to 2½-year high by very small number of companies. Treasury yields slipped Tuesday after bond investors shrugged off an increase in U.S. consumer prices in March that sent yearly inflation measures to the highest level in two and a half years. Treasury yields slipped Tuesday after bond investors shrugged off an increase in U.S. consumer prices in March that sent yearly inflation measures to the highest level in two and a half years. ( economistsview.typepad.com )
Inflation also might be coming via the devaluation of the dollar.
Notable quotes:
"... These articles are great at d ..."
"... There are no safe options. TIPS are indexed to the CPI. The CPI is "adjusted" by weighting, substitution, and hedonics to preserve the mirage of low inflation. We are being forced to either speculate in the market or watch our savings get swallowed by inflation. ..."
These articles are great at describing the problem, but not so great at suggesting what investors ought to do to
protect themselves.
TIPS are sometimes suggested, but if the govt is manipulating the reporting of inflation then TIPS
aren't going to be much help. Gold and blue chip stocks... "diversify"? how about some articles that will explore strategies.
There are no safe options. TIPS are indexed to the CPI. The CPI is "adjusted" by weighting, substitution, and hedonics to
preserve the mirage of low inflation. We are being forced to either speculate in the market or watch our savings get swallowed
by inflation.
Strong economic rebound and lingering pandemic disruptions fuel inflation forecasts
above 2% through 2023, survey finds. The U.S. inflation rate reached a 13-year high recently,
triggering a debate about whether the country is entering an inflationary period similar to the
1970s. WSJ's Jon Hilsenrath looks at what consumers can expect next.
Americans should brace themselves for several years of higher inflation than they've seen in
decades, according to economists who expect the robust post-pandemic economic recovery to fuel
brisk price increases for a while.
Economists surveyed this month by The Wall Street Journal raised their forecasts of how high
inflation would go and for how long, compared with their previous expectations in April.
The respondents on average now expect a widely followed measure of inflation, which excludes
volatile food and energy components, to be up 3.2% in the fourth quarter of 2021 from a year
before. They forecast the annual rise to recede to slightly less than 2.3% a year in 2022 and
2023.
That would mean an average annual increase of 2.58% from 2021 through 2023, putting
inflation at levels last seen in 1993.
"We're in a transitional phase right now," said Joel Naroff, chief economist at Naroff
Economics LLC. "We are transitioning to a higher period of inflation and interest rates than
we've had over the last 20 years."
Inflation likely rose sharply again in May. Economists polled by Dow Jones and The Wall
Street Journal predict the consumer price index rose 0.5% last month. The report comes out on
Thursday. If so, that would push the yearly rate close to 5% from 4.2% in April.
Consumer prices have only risen that fast twice in the past 30 years, most recently in 2008
when the cost of a barrel of oil topped $150.
... ... ...
The central bank has stuck to its prediction that inflation will drop back toward 2% by next
year. But many are beginning to wonder.
"The writing is on the wall: The Fed's temporary-inflation mantra is sounding more dated by
the week," said senior economist Sal Guatieri of BMO Capital Markets.
Strong economic rebound and lingering pandemic disruptions fuel inflation forecasts
above 2% through 2023, survey finds. The U.S. inflation rate reached a 13-year high recently,
triggering a debate about whether the country is entering an inflationary period similar to the
1970s. WSJ's Jon Hilsenrath looks at what consumers can expect next.
Americans should brace themselves for several years of higher inflation than they've seen in
decades, according to economists who expect the robust post-pandemic economic recovery to fuel
brisk price increases for a while.
Economists surveyed this month by The Wall Street Journal raised their forecasts of how high
inflation would go and for how long, compared with their previous expectations in April.
The respondents on average now expect a widely followed measure of inflation, which excludes
volatile food and energy components, to be up 3.2% in the fourth quarter of 2021 from a year
before. They forecast the annual rise to recede to slightly less than 2.3% a year in 2022 and
2023.
That would mean an average annual increase of 2.58% from 2021 through 2023, putting
inflation at levels last seen in 1993.
"We're in a transitional phase right now," said Joel Naroff, chief economist at Naroff
Economics LLC. "We are transitioning to a higher period of inflation and interest rates than
we've had over the last 20 years."
Cryptos are a collectors item just like fine art. While money has value based on the military jack boot of empire which insures
its value only with its domination of most countries and the violent destruction of any attempt to set up a transparent real money
system exchangable for gold (Libya). A painting by a hot painter is worth 900k because there are a handful of people who will
pay that for it, they're interest in it keeps the value at a certain level. Same with Bitcoin, but that interest is spread out
to millions of people. If they all decide its worthless than it is, but why would they? I think a lot of these evidence free claims
of hacking and ransom wear are made to devalue the currency that the ransom is paid in, it could have easily been paid in dollars
via the internet, as cryptos is basiclly just that: a stand in for the dollar being moved to an account that is a number. Cryptos
in this way provide a window to real capitalism. This to me is natural human evolution toward anarchism and a system of exchange
that is transparent and based on people working together instead of militaristic violence. You can exchange cryptos for gold,
rubles and yaun, so saying that it exist only based on the dollars supremacy is wrong.
What I know about computers and Bitcoin would get lost in a thimble. However, what I've learnt about the US Govt over the years
tells me that this problem wouldn't be happening if the USG hadn't dedicated itself to micro-managing, and dominating the www
- for Top Secret (i.e. bullshit) reasons.
I was appalled when I learnt that the USG had made strong encryption ILLEGAL, and dumbfounded when I first heard about the
PRISM 'co-operative' USG-mandated www surveillance program. Edward Snowden's NSA revellations confirmed that the USG has KILLED
computer security for crappy, feeble-minded reasons.
It's more or less par for the course that the USG blames other entities for its own prying and mischief-making. Were it not
for the USG placing LOW limits on computer security, we would all have access to Pretty Good Privacy and pro-active, timely means
of detecting and defending and/or evading malware.
"They mostly never see the piece, it's kept in climate controlled storage."
This is standard practice. Using "Ports Franches" as in several Swiss towns including Geneva. Perfectly legal as they are not
IN the country (for Tax purposes).
However, this is not really for "drug" cartels but just a way of transferring assets from one rich person to another.
Many ownership deals are made inside the Port Franche itself, without the need to transport the work outside. There is a limitation
on the time a work can be left inside the building, but I believe all that they have to do is drive more or less "round the block"
and re-enter it. I'm a bit hazy about that detail, as I do not have a spare Rembrandt to verify this personally.
****
jsanprox | Jul 12 2021 1:59 utc | 103
A painting by a hot painter is worth 900k because there are a handful of people who will pay that for it, they're interest
in it keeps the value at a certain level.
The primary dealers agree on a common price level for a stated painter. These paintings can even be used as collateral when
borrowing money.
Other painters do not have a "guaranteed" price level but one based on auction values (ie. What the customer is willing to pay.)
The Primary dealers are a very small group who control all the big art fairs and which other dealers are allowed to sell or deal
there -.
There are "rules" about "participation" (not sure about the terminology here), that various dealers will have made between themseves.
ie. There is a split-up of profits following certain agreed parts. Woe unto a dealer that doesn't pay his part. (OK; personal
note here, I once accidently fell foul of the "cartel" because a gallery owner with my works, had not paid "out" on a large sum
that he had made on another artist he was representing. They decided to "get" him.)
****
Ransomware ; Why are people getting all hot and bothered about Corporations paying money in Bitcoin? Happens all the
time.
Another Personal anecdote ; About five years ago I started recieving emails from unknown "people", Real first names,
with an attachement. As normal, these go into trash without being opened (or into a folder I have, called "dodgy spam?) About
20 + of them. Next I recieved one email saying (in French) " I know your little secret, and if you don't want everyone else to
know, pay (about €30) a "Small" sum into the following bitcoin account xxxxx."
In France you can " porter plainte" , ie, denounce and start a legal process against an "unknown person, or persons".
This is to protect yourself, and is run by the Government/police. In my case, never having opened any of the "attachments", I
don't know what they were, probably porn of some sort. IF they had been opened there would have been a suspicion that I was a
"willling" victim. (The first question asked by the Gov. Site was "Have you paid them/it, and by how much". in my case - none)
******
Haven't heard anything since. BUT, Bitcoin was already being used for criminal purposes.
Nobody had to find a super-secret backdoor into my computer. Just buy a data base with working emails - Corporations
use them all the time to send publicity. By looking at the address, and other more or less freely available information, they
can target people, by location, age, etc.
But you only know a Picasso is worth a lot because you can calculate it in USD terms (ultimately: you can also calculate in
any other fiat currency, but, since we live in the USD Standard, we only know a certain amount of fiat currency is worth if we
can convert it to USDs). The USD is still the unit of accountancy and the means of payment even in the art market.
You can never pay your taxes or fill the tank of your car with a Picasso - you would have to sell it for USDs, and use these
USDs to pay for everything you need. Sure, two megarich persons could exchange art between them as some kind of permute, but that
doesn't constitute a societal unity (because billionares don't exist in a vacuum). It is a particularity of society, not society
itself.
The same is true with crypto. And with gold. And with platinum. And with whatever else you want. It is a myth crypto is "fake"
just because it is purely digital: the material specification of the thing doesn't matter for its status of money. Being digital
is the lesser of crypto's problems. Crypto's main problem is the very economic foundations of its existence, which ensure it will
never be money.
And no: subdividing crypto wouldn't solve it - they tried it with gold when capitalism lived through the Gold Standard (when
it was on its death throes) and there's a limit to this. Even if the digital era allowed it, you would then simply have fiat money
system with extra steps and double the brutality, because then the power to issue money would rest with few private individual
hoarders of the crypto with no legal accountability and responsibility; it would be a dystopian "Pirates of the Caribbean" meets
"Mad Max" scenario.
The continued decline in Treasury yields has prompted many short-sighted arm-chair analysts
to declare that the Fed was right about inflationary pressures being "transitory". Of course,
as Treasury
Secretary Janet Yellen herself admitted, a little inflation is necessary for the economy to
function long term - because without "controlled inflation," how else will policymakers inflate
away the enormous debts of the US and other governments.
As policymakers prepare to explain to the investing public why inflation is a "good thing",
a report published this week by left-leaning NPR highlighted a phenomenon that is manifesting
in grocery stores and other retailers across the US: economists including Pippa Malmgren call
it "shrinkflation". It happens when companies reduce the size or quantity of their products
while charging the same price, or even more money.
As
NPR points out, the preponderance of "shrinkflation" creates a problem for academics and
purveyors of classical economic theory. "If consumers were the rational creatures depicted in
classic economic theory, they would notice shrinkflation. They would keep their eyes on the
price per Cocoa Puff and not fall for gimmicks in how companies package those Cocoa Puffs."
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However, research by behavioral economists has found that consumers are "much more gullible
than classic theory predicts. They are more sensitive to changes in price than to changes in
quantity." It's one of many well-documented ways that human reasoning differs from strict
rationality (for a more comprehensive review of the limitations of human reasoning in the
loosely defined world of behavioral economics, read Daniel Kahneman's "Thinking Fast and
Slow").
Just a few months ago, we described shrinkflation as "the
oldest trick in the retailer's book" with an explanation of how Costco was masking a 14%
price hike by instead reducing the sheet count in its rolls of paper towels and toilet
paper.
NPR's report started with the story of Edgar Dworsky, who monitors grocery store shelves for
signs of "shrinkflation".
A couple of weeks ago, Edgar Dworsky walked into a Stop & Shop grocery store in
Somerville, Mass., like a detective entering a murder scene.
He stepped into the cereal aisle, where he hoped to find the smoking gun. He scanned the
shelves. Oh no, he thought. He was too late. The store had already replaced old General Mills
cereal boxes -- such as Cheerios and Cocoa Puffs -- with newer ones. It was as though the
suspect's fingerprints had been wiped clean.
Then Dworsky headed toward the back of the store. Sure enough, old boxes of Cocoa Puffs
and Apple Cinnamon Cheerios were stacked at the end of one of the aisles. He grabbed an old
box of Cocoa Puffs and put it side by side with the new one. Aha! The tip he had received was
right on the money. General Mills had downsized the contents of its "family size" boxes from
19.3 ounces to 18.1 ounces.
Dworsky went to the checkout aisle, and both boxes -- gasp! -- were the same price. It was
an open-and-shut case: General Mills is yet another perpetrator of "shrinkflation."
It's also being used for paper products, candy bars and other packaged goods.
Back in the day, Dworsky says, he remembers buying bigger candy bars and bigger rolls of
toilet paper. The original Charmin roll of toilet paper, he says, had 650 sheets. Now you
have to pay extra for "Mega Rolls" and "Super Mega Rolls" -- and even those have many fewer
sheets than the original. To add insult to injury, Charmin recently shrank the size of their
toilet sheets. Talk about a crappy deal.
Shrinkflation, or downsizing, is probably as old as mass consumerism. Over the years,
Dworsky has documented the downsizing of everything from Doritos to baby shampoo to ranch
dressing. "The downsizing tends to happen when manufacturers face some type of pricing
pressure," he says. For example, if the price of gasoline or grain goes up.
The whole thing brings to mind a scene from the 2000s comedy classic "Zoolander".
"... This is not the first time Summers has predicted that the firehose of fiscal and monetary stimulus will unleash soaring inflation. While career economists at the White House and Fed - who have peasants doing their purchases for them - urge Americans to ignore the current hyperinflation episode, saying that the recent inflation surge will soon pass, Summers has been unique among his fellow Democrats in predicting that massive monetary and fiscal stimulus alongside the reopening of the economy would spark considerable price pressures. ..."
"... Asked how financial markets may behave in the rest of 2021, Summers said "there will probably be more turbulence" as traders react to faster inflation by pushing up bond yields. "We've got a lot of processing ahead of us in markets," he said. ..."
It may not be quite hyperinflation - loosely defined as pricing rising at a double-digit
clip or higher - but if former Treasury Secretary and erstwhile democrat Larry Summers is
right, it will be halfway there in about six months.
One day after Bank of America warned that the coming "hyperinflation" will last at least 2
and as much as 4 years - whether or not one defines that as transitory depends on whether one
has a Federal Reserve charge card to fund all purchases in the next 4 years - Larry Summers,
who is this close from being excommunicated from the Democrat party, predicted inflation will
be running "pretty close" to 5% at the end of this year and that bond yields will rise as a
result over the rest of 2021.
Considering that consumer prices already jumped 5% in May from the previous year, his
forecast is not much of a shock.
Speaking on Bloomberg TV, Summers said that "my guess is that at the end of the year
inflation will, for this year, come out pretty close to 5%," adding that "it would surprise me
if we had 5% inflation with no effect on inflation expectations." If he is right, the recent
reversal in one-year inflation expectations which dipped from 4.6% to 4.2% according to the
latest UMich consumer sentiment survey, is about to surge to new secular highs.
This is not the first time Summers has predicted that the firehose of fiscal and monetary
stimulus will unleash soaring inflation. While career economists at the White House and Fed -
who have peasants doing their purchases for them - urge Americans to ignore the current
hyperinflation episode, saying that the recent inflation surge will soon pass, Summers has been
unique among his fellow Democrats in predicting that massive monetary and fiscal stimulus
alongside the reopening of the economy would spark considerable price pressures.
Asked how financial markets may behave in the rest of 2021, Summers said "there will
probably be more turbulence" as traders react to faster inflation by pushing up bond yields.
"We've got a lot of processing ahead of us in markets," he said.
Ironically, Summers - who now teaches at Harvard University whose president he was not too
long ago when he hung out with his buddy Jeffrey Epstein...
Plus Size Model 5 hours ago (Edited)
Exactly!! Not only that, it's not just the FED that is contributing to inflation. We can
also blame the SEC and the DOJ. I've never seen a Zero Hedge article blaming stock price
appreciation or buybacks for causing inflation or increasing the money supply. The DOJ
never enforces antitrust laws. The FBI never investigates money laundering from overseas
that creates artificial real estate appreciation that inflates the money supply when people
take out HELOC. There are other oversight bodies that, in a sane world, would not allow
foreign investment in real estate. Bitcoin and others are a new tool that is being used to
manipulate the money supply. It's comical how coins always go down when the little guys are
holding the bag and go up when Coinbase executives want to cash out.
Another thing, this artificial chip shortage, punitive tariffs, and new tax laws are
also adding to price increases.
Totally_Disillusioned 1 hour ago
Speculative investments have NEVER been included in the forumulation of CPI that
determines inflation rate.
Revolution_starts_now 6 hours ago
Larry Summers is a tool.
gregga777 5 hours ago (Edited) remove link
Banksters in 2010's: We've got to revise how we calculate inflation again to conceal it
from the Rubes.
Banksters in 2020: Ho Lee Fuk! Gun the QE engine! Pedal to the metal! Monetize all of
the Federal government's debt! Keep those stonks zooming upwards!
Banksters in 2021: Ho Lee Fuk! The Rubes have caught onto our game! Gun the QE engine!
Keep that pedal to the metal! Maybe the Rubes won't notice housing prices going up 20% per
year?
Summer 2021: Ho Lee Fuk! They are noticing Inflation! We'd better revise how we
calculate inflation again to conceal it from the Rubes.
Paul Tudor Jones said economic orthodoxy has been turned upside down with the Federal
Reserve focused on unemployment even as inflation and financial stability are growing
concerns.
Inflation risk isn't transitory, the hedge fund manager said in an interview on CNBC.
If the Fed says the U.S. economy is on the right path, "then I would go all in on the
inflation trade, buy commodities, crypto and gold," he said. "If they course correct, you will
get a taper tantrum and a sell off in fixed income and a correction in stocks.
BofA expects U.S. inflation to remain elevated for two to four years, against a rising
perception of it being transitory, and said that only a financial market crash would prevent
central banks from tightening policy in the next six months.
It was "fascinating so many deem inflation as transitory when stimulus, economic growth,
asset/commodity/housing inflations (are) deemed permanent", the investment bank's top
strategist Michael Hartnett said in a note on Friday.
Thyagaraju Adinarayan
Fri, June 25, 2021, 5:24 AM
By Thyagaraju Adinarayan
LONDON (Reuters) - BofA expects U.S. inflation to remain elevated for two to four years,
against a rising perception of it being transitory, and said that only a financial market crash
would prevent central banks from tightening policy in the next six months.
It was "fascinating so many deem inflation as transitory when stimulus, economic growth,
asset/commodity/housing inflations (are) deemed permanent", the investment bank's top
strategist Michael Hartnett said in a note on Friday.
Hartnett thinks inflation will remain in the 2%-4% range over the next 2-4 years. U.S.
inflation has averaged 3% in the past 100 years, 2% in the 2010s, and 1% in 2020, but it has
been annualising at 8% so far in 2021, Bofa said in the note.
Global stocks were holding near record highs hours ahead of the reading of May core personal
consumption expenditures index, an inflation gauge tracked closely by the Fed. The gauge is
estimated to rise 3.4% year-on-year.
... In the week to Wednesday, investors pumped $7 billion into equities and $9.9 billion
into bond funds, while pulling $53.5 billion from cash funds, BofA calculated, using EPFR
data.
Inflation for common people level means devaluation of the dollar. It can happen for reasons
completely detached from money supply issues. For example shortage of commodities (especially
oil) or diminishing of the world reserve currency status of the dollar (refusal of some countries
to hold their currency reserves in dollars and switch to other currencies in mutual trade).
Increase of military expenses (Pentagon budget is over trillion dollars now) also does not help
(guns instead of butter policy)
The reason that rates are discounting the current "economic growth" story is that artificial
stimulus does not create sustainable organic economic activity.
"This is because bubble activities cannot stand on their own feet; they require support
from increases in money supply that divert to them real savings from wealth generators. Also,
note again that a major cause behind the possible decline in the pool of real savings is
unprecedented increases in money supply and massive government spending. While the pool of
real savings is still growing, the massive money supply increase is likely to be followed by
an upward trend in the growth rate of the prices of goods and services. This could start
early next year. Once the pool of real savings starts to decline, however -- because of
massive monetary pumping and reckless fiscal policies -- various bubble activities are will
plunge. This, in turn, is likely to result in a large decline in economic activity and in the
money supply." – Mises Institute
As stimulus fades from the system, that decline in money supply is only one of several
reasons that "deflation" will resurface.
Monetary & Fiscal Policy Is Deflationary
The Federal Reserve and the Government have failed to grasp that monetary and fiscal policy
is "deflationary" when "debt" is required to fund it.
How do we know this? Monetary velocity tells the story.
What is "monetary velocity?"
"The velocity of money is important for measuring the rate at which money in circulation
is used for purchasing goods and services. Velocity is useful in gauging the health and
vitality of the economy. High money velocity is usually associated with a healthy, expanding
economy. Low money velocity is usually associated with recessions and contractions. " –
Investopedia
With each monetary policy intervention, the velocity of money has slowed along with the
breadth and strength of economic activity.
While in theory, "printing money" should lead to increased economic activity and inflation,
such has not been the case.
A better way to look at this is through the " veil of money" theory.
If money is a commodity, more of it should lead to less purchasing power, resulting in
inflation. However, this theory began to fail as Governments attempted to adjust interest rates
rather than maintain a gold standard.
Crossing The Rubicon
As shown, beginning in 2000, the "money supply" as a percentage of GDP has exploded higher.
The "surge" in economic activity is due to "reopening" from an artificial "shutdown."
Therefore, the growth is only returning to the long-term downtrend. As shown by the attendant
trendlines, increasing the money supply has not led to either more sustainable economic growth
rates or inflation. It has been quite the opposite.
However, it isn't just the expansion of the Fed's balance sheet that undermines the strength
of the economy. For instance, it is also the ongoing suppression of interest rates to try and
stimulate economic activity. In 2000, the Fed "crossed the Rubicon," whereby lowering interest
rates did not stimulate economic activity. Therefore, the continued increase in the "debt
burden" detracted from it.
Similarly, we can illustrate the last point by comparing monetary velocity to the
deficit.
As a result, monetary velocity increases when the deficit reverses to a surplus. Such allows
revenues to move into productive investments rather than debt service.
The problem for the Fed is the misunderstanding of the derivation of organic economic
inflation
6-More Reasons Deflation Is A Bigger Threat
Previously,
Mish Shedlock discussed Dr. Lacy Hunt's views on inflation, or rather why deflation remains
a more significant threat.
Inflation is a lagging indicator. Low inflation occurred after each of the past four
recessions. The average lag was almost fifteen quarters from the end of each. (See Table
Below)
Productivity rebounds in recoveries and vigorously so in the aftermath of deep
recessions . The pattern in productivity is quite apparent after the deep recessions ending
in 1949, 1958, and 1982 (Table 2 Below). Productivity rebounded by an average of 4.8% in
the year after each of these recessions. Unit labor costs remained unchanged as the rise in
productivity held them down.
Restoration of supply chains will be disinflationary . Low-cost producers in Asia and
elsewhere could not deliver as much product into the United States and other relatively
higher-cost countries. Such allowed U.S. producers to gain market share. As immunizations
increase, supply chains will gradually get restored, removing that benefit.
Accelerated technological advancement will lower costs . Another restraint on inflation
is that the pandemic significantly accelerated the implementation of technology. The sharp
shift will serve as a restraint on inflation. Much of the technology substitutes machines
for people.
Eye-popping economic growth numbers vastly overstate the presumed significance of their
result . Many businesses failed in the recession of 2020, much more so than usual.
Furthermore, survivors and new firms will take over that market share, which gets reflected
in GDP. However, the costs of the failures won't be.
The two main structural impediments to traditional U.S. and global economic growth are
massive debt overhang and deteriorating demographics, both having worsened as a consequence
of 2020.
To summarize, the long-term risk to current outlooks remains the "3-Ds:"
Deflationary Trends
Demographics; and,
Debt
Conclusion
With this in mind, the debt problem remains a massive risk. If rates rise, the negative
impact on an indebted economy quickly depresses activity. More importantly, the decline in
monetary velocity shows deflation is a persistent threat.
"It is hard to overstate the degree to which psychology drives an economy's shift to
deflation. When the prevailing economic mood in a nation changes from optimism to pessimism,
participants change. Creditors, debtors, investors, producers, and consumers all change their
primary orientation from expansion to conservation.
Creditors become more conservative, and slow their lending.
Potential debtors become more conservative, and borrow less or not at all.
Investors become more conservative, they commit less money to debt investments.
Producers become more conservative and reduce expansion plans.
Consumers become more conservative, and save more and spend less.
These behaviors reduce the velocity of money, which puts downward pressure on prices.
Money velocity has already been slowing for years, a classic warning sign that deflation is
impending. Now, thanks to the virus-related lockdowns, money velocity has begun to collapse.
As widespread pessimism takes hold, expect it to fall even further."
There are no real options for the Federal Reserve unless they are willing to allow the
system to reset painfully.
Unfortunately, we now have a decade of experience of watching monetary experiments only
succeed in creating a massive "wealth gap."
Most telling is the current economists' inability to realize the problem is trying to "cure
a debt problem with more debt."
In conclusion, the Keynesian view that "more money in people's pockets" will drive up
consumer spending, with a boost to GDP being the result, has been wrong. It hasn't happened in
40 years.
Unfortunately, deflation remains the most significant threat as permanent growth doesn't
come from an artificial stimulus.
bikepath999 2 hours ago
Title is 100% wrong! It's artificial growth (money printing) that is the inflation!
Organic growth thru increased production can actually lead to deflation!
OldNewB 2 hours ago
Exactly. Inflation can be the reduction in the rate of deflation due to productivity
increases.
bikepath999 2 hours ago
Transitory is just the new little catch phrase to have you chasing after your own tail
rather than skinning alive a central banker or politician
dead hobo 2 hours ago (Edited)
Transitory was Janet Yellen's favorite word for years. It was her catch phrase like
Bernanke's was 'The benefits outweigh the costs'. Total blather in both cases.
In both cases, it was muppet-speak for 'p*ss off'. But it sounded oh so intelligent and
the media lapped it up.
About the above article ... Economics, as commonly applied by sales folk, teachers,
experts, and pundits is theology, not science. One credibility trick is to quote an expert
who quoted another expert. Like above. How can you argue against this depth?
Misesmissesme 2 hours ago (Edited)
They are somewhat correct on the technical definition of inflation. However,
hyper-inflation does not care about any of that. It only needs a government willing to
print and a populace that has lost faith in the currency. We know the gov and the Fed are
game. It's just a matter of time until the masses lose faith in the dollar.
OldNewB 2 hours ago (Edited) remove link
Devaluing the fiat by printing to infinity has nothing to do with growth.
Printing IS inflation. Where it shows up is another matter.
Whether it results in higher prices is a function of behavior between buyers and sellers
of assets, products and services.
-- ALIEN -- 2 hours ago (Edited) remove link
International Energy Agency said GLOBAL PEAK OIL PRODUCTION for all liquids happened in
2018.
NO economic growth is possible without growing the energy supply, so 2% predicted growth
is BS,
unless other countries contract by 2+%.
Quia Possum 2 hours ago
We're beyond the point of pulling the rip cord.
Some ZH writer had an excellent analogy to a hot air balloon on fire. Up to a height X,
you can jump off safely. Up to a height Y you can jump off and survive with some broken
bones, but you're going to have to muster some courage to do that. But once you pass that
height you're dead whether you jump or stay in the balloon all the way.
The price of energy is growing. and that means inflation is accelerating, but it will
probably take the form of stagflation...
Stagflation is characterized by slow
economic growth and relatively high unemployment -- or economic stagnation -- which is at the same time
accompanied by rising prices (i.e. inflation). Stagflation can also be alternatively defined as a
period of inflation combined with a decline in gross domestic product (GDP). See also Stagflation - Wikipedia
Stagflation led to the emergence of the Misery index . This index, which is
the simple sum of the inflation rate and unemployment rate, served as a tool to show just how
badly people were feeling when stagflation hit the economy.
Under neoclassic economic doctrine stagflation was long believed to be impossible. This
pseudoscience demonstrated in the Phillips Curve portrayed
macroeconomic policy as a trade-off between unemployment and inflation.
Excellent analysis. I would add one point as a result of your conclusion. Older
populations with declining birth rates and slower population, depress household, business and
public investment. The contracting effect on investment is highly deflationary and overwhelms
the impact of inflation due to the smaller labor force. This condition is plainly evident in
Japan and Europe. Moreover, this pattern will be increasingly apparent in the US .
The Transitory Boat
The transitory boat is a small one. Powell and Yellen have to say that no matter what they
believe.
Rosenberg, Hunt, and I are in the small boat.
And if you want another reason to be in that boat with us, then think about what happens
when asset bubbles burst. It won't be inflationary, that's for sure.
Meanwhile, "I just say buy the gold," Rosenberg said. "Gold has 1/5 of the volatility that
bitcoin has."
Let us preface our inflation note with one of our favorite quotes:
"World War II was transitory"
– GMM
Inflation has eroded my purchasing power in my transitory life. Bring back the $.35 Big Mac,
which was only about 20% of the minimum wage. Now? About 40-50%... Enough to spark a
revolution?
All factors that Stokman sites does not exclude bond rate remaining withing this yea max-min
band for the rest of the year. You never know how long Fed will continue to buy bonds to suppress
the yield.
The last "dead chicken bounce" of 10 year bond caught many people unprepared and
surprised.
The Fed's destructive money-pumping has many victims, but chief among these is the Wall
Street financial narrative itself.
It emits not a whiff about the patent absurdity of the Fed's monthly purchase of $120
billion of treasury and GSE debt under current circumstances; and treats with complete respect
and seriousness the juvenile word game known as "thinking about thinking about tapering" by
which the clowns in the Eccles Building fearfully attempt to placate the liquidity-intoxicated
speculators on Wall Street.
So it's not surprising that today's 5.0% CPI reading was made inoperative within minutes
after the BLS release by a chorus of financial pundits gumming about "base effects" and
ridiculing outliers like soaring used car prices (up 29.7% YoY), which, of course, Bloomberg
reporters never see the inside of anyway.
Then again, that's why we look at the two-year stacked CAGRs, which smooth the ups and downs
of the worst lockdown months last spring; and also why we use the 16% trimmed mean CPI, which
eliminates the highest 8% and lowest 8% of items in the overall CPI each month (both sets of
deleted outliers are different each month).
In the present instance, therefore, off-setting the used car prices in the highest 8% of
items during May is the -5.0% YoY drop in health insurance costs (if you believe that BLS
whopper) and the -5.3% drop in sporting event prices, which, of course, have been largely zero
since last April.
In any event, the 16% trimmed mean CPI for May was up by 4.7% annualized versus the April
number and was higher by 2.62% on YoY basis.
Still, the more salient point is that on a two-year stacked basis the plain old CPI -- used
car prices and all -- leaves not a scintilla of doubt: Consumer inflation is accelerating and
rapidly.
During the last eight months the growth rate for the two year stack has risen from 1.48% to
2.55% per annum. And we don't recall a word in May 2019 about that year's reading being
particularly deflationary. It was actually up 1.83% from May 2018.
Per Annum CPI Increase, Two-Year Stack:
October 2020: 1.48%;
November 2020: 1.59%;
December 2020: 1.78%;
January 2021: 1.92%;
February 2021: 1.99%;
March 2021: 2.07%;
April 2021: 2.23%;
May 2021: 2.55%.
Still, according to the Fed apologists there's nothing troubling about the above because the
Fed is now only trying to hit its 2.00% inflation target "averaged over time".
Let's see. Here are the CPI growth rates going back to May 2014. It turns out you have to
average back seven years before you have a shortfall from the 2.00% target!
CPI Increase per Annum To May 2021 From:
May 2018, 3-Yr, average: 2.31%;
May 2017, 4-Yr. average: 2.42%;
May 2016, 5-Yr. average: 2.31%;
May 2015, 6-Yr. Average:2.10%;
May 2014, 7-Yr. Average: 1.81%
You get the scam. These mendacious fools will just keep averaging back in time until the get
a number that's a tad under 2.00%, smack their lips loudly and then pronounce the current
inflation to be "transitory".
And they will also toss out any inflation index that undercuts their MOAAR inflation mantra
-- like all of the data reported above!
So we will say it again : The CPI is a highly imperfect general price measure owing to its
one-sided treatment of quality (hedonic) improvements, wherein some reported prices are
adjusted downward for improved product features like airbags and more powerful PCs, put few
prices are adjusted upward for the junkie toys, towels, kitchenware, appliances and furniture
that comes out of China.
But with the 8% highest and 8% lowest prices dropped out monthly to filter out the short-run
noise, the 16% trimmed mean version of the CPI at least purports to be a fixed basket price
index, not a variable weight deflator like the Fed's beloved PCE deflator.
In short, the 16% trimmed mean CPI puts paid to the "transitory" scam. Come hell or high
water, this serviceable inflation measure has been rising at 2.00% per annum since the year
2000, and even more than that during the 1990s.
Thus, during the 112 months since the Fed formally adopted inflation targeting in January
2012, it has risen by 2.03% per annum and by 2.15% per annum since January 2000.
Equally significantly, there have been only a handful of times during the 256 monthly
readings since January 2000 when the year-over-year measure dropped materially below 2.00%.
YoY Change, 16% Trimmed Mean CPI, 2000-2021
For want of doubt, here is the Fed's preferred short-ruler -- -the core PCE (personal
consumption expenditure deflator less food and energy). And the Fed's case for its insane
money-pumping essentially boils down to the dueling information covered by the red bars above
and the purple bars below.
As it happens, the one-year change in the core PCE deflator is 3.1% and the stacked two-year
gain is 1.99% per annum. That latter is apparently not close enough to 2.00% for government
work, meaning that the Fed needs to get more years into its average.
Even then, you have to be trained in the medieval theology of counting angels on the head of
a pin to ascertain the purported earth-shaking "shortfall" from target. Compared to April 2021,
here are the multi-year CAGRs on an April-to-April basis:
2019-2021: 1.99%;
2018-2021: 1.89%;
2017-2021: 1.92%;
2016-2012: 1.86%:
2015-2021:1.82%
That's right. For the five year-pairs shown above, the average CAGR for the core PCE
deflator was 1.90%. It seems that "lowflation" amounts to that which you need a magnifying
glass to ascertain -- 10 basis points of shortfall.
Of course, our monetary bean counters are not done "averaging", either. If you go back to
January 2012 when the Fed officially adopted inflation targeting, the core PCE deflator is up
by 1.69% per annum, and since January 2000 it has risen by 1.75% per annum.
So there you have it. For want of 25-31 basis points of annual inflation -- -averaging back
to the beginning of the current century -- you have a camarilla of central bankers giving deer
in the headlights an altogether new meaning. That is to say, they are apparently not even
thinking about thinking about tapering their massive bond-buying fraud owing to the barely
detectable differences between purple and red bars of these dueling charts.
As we said a few days back, would that they had applied the 25th Amendment to the Federal
Reserve Board.
These sick puppies are in urgent need of palliative care.
YoY Change In Core PCE Deflator, 2000-2021
They are also in need of a dose of realism, and on that score there are three figures in the
May CPI report which tell you all you need to know. To wit, compared to May 2020, durable goods
prices were up by 10.3%, nondurables were higher by 7.4% and services less energy gained
2.9%.
In fact, in the recent history of these three figures lays a stinging refutation of the
entire "lowflation" scam promulgated by the Fed money printers and their acolytes and shills on
Wall Street and in Washington, too.
On this matter, the Donald was right, even if by accident or for the wrong reasons. What we
are referring to, of course, is the "Shina" factor.
Beijing's form of state-controlled printing press capitalism has systematically drivendown
the cost of manufactured goods and especially durables by, in effect, draining the rice paddies
of China's great interior and herding its latent industrial work force into spanking new
factories which paid wages less than meager. And CapEx costs were rock bottom, too, owing to
$50 trillion of central bank-fueled domestic debt and the greatest cheap capital-driven
malinvestment spree in human history.
The result was an intense, multi-decade long deflation of manufactured goods as the high
labor costs embodied in US and European manufacturers were steadily squeezed out of global
prices levels as production shifted to China and its East Asian supply chain.
That impact is patently obvious in the composition of the CPI among the three components
which were flashing warning lights in today's inflation report.
Composition of CPI By Major Components, 2000-2021
In the first place, the core of domestic inflation lies in the 58.8% weight of the CPI
consisting of mainly domestically supplied services. The 2.9% YoY gain reported for May for CPI
services less energy was essentially par for the course.
That is, during the last 21 years (since January 2000) this component (black line) has risen
by 2.71% per annum, and since January 2012 it has gained a similar 2.63% per annum.
Needless to say, if there is any part of the inflation rate that the Fed can most powerfully
impact, it is domestically supplied services like health care, education, housing,
entertainment, travel and foods services. So where's the "lowflation" in that part of the CPI
basket?
Alas, we don't have lowflation in services at all, but a stubborn 2.6%-3.0% upward price
drift in domestic service components which account for nearly three-fifths of the household
budget.
By contrast, the durable goods component (brown line) accounts for 11.1% of the CPI, and
it's been an anchor to the windward for more than two decades. As of May 2021, prices were
still 8% below their January 2000 level.
The truth is, the alleged lowflation on the top line CPI has been heavily attributable to
the deflationary durable goods sector, but, alas, that era is apparently over. The Chinese rice
paddies have been drained on a one-time basis and its labor force is now actually shrinking,
while the Donald's ill-timed tariff barriers have forced production to move to higher cost
venues, albeit not necessary the USA of A.
Either way, the anchor to the windward is largely gone , meaning that rising durable goods
prices going forward will no-longer weigh as heavily on the CPI.
It should be further noted that during the past two-decades nondurable prices have also
held-down the CPI top line -- again in large part owing to the "Shina" factor and downward
pressures from cheap apparel, footwear, home furnishings and the like.
During the past 21 years, the nondurables component (yellow line) of the CPI rose by 1.99%
per annum, which is as close as you please to the target, but was also on anchor on the overall
CPI top-line ( purple line) which increased by 2.19% per annum.
Alas, during the period since January 2012, nondurables rose by just 0.63% per annum owing
to flat-lining energy and commodity prices, thereby pulling the overall CPI down to 1.80% per
annum, where it too fell awry of the Fed's sacred 2.00% target.
But here's the thing. A smattering of surging nondurable goods prices in the May 2021 report
are a stark reminder that the times they are a changin'.
On a YoY basis, these components suggest that "lowflation" in durables may have passed its
sell-by date and that the 7.4% YoY gain in nondurables overall may be lifting, not suppressing,
the CPI top-line going forward.
YoY Change In Major Nondurables Components:
Energy commodities: +54.5%;
Apparel: +5.6%;
Home furnishings and supplies: +3.7%;
Footwear: +7.1%;
Food away from home: +4.0%
Household furnishings and operations: +4.6%.
In sum, the chart above captures the one-time history of the Fed's phony "lowflation"
narrative -- an aberrant condition that is now fading fast. Sooner or latter they will run out
of excuses and back inflation reports to average down. And that, in turn, means tapering of the
Fed's great bond-buying fraud -- the lynch pin of the greatest bond and stock bubble in
recorded history.
Do we think that will trigger the greatest financial asset value collapse in modern
times?
Why, yes, we do! play_arrow
wareco 4 hours ago remove link
Seriously? David Stockman? This guy has been perpetually wrong for the last 4 years, at
least. In June, 2017, he was calling for the S&P to fall to 1600. Never happened. In
October 2019, he loudly proclaimed that everyone should get out of the "casino". S&P up
40% since then. He has as much credibility as that self-promoter, Harry Dent, who has been
calling for gold to drop to $700 since 2012.
Sound of the Suburbs 8 hours ago (Edited) remove link
Stage one – The markets are rising.
Look at all that wealth we are creating.
Stage two – It's a bubble.
That wealth is going to disappear.
Stage three – Oh cor blimey! I remember now, this is what happened last time
At the end of the 1920s, the US was a ponzi scheme of inflated asset prices.
The use of neoclassical economics, and the belief in free markets, made them think that
inflated asset prices represented real wealth.
1929 – Wakey, wakey time
The use of neoclassical economics, and the belief in free markets, made them think that
inflated asset prices represented real wealth, but it didn't.
It didn't then, and it doesn't now.
Putting a new wrapper around old economics did fool global elites.
You'd have to get up pretty early in the morning to catch me out.
E5 9 hours ago
Not going to happen.
No one is buying.
No one is raising salaries.
Inflation is a stalled plane.
Everyone is waiting.
Self fulfilling prophecy. Mainstreet is waiting on their inheritance from dead Boomers.
The only thing that will save America. Money being spent and Cuban Missile Crisis not
happening under Boomers.
May CPI is expected at 8:30 a.m. ET Thursday. It is unclear to me why the 10-year Treasury yield fell below the key 1.5% Wednesday.
Was it short-covering? if so what triggered it? If predictions are true it might jump up on Jun 10, 2021 because you can't have Headline
CPI 4.7% and the 10-year Treasury yield 1.5%. That's the theatre of absurd.
Rent, owners' equivalent rent and medical care services collectively are 50% of the core CPI basket.
Notable quotes:
"... Headline CPI is expected to jump 4.7% year-over-year, the highest rate since sky high energy prices spiked inflation readings in the fall of 2008. ..."
"... "I am worried about rent and owners' equivalent rent because it should go up. It had decelerated," she said. Shelter is more than 30% of CPI , and rent costs have bottomed in some cities, Swonk added. "The issue is it could have longer legs and keep overall inflation measures buoyed more than people expect." ..."
...The consensus forecast for the core consumer price index, which excludes food and energy, is 3.5% on a year-over-year basis,
according to Dow Jones. That's the fastest annual pace in 28 years.
Economists expect both core and headline CPI rose by 0.5% in May. Headline CPI is expected to jump 4.7% year-over-year, the highest
rate since sky high energy prices spiked inflation readings in the fall of 2008.
... ... ...
"I am worried about rent and owners' equivalent rent because it should go up. It had decelerated," she said. Shelter is more
than 30% of CPI , and rent costs have bottomed in some cities, Swonk added. "The issue is it could have longer legs and keep
overall inflation measures buoyed more than people expect."
Analysts said other factors are driving lower yields, including a weaker dollar, which has
lifted demand for Treasurys from foreign investors. Foreign investors tend to hold more
Treasurys when the dollar declines and reduces the costs of protecting against swings in
currencies.
That is a counterintuitive response , because rising inflation erodes the value of
Treasuries' payouts. And the data did indicate stronger inflation: Excluding volatile food and
energy costs, prices rose 0.7% in May. That was the second-highest monthly increase in consumer
prices since the early 1980s, behind April's 0.8% rise. Compared with last year, when the
global economy was mired in a pandemic-driven slowdown, headline consumer prices rose at
a 5% pace . (Excluding food and energy, they rose 3.8%.)
The market's moves could be muted because investors are betting that central bankers are
going to stick with their view that most of the strength in consumer prices will pass after a
potentially bumpy reopening period and keep policy easy.
That doesn't mean Treasuries have much room to rally more from here.
The Fed's meeting next week may be the first test. If central-bank officials talk about
starting to remove accommodation earlier than expected, that could send yields higher. In fact,
strategists from TD Securities decided to take a bearish view on the 10-year note on Thursday,
after yields fell below 1.5% earlier this week. They argued that continued economic momentum
and stronger inflation could lead central-bank officials to take a more upbeat tone on the
economy than investors expect at their meeting on June 15 and 16.
Wood, who became the face of the outsized rally in technology stocks such as Zoom Video
Communications Inc and electric vehicle maker Tesla Inc during the coronavirus pandemic last
year, said that falling lumber and copper prices signal that the market is "beginning to see
signs that the risks are overblown" from inflation.
...Wood, whose ARK Innovation ETF was the top-performing actively managed U.S. equity fund
tracked by Morningstar last year, has seen her performance stagnate along with the slowdown in
growth stocks. Her flagship fund is down nearly 28% from its early February high.
A short-term period of slightly higher inflation wouldn't be memorable, but an extended run
of inflation above 3% can be problematic. Social Security Is Your Best Inflation Hedge; you need
to maximize it.
Social Security checks represent about a third of income for all retirees.
Among elderly recipients, those checks represent half of their retirement income for married
couples and 70% for singles.
A primary residence, if you own a house and it is fully paid off, also gave some minimal
inflation protection.
Another factor is that once people actually get into retirement, ,
their spending generally decreases so much that they're spending less overall, even accounting
for inflation.
While seniors can't directly affect the inflation rate,
there are ways to minimize the shadow it casts over their retirement.
Reducing housing costs, for instance, is a step in the right direction. Trading in a larger
home for a smaller one, even if the mortgage is paid off, reduces the monthly outflow for
property taxes, utilities, homeowners insurance, and maintenance.
Another smart move is adding investments to your portfolio that are likely to increase in
value as inflation rises.
Yes, inflation is rising, and retirees must now consider repositioning not just their
short-term safe-haven investments (we'll talk more about that in part two) but their entire
portfolio as well (which we'll focus on here). Well that, conveniently enough, is the subject
(and title) of a paper soon to be published in the Journal of Portfolio Management that was
co-authored by Campbell Harvey, a professor at Duke University, and several of his colleagues
affiliated with Man Group. What more, Harvey and his co-authors found that no individual equity
sector, including the energy sector, offers significant protection against high and rising
inflation.
... here's what Harvey and his co-authors discovered after researching eight periods of
inflation dating back to 1925: Neither equities nor bonds performed well in real terms during
the inflationary periods studied. Real being the nominal rate of return minus the rate of
inflation.
... ... ...
TIPS
"Treasury Inflation-Protected Securities (TIPS) are robust when inflation rises, giving them
the benefit of generating similar real returns in inflationary and noninflationary regimes,
both of which are positive," the authors wrote.
In fact, TIPS had a 2% annualized real return during the most recent five periods of
inflation.
But what looks promising in a research paper might not work in reality given the current
yield on TIPS (0.872% as of June 2, 2021). The low yield means that TIPS are a "really super
expensive" inflation hedge going forward, said Harvey.
"It means that you're going to get a negative return in noninflationary periods," he said.
"So yes, they provide the protection, but they're an expensive way to get that protection."
Commodities
"Traded commodities" have historically performed best during high and rising inflation. In
fact, traded commodities have a "perfect track record" of generating positive real returns
during the eight U.S. periods studied, averaging an annualized 14% real return.
Now investors might not be able to trade commodities in the same manner as institutional
investors using futures, but they can invest in ETFs that invest in a broad basket of
commodities, said Harvey.
Other assets
Residential real estate on average holds its value during inflationary times, though not
nearly as well as commodities. Collectibles such as art (7%), wine (5%) and stamps (9%) have
strong real returns during inflationary periods, as well.
And while some suggest adding bitcoin to a diversified portfolio as an inflation protection
asset, caution is warranted given that bitcoin is untested with only eight years of quality
data -- over a period that lacks a single inflationary period, the authors wrote. "It's not
just untested," said Harvey. "It's too volatile."
Gold is also too volatile as a reliable hedge against inflation. Harvey noted, for instance,
that the performance of gold since 1975 is largely driven by a single year, 1979, when gold
dramatically appreciated in value. "And that makes the average look really good," he said.
Harvey also said his number one dynamic strategy for inflationary times is changing the
sector exposures in your portfolio. With this strategy, you would allocate a greater portion of
your assets to sectors that have historically performed well during inflationary periods, such
as medical equipment, and less if anything at all to sectors that have performed poorly during
inflationary periods, such as consumer durables and retail. "You can naturally rebalance your
portfolio to be a little more defensive," he said. "And that can be done by any investor."
Harvey and his co-authors also found active equity factors generally hold their own during
inflation surges with "quality stocks" having a small positive real return and "value stocks"
having a small negative return.
Dynamic strategies are "active" strategies that involve monthly rebalancing of portfolios,
according to Harvey. In contrast, passive strategies require minimal or no rebalancing; for
example, holding an S&P 500 index fund.
Active equity factor investing uses frequent rebalancing to take bets that deviate from the
investment weights implied by a passive market portfolio. These bets seek to produce returns
over and above the passive market portfolio, said Harvey.
In Harvey's study, quality is defined as a combination of profitability, growth and safety
and value is defined with traditional metrics such as the book-to-price ratio.
Is now the time to reposition your portfolio?
According to Harvey, inflation surging from 2% to more than 5% is bad for stocks and bonds.
We're not there yet; the current rate of inflation is 4.2%. But we are getting close to the
"red zone" and now would be a good time to "rethink the posturing of your portfolio," Harvey
said. "So even if it doesn't occur, it doesn't matter. If the risk is high enough, you take
some actions, you're basically buying some insurance."
And being proactive is the key. "So, at least right now, it's better to have the discussion
now than when it's too late; when we're already in the surge and the asset prices have already
dropped," said Harvey.
Remember too that what you hedge is "unexpected" inflation, Harvey said. "What you really
are concerned with is unexpected inflation or a surprise in inflation. We call it an economic
shock."
But not a transitory shock. That won't have any effect on asset prices. "You need to
consider long-term inflation," he said.
And that place to look for that is in the break-even inflation (BEI) rate reflected in
TIPS and nominal Treasurys. The BEI is the weighted average of inflation expectations over the
life of the bond. And changes in the BEI have the advantage of reflecting changes in long-term
or permanent inflation expectations. Presently the BEI is 2.44%. "Anything that is a long-term
measure of inflation is going to have the maximum reflection in the asset prices," he said.
As for the current inflationary environment, Harvey said it's a mix of transitory and not-so
transitory elements. Lumber prices are up but likely not permanently. The rising prices of
other goods and services, however, may not be transitory. "It's obviously difficult to dissect
this," he said. "But it's really important for people that are running a portfolio draw that
distinction."
US government bonds rallied on Friday following a weaker-than-expected reading on American
job growth for the month of May. But a key report on consumer price inflation will provide a
fresh test for investors. Consumer prices rose at its fastest pace in more a decade in the 12
months to April, but analysts project that it has picked up even more since then, raising fears
that the economy is overheating. Economists surveyed by Bloomberg expect the year on year
inflation rate to have jumped to 4.7 per cent in May in figures to be released by the
Department of Labor on Thursday, compared with 4.2 per cent in April.
It looks like this surge is suitable, especially in energy... That spells troubles for
the US economy which is based on cheap energy.
Higher prices for commodities are flowing through to more companies and consumers, making it
harder for central bankers to ignore them
...The world hasn't seen such across-the-board commodity-price increases since the beginning
of the global financial crisis, and before that, the 1970s. Lumber, iron ore and
copper have hit records . Corn, soybeans and wheat have jumped to their
highest levels in eight years . Oil recently reached
a two-year high .
At current metal prices, Rio Tinto PLC, BHP Group Ltd. , Anglo American PLC and Glencore PLC could this year generate a
combined $140 billion in earnings before interest, taxes, depreciation and amortization,
according to Royal Bank of Canada. That compares with $44 billion in 2015, when metals prices
were at or near lows.
However, in Russia, a commodity exporter, surging commodity prices also are driving up
inflation. While Russia's international reserves hit $600.9 billion in May, the highest ever,
its central bank increased its benchmark interest rate by 0.5 percentage point to 5% in April.
It said it would consider further increases, citing "pro-inflationary risks generated by price
movements in global commodity markets."
"We think that the inflation pressure in Russia is not transitory, not temporary,"
Russia's central-bank governor Elvira Nabiullina told CNBC in a recent interview.
...Nicolas Peter, chief financial officer of BMW AG , said in May that it expects
an impact of 500 million euros, equivalent to about $608 million, from prices for raw
materials. Increased steel prices have added about $515 to the cost of an average U.S. light
vehicle, according to Calum MacRae, an auto analyst at GlobalData.
Like most central banks, the US Federal Reserve has been forced to ask why more than a
decade of ultra-loose monetary policy has had such lacklustre economic results.
The Fed's data are misleading because they assume the US is the middle-class nation it has
ceased to be.
Until it uses data that reflect the nation as it is, the Fed will no more get America back
to shared prosperity than someone using a map of New Amsterdam will find the pond in Central
Park.
"If we ended up with a slightly higher interest-rate environment it would actually be a plus
for society's point of view and the Fed's point of view," she told Bloomberg.
"We've been fighting inflation that's too low and interest rates that are too low now for a
decade," she said. "We want them to go back to" a normal environment, "and if this helps a
little bit to alleviate things then that's not a bad thing -- that's a good thing."
The annual rate of inflation in the eurozone rose in May to hit the European Central Bank's
target for the first time since late 2018, as energy prices surged in response to a
strengthening recovery in the global economy.
"The consumer-price index rose at a remarkable 4.2%," says your editorial, "Powell
Gets His Inflation Wish" (May 13). Remarkable, yes, but our current inflation problem is
far worse than that 4.2%, which is bad enough. The real issue is what is happening in 2021. We
need to realize that for the first four months of this year, the seasonally-adjusted
consumer-price index is rising at an annual rate of 6.2%. Without the seasonal adjustments, it
is rising at 7.8%. Meanwhile, house prices are inflating at 12%.
We are paying the inevitable price for the Federal Reserve's monetization of government debt
and mortgages. As for whether this is "transitory," we may paraphrase J.M. Keynes: In the long
run, everything is transitory. But now it is high time for the Fed to begin reducing its debt
purchases, and to stop buying mortgages.
Skill shortages, wage pressures and "hawseholes flash with cash" is is a pretty questionable
consideration (mostly neoliberal mythology). It is typical for WSJ not to touch controversial topics
connected with the deterioration of global neoliberal empire centered in Washington and rampant money printing by Fed, which
increases the level of debt to Japanese's level. They also are buying bonds to keep rate under check which is kind of
counterfeiting money.
So we should expect US stock market to emulate Japanese's stock market. Under
neoliberalism there can be no wage pressures as war of labor was won by financial oligarchy which
institutes neo-feudal regime of wage slavery. One of the key methods is import of foreign workers
to undermine wages in the USA. And neoliberalism is a trap, creating "Welcome to the hotel California" situation.
Automation and robotization puts further pressure on workers in the USA, especially low skill jobs (in some restaurants
waiters are replaced by robots). In many large grocery shots, Wall Mart, etc automatic cashiers machines now are common.
That increase theft but saving on casheer job partially compensate for that. In back office cash and check counting is also
automated using machines.
The key issue here might be the status of dollar as world reserve currency... That allows the USA to
export inflation. If dollar dominance will be shaken inflation chickens will come to roost.
Inflation is here already, and in the long run there is a lot of upward
pressure on prices. But between now and then lies a big question for investors and the
economy: Is the Federal Reserve right to think that the price rises we're seeing now are
temporary and will abate by next year?
Some at the Fed are already having vague doubts, starting to talk about when to
discuss removing some of their extraordinary stimulus even as they continue to push the idea
that inflation is likely to fall back of its own accord.
... ... ..
Inflation expectations can become self-fulfilling, and are watched closely by the Fed.
One-year consumer inflation expectations reached 4.6% in May, according to the University of
Michigan survey, the highest since the China commodity boom of 2011.
Jeffrey P
It is important to not underestimate market sentiment and expectations in such matters
because sometimes in economics, the expectation can be strong enough to become a
self-fulfilling prediction even when other indicators recede or normally wouldn't be a
driver.
Jeffrey Whyatt
I wonder how COLAs in wages, pensions, social security, etc. will impact inflation when these
kick in. Think most occur automatically on a given contractual date. Might add fuel to the
fire.
BRANDON JAMES
Just look at the prices for all the things they exclude from the CPI and other indices of
inflation.
stephen rollins
How do you tell when the Treasury Sec. and Fed Chair are lying about inflation? When you open
your eyes in the morning and the Sun rises in the East.
RICHARD TANKSLEY
It seems wise not to overlook the upcoming problems that we might have with China which which
have the potential to create even more inflation. Lots of tensions are still around and
frankly we should seriously dent US imports from there over the Wuhan virus.
BRUCE MONTGOMERY
Economists are good at dissecting the past, but terrible at forecasting the future.
ROBERT BAILEY
They predicted 12 out of the last 3 recessions
stephen rollins
Yes, and non economists do even worse. Look at the Japanese stock market. About 37K in
1990, cratered, and still only at 28 today. Thats over 30 years, folks.
RODNEY EVERSON
Definition of a "Positive Carry Trade": Borrowing money at an interest rate and investing it
at a higher rate to earn the difference.
Banks do this with deposits, for example, borrowing money from savers and investing it in
higher-yielding loans.
Bond traders typically do it by purchasing longer maturities at, say, three percent and
financing them in the repo market at a rate now close to zero.
The main risk to such a trade is that the higher-yielding investment loses value while
holding it. The bank loan goes bad, or the long bond falls in value while holding it.
Today the Federal Reserve is running the largest positive carry trade in history,
borrowing trillions of dollars from the banking system and paying them 1/10 of one percent on
the loans while using the money to buy trillions of bonds and mortgages for its
portfolio.
If they raise short rates today, the banks will want more than 1/10 of a percent while,
simultaneously, bond prices will crater. Anyone see a conflict here?
RODNEY EVERSON
There seems to be universal agreement that inflation is underway today. The disagreement is
three-part: 1) It will be transitory and we will return to low levels; 2) It will not be
transitory and we are facing steadily rising prices for the foreseeable future; 3) Not only
will it not be transitory, but it will begin to escalate rapidly with the Fed proving unable
or even unwilling to control it, resulting in a hyperinflation.
The bond market is clearly betting on scenario #1, as is the Fed.
And yet the government is spending like the proverbial drunken sailor and the Fed has now
abandoned the banking system's fractional reserve mechanism that Volcker employed to bring
the 1970's inflation back under control. The result, to my mind, is that the U.S.
Government's finances now closely approximate those of Venezuela and Zimbabwe in the recent
past while the Fed has relinquished the tools that would ordinarily be used to yield a
different result than those countries experienced.
C Cook
Economics and politics.
The story describes reality well. Economics is just fuzzy theory now, neither I nor 99% of
America can sort it out. MMT... Print money forever and it doesn't matter?
Politics is clear. History has shown that new administrations lose the House at the first
mid-term. If that happens next year, the entire woke/green/leftist agenda goes down in
flames. Pelosi is back to being a pedestrian member of the House.
To avoid history, DNC will attempt to spend our grandchildren's future to buy every vote
available. Free everything, all the time. No need to work, study, or even get out of bed
before noon. Infrastructure is code for pay off Unions to get workers to vote, shake down
companies who want construction contracts to donate to DNC.
Equity market is watching. Bond market is watching. Likely, they realize that the only
reality is the massive damage to the US which will result from the DNC wanting to keep Nancy
happy.
James Cornelio
Unexplored in this article is the issue of what CAN the Fed do if there is unacceptable
inflationary pressures. To think that it could reduce its $100+ billion monthly purchases in
debt let alone raise interest rates by any serious amount is to forget that we are a nation
awash in debt and that any move by the Fed to do either would result in a 'taper tantrum' the
likes of which will cause all previous tantrums to look like nothing more than naughty
child's play.
William Mackey
The poster child for inflation has to be in the retail housing market. Fixer Uppers that went
begging for a buyer two years ago are the subject of bidding wars today. Biden is pouring
trillions into an emergency that is not there.
DANIEL PETROSINI
The Fed is now just another political entity. They are justifying the ridiculous
increase in money supply with the 'temporary' argument. It is critical to note, they have
always been late. This will not end well.
jennifer raineri
So right. And everyone is just whistling through the graveyard.
Ivaylo Ivanov
One possibility is that households spend some of their savings but continue to save more
than before in case of future trouble, while higher prices make people think twice about
splashing out.
When people see prices rising across the board they spend and hoard, they don't
save, especially when savings accounts interest rates are 0%.
CHING CHANG TSAI
In my opinion, anyone with common sense knows that inflation is here. Everything is more
expensive than before with a significant difference that draws buyer's attention. Even my
home value appreciates about 20% more than the value in 2020, estimated by the local
government. Thanks to my senior age that helped me to limit the raise to 10%. I protested in
vain due to local taxing authority had hard data on hand to dispute my protest.
I accept the reality except that FED said this inflation is "transitory." I can hardly
wait till next year to see my home value will depreciate back to my 2020 property value. I
hope FED will not "lie" on this subject.
David Weisz
I accept the reality except that FED said this inflation is "transitory."
The Fed description is accurate... it's just whether the transition is to
lower inflation or to runaway inflation.
I accept the reality except that FED said this inflation is "transitory."
The Fed description is accurate... it's just whether the transition is to
lower inflation or to runaway inflation.
Jim McCreary
The biggest single factor that will drive long-term inflation is the absence of downward
price pressure from new Chinese market entrants. Cutthroat pricing from China is the ONLY
reason the West has been able to get away with Money-Printing Gone Wild for the past 20 years
without triggering runaway inflation.
There are no new Chinese entrants because the Chinese are now all in in the world economy.
The existing Chinese competitors are seeing their costs go UP, not down, because they have
fully employed the Chinese population, and have to pay up in order to get and keep
workers.
So, without any more downward price pressure from China, this latest round of
Money-Printing Gone Wild is showing up as price inflation, and will continue to do so.
Batten down the hatches! Stagflation and then runaway inflation are coming!
The read question is when this will happen. So far this year the yield of 10 year bond fluctuate in a rather narrow band. It
does not steadily increases...
Some tried to downplay concern by pointing out that the gains resulted from the "base effect" of comparing current prices with
the artificially depressed "Covid lockdown" prices of March and April of last year. But that ignores the more alarming trend of near-term
price acceleration.
According to the Bureau of Labor Statistics, in every month this year, the month-over-month change in prices has been greater
than the change in the previous month.
In April prices jumped .8% from March, versus an expected gain of just .2%. Clearly, if this trend continues, or even fails to
dramatically reverse, we could be looking at inflation well north of 5 or 6 percent for the calendar year. That would create a big
problem.
Despite Federal Reserve officials' recent assurances that the inflation problem is "transitory," many investors are concluding
that the central bank will have to deal with this problem by tightening monetary policy far sooner than had been expected. This would
make sense if the Fed cared about restraining inflation or, more importantly, had the power to do anything to stop it. In truth,
we are sailing into these waters with little ability to alter speed or course, and we will be wholly at the mercy of the waves we
have spent a generation creating.
The Commerce Department on Friday reported that
consumer spending rose 0.5% in April from a month earlier, which, coming after March's government stimulus-check-fueled surge,
was impressive. The gain was driven by a 1.1% increase in spending on services""an indication of how, with
Covid-19 cases dropping
and
vaccination rates rising , consumers are shifting their behavior. Spending on goods actually declined, with the weakness concentrated
in spending on nondurable goods such as groceries and cleaning products.
But a closer look at April's overall gain indicates it was mainly driven by price increases. By the Commerce Department's measure,
which is the Federal Reserve's preferred gauge of inflation, consumer prices rose 0.6% in April from March, putting them 3.6% above
their year-earlier level. As a result, real, or inflation-adjusted spending declined. Core prices, which exclude the often volatile
food and energy categories to better capture inflation's underlying trend, were up 0.7% from March, and 3.1% on the year. The Fed's
inflation goal is 2%, though it has said it
will tolerate higher readings than that for some time.
Some tried to downplay concern by pointing out that the gains resulted from the "base
effect" of comparing current prices with the artificially depressed "Covid lockdown" prices of
March and April of last year. But that ignores the more alarming trend of near-term price
acceleration.
According to the Bureau of Labor Statistics, in every month this year, the month-over-month
change in prices has been greater than the change in the previous month.
In April prices jumped .8% from March, versus an expected gain of just .2%. Clearly, if this
trend continues, or even fails to dramatically reverse, we could be looking at inflation well
north of 5 or 6 percent for the calendar year. That would create a big problem.
Despite Federal Reserve officials' recent assurances that the inflation problem is
"transitory," many investors are concluding that the central bank will have to deal with this
problem by tightening monetary policy far sooner than had been expected. This would make sense
if the Fed cared about restraining inflation or, more importantly, had the power to do anything
to stop it. In truth, we are sailing into these waters with little ability to alter speed or
course, and we will be wholly at the mercy of the waves we have spent a generation
creating.
Prices for the building blocks of the economy have surged over the past year. Oil, copper, corn and gasoline futures all cost
about twice what they did a year ago, when much of the world was locked down to fight the spread of the deadly coronavirus. Lumber
has more than tripled.
Not sure its adding anything which hasn't been said already but to look at the same thing in a different way:
2, or if you look at it 'sideways' 3, main interwoven factors drive inflation:
Access to money to spend - That can be wage/earnings increases or access to cheap debt. That ups demand & prices follow.
Devaluation of the currency - Pushes up raw material imports & prices follow.
What curbs inflation?:
High taxation
High interest rates
High unemployment
And if anyone can point to any Western Democracy currently willing to implement any one, never mind all three, of those
controls a lot of folk will probably be pretty surprised.
Michael Matus
Commodities prices are not the problem. They are high now because of a short-term surge in demand and supply chain issues. All
should be worked out by this time next year.
The long-term structural problem could be wages. If inflation shows up in wages through wage increases through a multitude
of industries then there will be a problem,....... a major one.
Having all these people on the Dole from the government didn't help things Joe!
But like all Presidents that came after HW Bush all you care about is getting re-elected. Doling out is a great way even if
its at the cost of the country.
The FED as been intervening in the markets for so long that they have no tools left for the next crisis.
The FED painted themselves into a corner and the Stimulus that was not needed left them no Escape.
Michael Brown
"Having all these people on the Dole from the government didn't help things Joe!"
What about raising the minimum wage, and Joe commanding that all workers for federal contractors be paid $15 per hour or more?
You think that could be inflationary?
Michael Matus
I would have to agree with yoiu Michael. I should have mentioned that, thank you for reminding me. However, the main problem with
all the sources trhat I have out on the street and their are mnay. Is WAGE growth. As far as a national mimum wage there is none.
Altough there probably will be now. Most states pay as high or higher than what the Federal Government was proposing.
90% of government contractors make at least $15.00 an hour anyway. The VAST majority of the problem is enhanced unemployment
insurance. The 3 month averge of wage groth ending in March was 3.4%. If it hits > 4.0% that will be bad.
Michael Brown
Excellent points, Michael. The list of government actions instigating inflation would be long indeed.
Michael Matus
Unfortunately, Michael, I would have to Wholeheartedly agree with you, Have a Good Weekend!
JOSEPH MICHAEL
Serious, severe inflationary problems are here, they are just starting, and they are going to get much worse.
Brian Kearns
eh.
best to give corporations a large tax cut
so the can buy back stock
Bill Hestir
I will interested to see if new car prices, lumber prices, new home prices, gasoline prices, and food prices will ever go back
down to pre-pandemic levels.
If not, with all the new anti-business taxes and reluctance of out-of-work laborers to go back to work, how will businesses
not be forced to raise their wages and increase the price of their products even higher than they are today?
At what point, therefore, will the Fed end their "inflation is transitory" farce and raise interest rates?
Deirdre Hood
Food prices, regardless of when inflation ends, will not go down/return to 'normal'.
Supply lines are squeezed (NO ONE can hire reliable transport drivers), low supply of workers, plus factor in a bad
year for wheat, and it turns into the perfect storm for commercial bakers.
Judy Neuwirth
Inflation is just getting started. Cho Bi-Den's hyper-regulated economy is only three months old and already it's 1976 all over
again!
Jim Chapman
Now Judy, it's just "transitory" inflation as per Yellen, Powell and Buyden. You really must stick with the narrative, and remember,
Adam Smith's scurrilous "Invisible Hand" is a ultra-right wing conservative myth. So we are not supposed to believe our lying
eyes.
The price of the benchmark 10-year Treasury inflation-protected security logged its biggest
one-day decline in a month. Shares of real-estate investment trusts slid the most since
January. Commodities were generally flat but dropped the following day.
The three asset classes have vacillated since, but their initial moves showed the unexpected
ways that markets can behave when inflation is rising, especially when many are already
expensive by historical measures.
This week, investors will gain greater insight into the inflation picture when the Commerce
Department updates the Federal Reserve's preferred inflation gauge, the
personal-consumption-expenditures price index. They will also track earnings from the likes of
Dollar General Corp. ,
Costco Wholesale
Corp. and Salesforce.com Inc.
The stakes are high for investors. Inflation dents the value of traditional government and
corporate bonds because it reduces the purchasing power of their fixed interest payments. But
it can also hurt stocks, analysts say, by pushing up interest rates and increasing input costs
for companies.
From early 1973 through last December, stocks have delivered positive inflation-adjusted
returns in 90% of rolling 12-month periods that occurred when inflation""as measured by the
consumer-price index""was below 3% and rising, according to research by Sean Markowicz, a
strategist at Schroders, the U.K. asset-management firm. But that fell to only 48% of the
periods when inflation was above 3% and rising.
A recent report from the Labor Department showed that the
consumer-price index jumped 4.2% in April from a year earlier, up from 2.6% in March. Even
excluding volatile food and energy prices, it was up 3% from a year earlier, blowing past
analysts' expectations for a 2.3% gain.
Analysts say that there are plenty of reasons why inflation won't be able to maintain that
pace for long. The latest year-over-year numbers were inflated by comparisons to deeply
depressed prices from the early days of the pandemic. They were also supported by supply
bottlenecks that many view as fixable and robust consumer demand that could dissipate once
households have spent government stimulus checks.
... ... ...
By comparison, the S&P GSCI Commodity Total Return Index delivered positive
inflation-adjusted returns in 83% of the high and rising inflation periods. "Commodities are a
source of input costs for companies and they're also a key component of the inflation index,
which by definition you're trying to hedge," said Mr. Markowicz.
At the same time, commodities are among the most volatile of all asset classes and can be
influenced by an array of idiosyncratic factors.
Charles Goodhart, the economist from the Bank of England, has just written an important book
arguing that worldwide demographic changes are going to result in a couple of decades of high
inflation. See Charles Goodhart, The Great Democratic Reversal: Ageing Societies, Waning
Inequality, and an Inflation Revival. Maybe the Journal could find someone to review it.
Maybe Ms. Yellen should read it.
(Douglas Levene)
Bruce Fegley
This article is naive, if not ridiculous, for several reasons. I name a few.
1st - the stock market is the best hedge against inflation over a long time period -
years, not daily, weekly, or quarterly. Especially with dividend reinvesting and with an
automatic buying plan like the DRIP plans offered by many companies at no or very low
cost.
2nd - Individuals can buy US government I-series savings bonds at NO COST directly from
the US Treasury, and while they do not completely hedge against inflation, they offer good
interest rates that beat bank interest and are completely insured.
3rd - Toyota and perhaps other car companies offer notes with higher interest than banks
but not FDIC insured. About 1.5% now.
One does not have to blow money away on bitcoin or hold gold, which is taxed as a
collectible and has assay fees on the front and back ends of any buy/sell transaction unless
one is buying coins which have a markup to begin with.
Theo Walker
Started buying I-bonds this month. The rates are great! Easily the best safe investment right
now.
Bryson Marsh
... why would you buy TIPS? The spread is a farce after all.
PHILIP NICHOLAS
Inflation is always sticky . In other words all the prices do not go down . Wages that are
increased , usually stay . Companies sense a new level they can pass on to consumers . And
the Government damage to energy prices will influence prices .
Bryson Marsh
Memory costs, data plans, and televisions are all examples that clearly demonstrate secular
price declines despite periodic increases.
Charles D
"Inflation Forces Investors to Scramble for Solutions"
Hundreds of millions of Americans are going to suffer as the Federal Government
inflates the national debt away over the next 10 to 15 years. Investors will figure it out,
but the little guy will get crushed once again. Oh well, we get the government we deserve.
They are all substantially down, one year from now; except Copper and financials which are
flat.
What does that say about the economy & inflation in one year?
Paul Smith
I am under the impression that the Social Security COLA is based on a September to September
comparison of the CPI-U. That is to say, for example, September 2020 CPI-U vs. September 2021
CPI-U. Is this not correct?
We have had inflation over over the past decade or so. As measured by the CPI-U, it has
hovered around 2 percent. Not a big deal to the Fed's economists. Cumulatively, however, it
adds up.
I have been retired for 16 years. Inflation has eroded the purchasing power of my fixed
pension by 25.5. Mercifully, I have other resources to make up the loss, but for people on a
fixed pension, so-called mild inflation can wreck it over time.
James Webb
Paul, one of the lower estimates for 2022:
"The Kiplinger Letter is forecasting that the annual cost-of-living adjustment for Social
Security benefits for 2022 will be 4.5%, the biggest jump since 2008, when benefits rose
5.8%. That would also be higher than the 3% adjustment The Kiplinger Letter predicted earlier
this year."
From SocialSecurity dot gov:
"To determine the COLA, the average CPI-W for the third calendar quarter of the most
recent year a COLA was determined is compared to the average CPI-W for the third calendar
quarter of the current year. The resulting percentage increase, if any, represents the
percentage that will be used to increase Social Security benefits beginning for December of
the current year. "
So the predicted 4.5-4.7% increase for 2022 will take effect December 31 this year.
Of course the calculation is not completed yet....
James Robertson
The Fed's inflation calculations have become increasingly "fuzzy" since the Boskin Commission
in 1995. The CPI ignores housing, food, and energy. Healthcare gets weighted at 3 percent,
though it accounts for 18 percent of expenditures. "Hedonic quality adjustment" is another
knob the Fed turns to "control" inflation. Inflation calculated by comparing the price of a
basket of goods this year to a basket of goods last year runs quite a bit higher than the
CPI; even higher if you include food, shelter, and energy in that basket.
James Webb
What's in the CPI?
-Food and Beverages (breakfast cereal, milk, coffee, chicken, wine, full service meals,
snacks)
-Housing (rent of primary residence, owners' equivalent rent, fuel oil, bedroom
furniture)
-Clothes (men's shirts and sweaters, women's dresses, jewelry)
-Transportation (new vehicles, airline fares, gasoline, motor vehicle insurance)
-Medical Care (prescription drugs and medical supplies, physicians' services, eyeglasses and
eye care, hospital services)
-Recreation (televisions, toys, pets and pet products, sports equipment, admissions)
-Education and Communication (college tuition, postage, telephone services, computer software
and accessories)
-Other Goods and Services (tobacco and smoking products, haircuts and other personal
services, funeral expenses)
Tim Adams
The core CPI which the Fed uses excludes food and energy. The Consumer price index which is
used for things like social security adjustments does not. These very similar but different
uses of the same acronym just adds to the confusion.
"... there's a growing sense that the forces behind the recovery will eventually feed through to higher prices if left unchecked. One harbinger could be the rally in commodities, with a key index of raw materials this month jumping to a five-year high. ..."
"... "If the stimulus continues, at some point it will become inflationary," said Sanjiv Bhatia, the chief investment officer at Pembroke Emerging Markets in London. "At some point, we believe it will become a problem." ..."
The prospect of tighter monetary conditions in emerging markets still hasn't changed the
overall calculus for many investors, with behemoths including Pacific Investment Management Co.
and BlackRock Inc. focusing on the growth story instead. Developing-nation inflation remains
near a record low, with the economic rebound making assets look "increasingly interesting,"
according to Dan Ivascyn, Pimco's group chief investment officer in Newport Beach,
California.
Yet there's a growing sense that the forces behind the recovery will eventually feed
through to higher prices if left unchecked. One harbinger could be the rally in commodities,
with a key index of raw materials this month jumping to a five-year high.
"If the stimulus continues, at some point it will become inflationary," said Sanjiv
Bhatia, the chief investment officer at Pembroke Emerging Markets in London. "At some point, we
believe it will become a problem."
For now, assurances from the Federal Reserve that inflation in the U.S. is unlikely to get
out of control have supported the bulls. The Fed appears in no rush to raise interest rates, a
move that would siphon capital out of emerging economies currently enjoying the windfall from
U.S. stimulus.
That major central banks currently view inflation as transitory should boost
developing-nation currencies as a whole, according to Henrik Gullberg, a London-based macro
strategist at Coex Partners Ltd.
MSCI Inc.'s emerging-market currency index has climbed to a record high, while the benchmark
equity gauge just posted its biggest two-day rally in almost two weeks amid a rally in energy
and technology shares. On Friday, risk assets got further support when U.S. job growth data
significantly undershot forecasts.
"On the one hand, the valuations of growth stocks look meaningfully less demanding after
recent underperformance coupled with earnings upgrades," said Kate Moore, the head of thematic
strategy at BlackRock in New York. "On the other, rising inflationary pressures from the broad
economic restart and low inventories should be supportive of cyclicals and commodity
producers."
"... Mark Carbana, U.S. rates strategist at Bank of America, still expects U.S. rates to rise further especially if there is a strong reading for the Fed's preferred measure of inflation, personal consumption expenditures, due out next Friday. ..."
"... He expects Treasury yields to rise in the second half of the year ..."
In the U.S., inflation readings have been strong and the minutes of the last Fed meeting
released Wednesday showed there had been
some discussion about slowing bond purchases -- also known as taper talk.
... Mark Carbana, U.S. rates strategist at Bank of America, still expects U.S. rates to
rise further especially if there is a strong reading for the Fed's preferred measure of
inflation, personal consumption expenditures, due out next Friday. "Uncertainty around
inflation is the highest it has been in decades," he said, particularly around whether recent
high readings are temporary or due to changes in the underlying economy. He expects
Treasury yields to rise in the second half of the year , pushed higher by rises in yields
on inflation-protected Treasurys as the Fed starts to talk more seriously about tapering its
bond purchases.
As the credit strategist continues, "while it is easy to blame transitory factors, these
were surely all known about before the last several data prints and could have been factored
into forecasts. That they weren't suggests that the transitory forces are more powerful than
economists imagined or that there is more widespread inflation than they previously believed.
"
To be sure, all such "˜surprise' indices always mean revert so the inflation one will
as well. However as Reid concludes, "the fact that we're seeing an overwhelming positive beat
on US inflation surprises in recent times must surely reduce the confidence to some degree of
those expecting it to be transitory. "
Inflation fears already roiled the market this week with the Nasdaq falling nearly 2%, but
one hedge fund founder is sounding the alarm over a potential 20% collapse that could be
sparked by the Federal Reserve signaling an end to accommodative pandemic-era monetary policy
later this year.
Satori Fund founder Dan Niles recently told Yahoo Finance that this week's
hotter-than-anticipated inflation data coupled with other central banks around the world
already coming off their easy money policies will likely corner the Fed into tapering its
accommodative policies sooner than expected.
"If you've got food prices, energy prices, shelter prices moving up as rapidly as they are,
the Fed's not going to have any choice," he said, predicting that the Fed could signal the
beginning of a move to wind down its monthly $120 billion a month pace of asset purchases by
this summer. "They can say what they want, but this reminds me to some degree of them saying
back in 2007 that the subprime crisis was well contained. Obviously it wasn't."
Can it be wage driven inflation, when there is mass unemployment of the scale that we
observer. That's a stupid idea. Commodites driven inflation is possible as oil if probably past
its peak, but for now production continued at plato level and cars are getting slightly more
economical, espcially passenger car, where hybrids reached 40 miles er gallon.
Notable quotes:
"... The prospect of a rebound to 2% yields on the world's benchmark bond is alive and well. ..."
The prospect of a rebound to 2% yields on the world's benchmark bond is alive and
well.
Treasury-market bears found a deeper message within Friday's weak employment report that's
emboldened a view that inflationary pressures are on the rise, and could boost rates to levels
not seen since 2019. For Mark Holman at TwentyFour Asset Management, the sub-par April labor
reading indicated companies will need to lift wages to entice people back into the labor force;
he's expecting a break of 2% on the 10-year this year.
That level has come to symbolize a return to pre-pandemic normalcy in both markets and the
economy. The wild ride in markets on Friday suggests Holman likely has company in his views.
Ten-year yields initially plunged to a more than two-month low of 1.46%, then reversed to end
the day at 1.58%. Meanwhile, a key market proxy of inflation expectations surged to a level
last seen in 2013.
I agree that Fed might lose the control: much depends on the continuation of the status of
the dollar as the main reserve currency. If this position continue to weaken all beta are
off.
What would happen to the financial system if the Fed stopped printing massive amounts of
money for stimulus and debt service? Williams explains,
" You could see financial implosion by preventing liquidity being put into the system. The
system needs liquidity (freshly created dollars) to function. Without that liquidity, you
would see more of an economic implosion than you have already seen. In fact, I will contend
that the headline pandemic numbers have actually been a lot worse than they have been
reporting. It also means we are not recovering quite as quickly. The Fed needs to keep the
banking system afloat. They want to keep the economy afloat. All that requires a tremendous
influx of liquidity in these difficult times."
So, is the choice inflation or implosion? Williams says, "That's the choice, and I think we
are going to have a combination of both of them. .."
" I think we are eventually headed into a hyperinflationary economic collapse. It's not
that we haven't been in an economic collapse already, we are coming back some now. . . . The
Fed has been creating money at a pace that has never been seen before. You are basically up
75% (in money creation) year over year. This is unprecedented. Normally, it might be up 1% or
2% year over year. The exploding money supply will lead to inflation. I am not saying we are
going to get to 75% inflation -- yet, but you are getting up to the 4% or 5% range, and you
are soon going to be seeing 10% range year over year. . . . The Fed has lost control of
inflation. "
And remember, when the Fed has to admit the official inflation rate is 10%, John Williams
says, "When they have to admit the inflation rate is 10%, my number is going to be up to around
15% or higher. My number rides on top of their number."
Right now, the Shadowstat.com inflation rate is above 11%. That's if it were calculated the
way it was before 1980 when the government started using accounting gimmicks to make inflation
look less than it really is. The Shadowstats.com number cuts out all the accounting gimmicks
and is the true inflation rate that most Americans are seeing right now, not the "official"
4.25% recently reported.
Williams says the best way to fight the inflation that is already here is to buy tangible
assets. Williams says,
"Canned food is a tangible asset, and you can use it for barter if you have to. . . .
Physical gold and silver is the best way to protect your buying power over time."
Gold may be a bit expensive for most, but silver is still relatively cheap. Williams says,
"Everything is going to go up in price."
When will the worst inflation be hitting America? Williams predicts,
"I am looking down the road, and in early 2022, I am looking for something close to a
hyperinflationary circumstance and effectively a collapsed economy."
Join Greg Hunter of USAWatchdog.com as he goes One-on-One with John Williams, founder of
ShadowStats.com.
2 play_arrow 1
Nikki Alexis 7 minutes ago
John Williams warning about hyperinflation is like Peter Schitt telling me stocks are
going to crash. It's coming, it's coming! Boy crying wolf.
Cautiously Pessimistic 59 minutes ago
Accounting Gimmicks. Election Gimmicks. Gender Gimmicks. Science Gimmicks. Rule of Law
Gimmicks.
America has become one big fun house of gimmicks.
Time for a RESET.
NoDebt 54 minutes ago remove link
Yeah, the Reset Gimmick. Where they fundamentally transform themselves into a permanent
position of power. Never mind that they'll kill millions to achieve it.
Samual Vimes 47 minutes ago (Edited)
What about gutting primary dealers by buying T bills directly ?
Who Bought the $4.7 Trillion of Treasury Securities Added Since March 2020 to the
Incredibly Spiking US National Debt?by Wolf Richter • May 17, 2021 •
119 CommentsThe Fed did. Nearly everyone did. Even China nibbled again. Here's who
holds that monstrous $28.1 trillion US National Debt.By Wolf Richter for WOLF STREET .
The US national debt has been decades in the making, was then further fired up when the tax
cuts took effect in 2018 during the Good Times. But starting in March 2020, it became the
Incredibly Spiking US National Debt. Since that moment 15 months ago, it spiked by $4.7
trillion, to $28.14 trillion, amounting to 128% of GDP in current dollars:
But who bought this $4.7 trillion in new
debt?
We can piece this together through the first quarter in terms of the categories of holders:
Foreign buyers as per the Treasury International Capital data,
released this afternoon by the Treasury Department; the purchases by the Fed as per its weekly
balance sheet; the purchases by the US banks as per the Federal Reserve Board of Governors bank
balance-sheet data; and the purchases by US government entities, such as US government pension
funds, as per the Treasury Department's data on Treasury securities.
Foreign creditors of
the US.
Japan , the largest foreign creditor of the US, dumped $18 billion of US Treasuries in
March, reducing its stash to $1.24 trillion. Since March 2020, its holdings dropped by $32
billion.
China had been gradually reducing its holdings over the past few years, but then late last
year started adding to them again. In March, its holdings ticked down for the first time in
months, by $4 billion, bringing its holdings to $1.1 trillion. Since March 2020, it added $9
billion:
But Japan's and China's importance as creditors to the US has been diminishing because the
US debt has ballooned. In March, their combined share (green line) fell to 8.3%, the lowest in
many years:
All foreign holders combined dumped $70 billion in Treasury securities in March, bringing
their holdings to $7.028 trillion (blue line, left scale). But this was still up by $79 billion
from March 2020.
These foreign holders include foreign central banks, foreign government entities, and
foreign private-sector entities such as companies, banks, bond funds, and individuals. Despite
the increase of their holdings since March 2020, their share of the Incredibly Spiking US
National Debt fell to 25.0%, the lowest since 2007 (red line, right scale):
After Japan & China, the 10 biggest foreign holders include tax havens where US
corporations have mailbox entities where some of their Treasury holdings are registered. But
Germany and Mexico, with which the US has massive trade deficits, are in 17th and 24th place.
The percentages indicate the change from March 2020. Note the percentage increase of India's
holdings:
US government funds hit record, but share of total debt drops further.
US government pension funds for federal civilian employees, pension funds for the US
military, the US
Social Security Trust Fund , and other federal government funds bought on net $5 billion of
Treasury securities in Q1 and $98 billion since March 2020, bringing their holdings to a record
of $6.11 trillion (blue line, left scale).
But that increase was outrun by the Incredibly Spiking US National Debt, and their share of
total US debt dropped to 21.8%, the lowest since dirt was young, and down from a share of 45%
in 2008 (red line, right scale):
Federal Reserve goes hog-wild: monetization of
the US debt.
The Fed bought on net $243 billion of Treasury securities in Q1 and $2.44 trillion since it
began the bailouts of the financial markets in March 2020. Over this period through March 31,
it has more than doubled its holdings of Treasuries to $4.94 trillion (blue line, left scale).
It now holds a record of 17.6% of the Incredibly Spiking US National Debt (red line, right
scale):
US Banks pile them up.
US commercial banks bought on net $28 billion in Treasury securities in Q1 and $267 billion
since March 2020, bringing the total to a record $1.24 trillion, according to Federal Reserve
data on bank balance sheets. They now hold 4.4% of the Incredibly Spiking US National
Debt:
Other US entities & individuals
So far, we covered the net purchases by all foreign-registered holders, by the Fed, by US
government funds, and by US banks. What's unaccounted for: US individuals and institutions
other than the Fed, the banks, and the government. These include bond funds, private-sector,
state, and municipal pension funds, insurers, US corporations, hedge funds (they use Treasuries
in complex leveraged trades), private equity firms that need to park billions in "dry powder,"
etc.
These US entities hold the remainder of Incredibly Spiking US National Debt. Their holdings
surged by $149 billion in Q4 and by $2.35 trillion since March 2020, to a record $8.76 trillion
(blue line, left scale). This raised their share of the total debt to 31.2% (red line, right
scale), making these US individuals and institutions combined the largest holder of that
monstrous mountain of debt:
The Incredibly Spiking US National Debt and who
holds it, all in one monstrous pile:
Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get
why – but want to support the site? You can donate. I appreciate it immensely. Click on
the beer and iced-tea mug to find out how:
Inflation fears already roiled the market this week with the Nasdaq falling nearly 2%, but
one hedge fund founder is sounding the alarm over a potential 20% collapse that could be
sparked by the Federal Reserve signaling an end to accommodative pandemic-era monetary policy
later this year.
Satori Fund founder Dan Niles recently told Yahoo Finance that this week's
hotter-than-anticipated inflation data coupled with other central banks around the world
already coming off their easy money policies will likely corner the Fed into tapering its
accommodative policies sooner than expected.
"If you've got food prices, energy prices, shelter prices moving up as rapidly as they are,
the Fed's not going to have any choice," he said, predicting that the Fed could signal the
beginning of a move to wind down its monthly $120 billion a month pace of asset purchases by
this summer. "They can say what they want, but this reminds me to some degree of them saying
back in 2007 that the subprime crisis was well contained. Obviously it wasn't."
For their part,
Fed officials have remained adamant that a rise in inflation is to be expected as a
transitory reality of the economy reopening from the pandemic lockdown. The latest print
from the Bureau of Labor Statistics out this week , however, may have spooked investors
when it showed consumer prices for the month of April rose at their fastest annual pace since
2008. That inflation metric, which is different than the Fed's
preferred Personal Consumption Expenditures (PCE) index , jumped to a 4.2% rise over the
last 12 months. The Fed has already signaled it would be comfortable staying accommodative even
if inflation in the recovery shoots past 2% as measured by its preferred metric.
In the US, this translates to a growth environment where GDP will be 3pp above its
pre-COVID-19 path by end-2022 and underlying core PCE inflation (adjusted for base effects)
rises above 2%Y from March 2022. The Fed, which is now aiming for inflation averaging 2%Y and
maximum employment, should remain accommodative. Our chief US economist Ellen Zentner expects
the Fed to signal its intention to taper asset purchases at the September FOMC meeting, to
announce it in March 2022 and to start tapering from April 2022 . On our forecasts, rate hikes
begin in 3Q23, after inflation remains at or above 2%Y for some time and the labour market
reaches maximum employment.
What are the risks to this story? Most obvious is the emergence of new COVID-19 variants
that resist vaccines. However, I have argued that the biggest threat to this cycle is an
overshoot in US core PCE inflation beyond the Fed's implicit 2.5%Y threshold – a serious
concern, in my view, which could emerge from mid-2022 onwards .
Portal 4 hours ago
LMFAO!!!
You sent manufacturing and industry to China.
There is no "red hot recovery.". Just a long descent into fascism and communist
poverty.
Newpuritan 4 hours ago
The "red hot recovery." they are hoping for is replacing all efficient energy production
with inefficient "green" energy. The costs will be astronomical but are hoped to offset the
Boomer generation retirement period.
Iskiab 2 hours ago (Edited)
Yea, all these forecasting models are garbage. They're all based on a faulty assumption
that trends continue so the growth we see now will continue, plus things will revert back to
the trend line. Junk in, junk out.
A more realistic assessment would be there was a bump from reopening, but costs have
increased. It will be impossible to get back to the old growth trend line, and expect the low
growth of the last 20 years to continue from hereon out. The stimulus will help a bit but not
much, most of the stimulus was misallocated.
JH2020 3 hours ago (Edited)
It's the sycophants of the Wall Street/government confidence game, dropping words that,
hopefully, lead to buying securities, not selling, though, perversely, any negative truths
result in the assumption there will be a new flood of free money, from the Fed, driving
margin debt even more vertical, such that one needs a second page for the chart, or a more
drastic log scale. (In this economy so red hot interests rates need to be kept near zero, for
the remainder of the century, and near daily reassurance the Fed will accommodate anything
and everything, whatsoever, anytime a sector gets some heartburn, or a red candlestick gets
too large.)
Red hot = FOMO bait.
The "red not" verbiage is comical, reminds me of Hollywood sycophants, that write reviews
of some pretend person, some degenerate nobody, "In an unparalleled display of performing
brilliance, in this worthy sequel to A Couple Hours of Brains Splattered All Over the Wall,
and which only proves his sheer genius, the way he flared his nostrils, while driving in the
chase scene, that went two times around the entire city perimeter, in the ongoing
lanes...".
ebworthen 4 hours ago
"Red hot global recovery"? ROFLMAO!
That isn't recovery, it is money printing, inflation, and rabid speculation.
hugin-o-munin 4 hours ago (Edited)
Who do these people think they can fool?
This was about the dumbest article by a bank in a long while. Pushing a contrarian lie too
hard reveals it quicker than keeping quiet. Someone should remind Morgan Stanley of this age
old truth. Real inflation is destroying the USD right now. Ignoring it and pretending
otherwise will only accelerate the fall into hyper inflation.
J J Pettigrew 3 hours ago
A little inflation is good for you.
What's a little? 2.5%? For ten years....a flat chart of 2.5% each year... .looks like
nothing happened....just 28% off the value of the dollar...thats all.
Sound of the Suburbs 2 hours ago
How does anything really work?
I don't know, I use neoclassical economics.
Everyone tries to kill growth by making the same mistakes as Japan.
Japan led the way and everyone followed.
At 25.30 mins you can see the super imposed private debt-to-GDP ratios.
Why did they think private debt wouldn't be a problem after 2008?
Probably the same reason they didn't notice it building up before 2008.
The economics of globalisation has always had an Achilles' heel.
The 1920s roared with debt based consumption and speculation until it all tipped over into
the debt deflation of the Great Depression. No one realised the problems that were building
up in the economy as they used an economics that doesn't look at debt, neoclassical
economics.
Not considering private debt is the Achilles' heel of neoclassical economics.
That explains it.
"We cannot solve our problems with the same thinking we used when we created them." Albert
Einstein.
Who do you think you are?
This is what we are going to do, whether you like it or not.
He must be one of those populists.
Einstein was right of course, but you know what neoliberals are like.
Anyone that doesn't go along with their ideas must be a populist.
Sound of the Suburbs 2 hours ago (Edited) remove link
Not considering private debt is the Achilles' heel of neoclassical economics.
Weak analysis. The fundamental factor is the price for energy, not some trivia like used cars
and trucks. Teh second dot com bubble will deflate but it is unclear when and whether this is a
crash or gradual deplation of worthless junk stocks which enjoyed "profitless" IPOs.
With rising energy prices it is more difficult to keep interpreting high CPI numbers as
temporary. But like in the past the USA will fight the rise in energy prices tools and nail. With
the full power of their global neoliberal empire.
... prices for used cars and trucks jumped 10 per cent in April alone, accounting for a
large slice of the gains in the overall index.
"It looks like Wall Street is climbing the wall of worry," said Gregory Perdon, co-chief
investment officer at private bank Arbuthnot Latham. "The bears are constantly looking for
signs that the world is going to end. They come up with all the potential excuses. The reality
is that the only question that matters is whether the reopening is going OK or not.
... Notably, while 10-year US yields did rise on Wednesday after the inflation data release,
they did not hit new highs.
Inflation is back. The U.S. consumer-price index
surged to a 13-year high of 4.2% in April, official data showed Wednesday. The eurozone's
figure is a weaker 1.6%, but still a two-year high. The global bond market isn't panicking yet.
The pandemic led many distressed companies to slash prices in 2020. Investors always knew that,
as the economy reopened, some year-over-year increases would be huge.
The prices of most products
haven't changed much . CPI gyrations are mostly down to a few items particularly affected
by lockdowns and travel restrictions, such as airfares and restaurant prices, as well as
commodities. Excluding food and energy, U.S. inflation in April was just 3%.
... Over the past few decades, for example, CPI figures
have mostly been the results of a concatenation of "temporary" trends in different sectors
-- the costs of education and healthcare rose nonstop, while the prices of many goods
continuously fell. It was different in the 1970s, when an idiosyncratic squeeze in the supply
of oil fueled an inflationary spiral that pushed all costs up.
...As Peter Schiff put it, CPI is a lie . Grant used the
evolution of the toothbrush into its electric form as an example. How do you measure the clear
quality improvements in the toothbrush? The government uses hedonics to measure these changes,
but as Grant pointed out, this is "inexact and not really a science."
Grant believes that the economy can only tolerate 2.5% real rates. If that is breached, he
thinks the Fed will have to resort to yield-curve control. If it does actually try to shrink
its balance sheet and sell bonds, it will drive bond yields even higher. Fed bond-buying is the
only thing propping up the bond market right now.
In fact, the Fed is propping up the entire economy. There is a sense that the Fed will
always step in and save the markets. As a result, we have bubbles everywhere, from the stock
market, to real estate, to cryptocurrency.
"These are strange and oppressive markers of financial markets that have lost moorings of
valuation," Grant said.
I think the astounding complacency toward, or indifference of, the evident excesses in our
monetary and fiscal affairs I think the lack of concern about those things is perhaps the
most striking inflationary augur I know of."
Meanwhile, the Fed continues to create money. M1 annual growth is 350%; M2 is growing at
approximately 28%.
"Never before have we had monetary peacetime growth this fast," Grant said.
"Tell me who cares."
Grant said central bankers like Powell are guilty of hubris. They suffer from the delusion
that they can actually control everything. Grant called the Fed "un-self-aware."
Despite Jay Powell's credentials, he knows nothing about the past and believes he knows
everything about the future."
Grant talked about gold ,
saying it is an investment in "monetary disorder."
To me, gold isn't a hedge against monetary disorder. It's an investment in monetary
disorder, which is what we have. We have floating-rate currencies. We have manipulated
exchange rates. We have manipulated interest rates. When the cycle turns, people will want
gold and silver, and they will want something tangible ."
Consumers are picking up on the rise of inflation, and the Fed, which has been trying to
heat up inflation, is pleased. The Fed watches "inflation expectations" carefully. The minutes
from the March FOMC meeting mention "inflation expectations" 12 times.
The New York Fed's Survey of Consumer
Expectations for April, released today, showed that median inflation expectations for one
year from now rose to 3.4%, matching the prior highs in 2013 (the surveys began in June
2013).
But wait the median earnings growth expectations 12 months from now was only 2.1%, and
remains near the low end of the spectrum, a sign that consumers are grappling with consumer
price inflation outrunning earnings growth. The whoppers were in the major specific
categories.
History repeats and the repetition is coming with some minor variations.
Notable quotes:
"... "Corporate bond rates have been rising steadily since May. Yellen is not doing what Greenspan did in 2004." ..."
"... There isn't much of a difference between signaling tighter money to a market that is skeptical of Fed forecasts and actually tightening. ..."
"... While at 5.0 percent, the unemployment rate is not extraordinarily high, most other measures of the labor market are near recession levels. The percentage of the workforce that is involuntarily working part-time is near the highs reached following the 2001 recession. The average and median duration of unemployment spells are also near recession highs. And the percentage of workers who feel confident enough to quit their jobs without another job lined up remains near the low points reached in 2002. ..."
"... While wage growth has edged up somewhat in recent months by some measures, it is still well below a rate that is consistent with the Fed's inflation target. Hourly wages have risen at a 2.7 percent rate over the last year. If there is just 1.5 percent productivity growth, this would be consistent with a rate of inflation of 1.2 percent. ..."
"... One positive point in today's action is the Fed's commitment in its statement to allow future rate hikes to be guided by the data, rather than locking in a path towards "normalization" as was effectively done in 2004. ..."
Washington, D.C.- Dean Baker, economist and a co-director of the Center for Economic and Policy Research (CEPR) issued the
following statement in response to the Federal Reserve's decision regarding interest rates:
"The Fed's decision to raise interest rates today is an unfortunate move in the wrong direction. In setting interest rate policy
the Fed must decide whether the economy is at risk of having too few or too many jobs, with the latter being determined by the
extent to which its current rate of job creation may lead to inflation. It is difficult to see how the evidence would lead the
Fed to conclude that the greater risk at the moment is too many jobs.
"While at 5.0 percent, the unemployment rate is not extraordinarily high, most other measures of the labor market are near
recession levels. The percentage of the workforce that is involuntarily working part-time is near the highs reached following
the 2001 recession. The average and median duration of unemployment spells are also near recession highs. And the percentage of
workers who feel confident enough to quit their jobs without another job lined up remains near the low points reached in 2002.
"If we look at employment rates rather than unemployment, the percentage of prime-age workers (ages 25-54) with jobs is still
down by almost three full percentage points from the pre-recession peak and by more than four full percentage points from the
peak hit in 2000. This does not look like a strong labor market.
"On the other side, there is virtually no basis for concerns about the risk of inflation in the current data. The most recent
data show that the core personal consumption expenditure deflator targeted by the Fed increased at just a 1.2 percent annual rate
over the last three months, down slightly from the 1.3 percent rate over the last year. This means that the Fed should be concerned
about being below its inflation target, not above it.
"While wage growth has edged up somewhat in recent months by some measures, it is still well below a rate that is consistent
with the Fed's inflation target. Hourly wages have risen at a 2.7 percent rate over the last year. If there is just 1.5 percent
productivity growth, this would be consistent with a rate of inflation of 1.2 percent.
"Furthermore, it is important to recognize that workers took a large hit to their wages in the downturn, with a shift of more
than four percentage points of national income from wages to profits. In principle, workers can restore their share of national
income (the equivalent of an 8 percent wage gain), but the Fed would have to be prepared to allow wage growth to substantially
outpace prices for a period of time. If the Fed acts to prevent workers from getting this bargaining power, it will effectively
lock in place this upward redistribution. Needless to say, workers at the middle and bottom of the wage distribution can expect
to see the biggest hit in this scenario.
"One positive point in today's action is the Fed's commitment in its statement to allow future rate hikes to be guided
by the data, rather than locking in a path towards "normalization" as was effectively done in 2004. If it is the case that
the economy is not strong enough to justify rate hikes, then the hike today may be the last one for some period of time. It will
be important for the Fed to carefully assess the data as it makes its decision on interest rates at future meetings.
"Recent economic data suggest that today's move was a mistake. Hopefully the Fed will not compound this mistake with more unwarranted
rate hikes in the future."
RC AKA Darryl, Ron said in reply to Peter K....
I like Dean Baker. Unlike the Fed, Dean Baker is a class warrior on the side of the wage class. He makes the point about the
path to normalization being critical that I have been discussing for quite a while. Let's hope this Fed knows better than Greenspan/Bernanke
in 2004-2006. THANKS!
likbez said in reply to RC AKA Darryl, Ron...
Very true !
pgl said in reply to RC AKA Darryl, Ron...
"Longer-term bond rates barely moved, showing that there was very little news." This interest rate rose from 4.45% to 5.46%
already. So the damage was already done:
"... This interest rate rose from 4.45% to 5.46% already..."
Exactly! Corporate bond rates have been rising steadily since May. Yellen is not doing what Greenspan did in 2004. Yellen's
Fed waited until the bond rate lifted off on its own (and maybe with some help from policy communications) before they raised
the FFR.
So far, there is no sign of their making a fatal error. They are not fighting class warfare for wage class either, but they
seem intent on not screwing the pooch in the way that Greenspan and Bernanke did. No double dip thank you and hold the nuts.
"... "It's just unbelievable that central banks are actively encouraging this." ..."
"... Good point. Many times we look at charts and say WTF but once you normalize to inflation, maybe this is not as bad as originally it appeared ..."
"... reminds me of an abusive husband telling his beaten wife, "See what you made me do!" ..."
"... Hussman says the right way to do that is to look at margin debt to GDP ration, which is a record. GDP is doubling rate is about every 20 years now at nominal 3.5% ..."
"... That description applies to most Wall Streeters and banksters, whose titanic egos are amazing given the fact that most are parasites that contribute less than a woodlouse to society. Still, I dread the coming US debt collapse discussed in this website, which I would term a debt explosion as all of the bubbles start to pop and so many debtors and former creditors (like lessors, banks, etc.) become publicly known to be legally insolvent. ..."
"... I have invested carefully but we will all lose much or most of our savings. ..."
"... It is very irritating to think of the trillions that the banksters' deceptively named, "Federal" Reserve has been transferring to its ultra-rich owners for decades. They will probably even avoid most taxation again. ..."
Exactly. It is way more scary than even Wolf's charts suggest because there are so many
layers of leverage stacked on top of each other.
People taking out margin debt on stock portfolios that they bought by re-mortgaging their
bubbled houses to buy stocks with record corporate debt, collaterised (if at all) with bubble
assets, at record valuations driven itself by leverage etc etc
It's just unbelievable that central banks are actively encouraging this.
The amount of margin debt is not a WTF amount if you use the prices-double each 11 year
rule of thumb.
This 11 year period is strikingly accurate if you take the price of the New York Times
since 1900 (I have a booklet with frontpages of each year and discovered this when looking at
the selling prices). Having said that, the current 800B is the same as the previous inflation corrected peaks
of 2009 and around 1999.
So yes, Wolf is 100% correct with the prediction on what is coming. It is just not a WTF
amount but a history-repeats-itself moment
"normalize to inflationary, maybe not as bad as originally it appeared"
I know what you mean, but then the (major) problem is that the inflation itself shouldn't be viewed as "normal". Kinda reminds me of a gvt program defending doubled budget over 8 yrs because of
"inflation" when in point of fact it is likely that G printing/policy has *created* the
inflation in the first place (to help fund the program now pointing at inflation).
Also, reminds me of an abusive husband telling his beaten wife, "See what you made me
do!"
Hussman says the right way to do that is to look at margin debt to GDP ration, which is a record. GDP is doubling rate is about
every 20 years now at nominal 3.5%
That description applies to most Wall Streeters and banksters, whose titanic egos are
amazing given the fact that most are parasites that contribute less than a woodlouse to
society. Still, I dread the coming US debt collapse discussed in this website, which I would
term a debt explosion as all of the bubbles start to pop and so many debtors and former
creditors (like lessors, banks, etc.) become publicly known to be legally insolvent.
It is unfortunate that it may happen at the worst possible time, when we face an adversary
worse and more powerful than the Soviet Union or Nazi Germany ever was. I have invested
carefully but we will all lose much or most of our savings.
It is very irritating to think of
the trillions that the banksters' deceptively named, "Federal" Reserve has been transferring
to its ultra-rich owners for decades. They will probably even avoid most taxation again.
I do not like to even think how many Americans will wind up. Remember the saying "There
but for the grace of god, go I." Many of us will be saying that a lot in the coming years if
we are very fortunate.
"... The CPI is calculated by analyzing the price of a "basket of goods." The makeup of that basket has a big impact on the final CPI number. According to WolfStreet , 10.9% of the CPI is based on durable goods (computers, automobiles, appliances, etc.). Nondurable goods (primarily food and energy) make up 26.6% of CPI. Services account for the remaining 62.5% of the basket. This includes rent, healthcare, cellphone service etc.) ..."
"... The things the government includes and excludes from the basket can make a profound difference in that final CPI number. Back in 1998, the government significantly revised the CPI metrics. Even the Bureau of Labor Statistics (BLS) admitted the changes were "sweeping." ..."
"... In 1998, the BLS followed the recommendations of the Boskin Commission. It was appointed by the Senate in 1995. Initially called the "Advisory Commission to Study the Consumer Price Index," its job was to study possible bias in the computation of the CPI. Unsurprisingly, it determined that the index overstated inflation " by about 1.1% per year in 1996 and about 1.3% prior to 1996. The 1998 changes to CPI were meant to address this "issue." ..."
"... As Peter pointed out, there is a lot of geometric weighting, substitution and hedonics built into the calculation. The government can basically create an index that outputs whatever it wants. ..."
"... Peter said there is a bit of irony in government officials and central bankers constantly complaining about "not enough inflation." ..."
"... They're the ones that are cooking the books to pretend that inflation is lower than it really is. Because what they're really trying to do is get the go-ahead to produce more inflation, which is printing money." ..."
"... And there are other things that hide inflation. For instance, shrinking packaging so there is less product sold at the same price, or substituting lower quality ingredients, or requiring consumers to assemble items themselves. ..."
"... They find different ways to lower the quality and not increase the price, and I'm sure that the government is not picking up on any of that. If the quality improves, yeah, yeah, they calculate that. But they probably ignore all the circumstances where the quality is diminished." ..."
"... The bottom line is we can't trust CPI to tell us the truth about inflation. ..."
And we're seeing rising prices all over the place, from the grocery store to the gas station. Even
the government numbers flash
warning signs . But as Peter Schiff explains in this clip from an interview with Jay Martin, it's probably even worse than we
realize because the government cooks the numbers when it calculates CPI.
The monthly rises in CPI
through the first quarter show an upward trend. The CPI in January was up 0.3%. It was up 0.4% in February. And now it's up 0.6%
in March. That totals a 1.013% increase in Q1 alone. The question is does this really reflect the truth about inflation? Peter doesn't
think it does.
The government always makes changes to their methods of measuring things, whether it's GDP, or inflation, or unemployment.
And they always tweak the numbers to produce a better result as a report card. "
Imagine if students in a school had the ability to change the metrics by which they were graded or the methodology the teacher
used to calculate their grades.
Would it surprise anybody that all of a sudden they started getting more As and Bs and fewer Cs and Ds? The government always
wants to make the good stuff better, like economic growth, and the bad stuff better, like unemployment or inflation. So, they
want to find ways to make those numbers little and the good numbers big."
The CPI is calculated by analyzing
the price of a "basket of goods." The makeup of that basket has a big impact on the final CPI number. According to WolfStreet , 10.9%
of the CPI is based on durable goods (computers, automobiles, appliances, etc.). Nondurable goods (primarily food and energy) make
up 26.6% of CPI. Services account for the remaining 62.5% of the basket. This includes rent, healthcare, cellphone service etc.)
The things the government includes and excludes from the basket can make a profound difference in that final CPI number. Back in 1998, the government significantly revised the CPI metrics. Even
the Bureau of Labor Statistics
(BLS) admitted the changes were "sweeping."
According to the BLS, periodic changes to the CPI calculation are necessary because "consumers change their preferences or new
products and services emerge. During these occasions, the Bureau reexamines the CPI item structure, which is the classification scheme
of the CPI market basket. The item structure is a central feature of the CPI program and many CPI processes depend on it."
In 1998, the BLS followed the recommendations of the Boskin Commission. It was appointed by the Senate in 1995. Initially called
the "Advisory Commission to Study the Consumer Price Index," its job was to study possible bias in the computation of the CPI. Unsurprisingly,
it determined that the index overstated inflation " by about 1.1% per year in 1996 and about 1.3% prior to 1996. The 1998 changes
to CPI were meant to address this "issue."
As Peter pointed out, there is a lot of geometric weighting, substitution and hedonics built into the calculation. The government
can basically create an index that outputs whatever it wants.
I think this period of "˜Oh wow! We have low inflation!' It's not a coincidence that it followed this major revision into how
we calculate it."
Peter said there is a bit of irony in government officials and central bankers constantly complaining about "not enough inflation."
They're the ones that are cooking the books to pretend that inflation is lower than it really is. Because what they're really
trying to do is get the go-ahead to produce more inflation, which is printing money."
Peter said the CPI will never reveal the true extent of rising prices.
And there are other things that hide inflation. For instance, shrinking packaging so there is less product sold at the same price,
or substituting lower quality ingredients, or requiring consumers to assemble items themselves.
They find different ways to lower the quality and not increase the price, and I'm sure that the government is not picking up
on any of that. If the quality improves, yeah, yeah, they calculate that. But they probably ignore all the circumstances where
the quality is diminished."
The bottom line is we can't trust CPI to tell us the truth about inflation.
"... "In a highly inflationary environment, we like the auto parts space with its unique ability to pass-through higher costs to customers given the non-discretionary nature of the category," says Goldman Sachs analyst Kate McShane. "For instance, in 2019, telegraphed prices increases to offset cost pressures arising from tariffs provided an incremental benefit to same-store sales growth and most auto parts retailers cited between 150-300 basis points of tariff-related inflation." ..."
The investment thesis is pretty straightforward. With mobility across the country picking up (see chart below) as people get vaccinated,
cars will likely need more maintenance. That leaves auto parts retailers such as O'Reilly (
ORLY ), Genuine Parts Company (
GPC ), AutoZone (
AZO ) and Advance Auto Parts (
AAP ) in the enviable position of being able
to pass inflation in everything from tires to car wax on to consumers and then post strong profits.
"In a highly inflationary environment, we like the auto parts space with its unique ability to pass-through higher costs to
customers given the non-discretionary nature of the category," says Goldman Sachs analyst Kate McShane. "For instance, in 2019, telegraphed
prices increases to offset cost pressures arising from tariffs provided an incremental benefit to same-store sales growth and most
auto parts retailers cited between 150-300 basis points of tariff-related inflation."
McShane rounds out her bullish thesis on auto parts retailers by noting the main sector plays sport price-to-earnings multiples
below historical averages. Of the four aforementioned auto parts retailers, AutoZone has the lowest forward price-to-earnings multiple
of 18.7 times, according to Yahoo Finance
Plus data .
Mobility is back on the move higher as people get vaccinated for COVID-19.
As for which name McShane is most bullish on, that award goes to Advance Auto Parts in the wake of a recent analyst day. McShane
made the rare Wall Street move of upgrading her rating on Advance Auto Parts to Buy from Sell.
"Our double tier upgrade " from Sell to Buy " is predicated upon
(1) Advance Auto Parts improving profit and loss dynamics with 2-4% same-store sales per annum and 230-450 basis points of margin
expansion by 2023;
(2) cyclical recovery in do-it-for-me, where Advance Auto Parts has greater exposure vs peers;
(3) a finally improving do-it-yourself story as its new private label and loyalty program appears to be resonating with customers;
(4) improved capital allocation to shareholders;
(5) the ability of the auto parts space to pass-through inflation; and
(6) valuation that looks appealing vs history, especially in light of improving macro and company specific dynamics,"
Signs of inflation are picking up, with a mounting number of consumer-facing companies
warning in recent days that supply shortages and logistical logjams may force them to raise
prices.
Tight inventories of materials as varied as semiconductors, steel, lumber and cotton are
showing up in survey data, with manufacturers in Europe and the U.S. this week flagging record
backlogs and higher input prices as they scramble to replenish stockpiles and keep up with
accelerating consumer demand.
As commodities become increasingly expensive, whether faster inflation proves transitory --
or not -- is the biggest question for policy makers and markets. Rising prices and the
potential for a response from central banks topped the list of concerns for money managers
surveyed by Bank of America Corp.
Many economists and central bankers, from the Federal Reserve on down, maintain that price
gains are temporary and will be curbed by forces such as virus worries and unemployment.
Investors remain skeptical, with businesses including Nestle SA and Colgate-Palmolive Co.
already announcing they’ll need to raise prices.
U.S. Treasury Secretary Janet Yellen, a former Fed chair, entered the debate on Tuesday when
she ruffled markets with the observation that rates will likely rise as government spending
ramps up. She later clarified she was neither predicting nor recommending an increase.
The Bloomberg Commodity Spot Index, which tracks 23 raw materials, has risen to its highest
level in almost a decade. That has pushed a gauge of global manufacturing output prices to its
highest point since 2009, and U.S. producer prices to levels not seen since 2008, according to
data from JPMorgan Chase & Co. and IHS Markit. JPMorgan analysts also estimate non-food and
energy import prices in the biggest economies rose almost 4% in the first quarter, the most in
three years.
“Risk clearly leans to the upside in the current
environment,†said John Mothersole, pricing and purchasing research director at IHS
Markit. “The surge in commodity prices over the past year now guarantees
higher goods-price inflation this summer.â€
Money managers who’ve spent the bulk of their careers profiting from
deflationary trends need to quickly switch gears or risk an “inflation
shock†to their portfolios, warns JPMorgan Chase & Co. chief global markets
strategist Marko Kolanovic.
“Many of today’s investment managers have never
experienced a rise in yields, commodities, value stocks, or inflation in any meaningful
way,†Kolanovic wrote in a report Wednesday. “A significant
shift of allocations towards growth, ESG and low volatility styles over the past decade, all of
which have negative correlation to inflation, left most portfolios vulnerable.â€
After staging a powerful rally since November amid vaccine rollouts and government stimulus,
bets tied to inflation -- rising Treasury yields, cyclical stocks and small-caps, to name a few
-- have taken pause in recent weeks. While that has sparked debate over how long the trend will
persist, Kolanovic urged clients to adjust to the new regime amid the reopening of the global
economy.
“Given the still high unemployment, and a decade of inflation undershoot,
central banks will likely tolerate higher inflation and see it as temporary,†he
wrote. “The question that matters the most is if asset managers will make a
significant change in allocations to express an increased probability of a more persistent
inflation.â€
The way Kolanovic sees it, as data continue to point to higher prices of goods and services,
investors will be forced to shift from low-volatility plays to value stocks, while increasing
allocations to direct inflation hedges such as commodities. That trend is likely to persist in
the second half of the year, he wrote.
Based on JPMorgan’s data, professional investors have yet to fully
embrace the reflation trade. Take equities, for instance. Both computer-driven traders and
hedge funds now hold stocks at levels below historical averages.
“Portfolio managers likely will not take chances and will reposition
portfolios,†Kolanovic wrote. “The interplay of low market
liquidity, systematic and macro/fundamental flows, the sheer size of financial assets that need
to be rotated or hedges for inflation put on, may cause outsized impact on inflationary and
reflationary themes over the next year.â€
And if it doesn't last after the stimmies are gone, dealers will sit on massively
overpriced collateral, which could get messy. By Wolf Richter for WOLF STREET .
This has been going on for months: Used-vehicle prices spiking from jaw-dropper to
jaw-dropper, and just when I thought prices couldn't possibly spike further, they do.
Prices of used vehicles that were sold at auctions around the US in April spiked by 8.3%
from March, by 20% year-to-date, by 54% from April 2020, and by 40% from April 2019, according
to the Used Vehicle Value Index released today by Manheim, the largest auto auction operator in
the US and a unit of Cox Automotive. All heck has broken loose in the used vehicle market:
The price spike has now completely blown by the prior record spike over the 13-month period
through September 2009, which included the cash-for-clunkers program that removed a whole
generation of serviceable older vehicles from the market.
Curiously, the St. Louis Fed says used car prices have been pretty much flat for the last
25 years. While the last year of data shows a notable jump in prices, it's apparently been
bludgeoned a little with some old fashioned hedonic quality adjustments.
I'll help you out since I've been covering this for years. So here is the correct link
that explains it all, new vehicle CPI and used vehicle CPI (which is what you cited), plus
"hedonic quality adjustments."
I can see how the supply for these auctions will be tight for some time given that
business travel and the resulting car rental usage is way down. In addition, I would expect a
lot of corporate car purchasing is down considerably as many sales reps have worked remotely
which stalled corporate car purchasing schedules.
Messrs. Levy and Bordo allude to the sharp drop in the velocity of M2 after the 2007-09
crisis. The actual decline is startling. In the first quarter of 2007 M2 velocity was 1.99, by
the first quarter of 2020 it had fallen almost continually to 1.38. In other words, the money
stock went from turning over twice a year to under 1.4 times a year. This is the primary reason
for the very low inflation over the period.
Because of the Covid lockdowns, M2 fell even further to 1.13 by the fourth quarter of 2020.
As the authors point out, conditions are much different today than in 2007-20 because of
boosted bank reserves, households with substantial savings ready to spend and commercial banks
in good shape and eager to lend. Unless an economy-wide lockdown occurs, these are very good
reasons to believe the velocity of money will increase significantly, just as the 27% surge in
M2 since the outbreak of the pandemic works its way through the economy.
This is a prescription for major inflation, perhaps 4%-5% in the next two years. When people
say "no way," I remind them that in the early 1980s hardly anyone believed that interest rates
would ever return to 1950s levels. While many individuals prefer to trend forecast, never
underestimate how inflation (and interest rates) can swing back and forth in ways that
amaze.
Em. Prof. Stephen Happel
Arizona State University
Tempe, Ariz.
Messrs. Levy and Bordo might have made an equally compelling case about the Fed being in
total denial about the more troubling risk: that its policies have been contributing to a
global asset-price and credit-market bubble.
By maintaining ultralow interest rates and by continuing to expand its balance by $120
billion a month, even when the economy could soon be overheating and U.S. equity valuations are
close to their all-time highs, the Fed risks further inflating the asset-price bubble. By so
doing, it is heightening the chances of a hard economic landing when the Fed is eventually
forced to slam on the monetary-policy brakes to meet its inflation objective.
Desmond Lachman
American Enterprise Institute
Washington
Why did the money supply hardly budge in 2008, whereas now it's steadily increasing? The
answer is that during the financial crisis the Fed conducted a radical experiment: It paid
banks not to lend. By design, quantitative easing shored up banks' balance sheets while
interest on excess reserves prevented the newly created money from circulating.
In March 2020, the Fed slashed interest on excess reserves from 1.60% to 0.10%. The benefits
of sitting on funds is much smaller, which is why lending has increased.
Messrs. Levy and Bordo emphasize structural factors in the U.S. economy, such as housing and
trade. These matter, but not nearly so much as policy. Inflationary pressures will continue if
the Fed's asset purchases increase the broader money supply. But this depends on whether the
Fed raises interest on excess reserves to prepandemic levels.
For better or worse, interest on excess reserves is now a crucial policy tool. We can't
understand inflation without it.
SUBSCRIBER 3 hours ago Yellen and the Fed are currently repeating one of the most disturbing
episodes of U.S. economic history. It happened during the 1940s following the conclusion of
WWII.
The Fed is riding a tiger by the tail and will likely have great difficulty extricating
itself from a torrid monetary experiment that is reaching its limits. The U.S. M4 money supply
rose an alarming 24% in March alone from a year earlier whereas M1 rose 37%. Notwithstanding
these shocking numbers the Fed continues to buy $120bn of bonds each month and the total amount
of money in circulation is exploding at an unprecedented 40% rate.
Professor William Barnett of the Center for Financial Stability in New York explained that
today's financial collusion between the Fed and the Treasury is much like the 1940s when the
Fed served as a fiscal agent for Democratic administrations. The chaotic aftermath? By mid-1947
the rate of inflation exceeded 17% per year - destroying low income households.
(Cont.)
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Yellen and the Fed are currently repeating one of the most disturbing episodes of U.S.
economic history. It happened during the 1940s following the conclusion of WWII.
The Fed is riding a tiger by the tail and will likely have great difficulty extricating
itself from a torrid monetary experiment that is reaching its limits. The U.S. M4 money
supply rose an alarming 24% in March alone from a year earlier whereas M1 rose 37%.
Notwithstanding these shocking numbers the Fed continues to buy $120bn of bonds each month
and the total amount of money in circulation is exploding at an unprecedented 40% rate.
Professor William Barnett of the Center for Financial Stability in New York explained that
today's financial collusion between the Fed and the Treasury is much like the 1940s when the
Fed served as a fiscal agent for Democratic administrations. The chaotic aftermath? By
mid-1947 the rate of inflation exceeded 17% per year - destroying low income households.
Yellen and the Fed are currently repeating one of the most disturbing episodes of U.S.
economic history. It happened during the 1940s following the conclusion of WWII.
The Fed is riding a tiger by the tail and will likely have great difficulty extricating
itself from a torrid monetary experiment that is reaching its limits. The U.S. M4 money
supply rose an alarming 24% in March alone from a year earlier whereas M1 rose 37%.
Notwithstanding these shocking numbers the Fed continues to buy $120bn of bonds each month
and the total amount of money in circulation is exploding at an unprecedented 40% rate.
Professor William Barnett of the Center for Financial Stability in New York explained
that today's financial collusion between the Fed and the Treasury is much like the 1940s
when the Fed served as a fiscal agent for Democratic administrations. The chaotic
aftermath? By mid-1947 the rate of inflation exceeded 17% per year - destroying low income
households.
Yellen and the Fed are currently repeating one of the most disturbing episodes of U.S.
economic history. It happened during the 1940s following the conclusion of WWII.
The Fed is riding a tiger by the tail and will likely have great difficulty
extricating itself from a torrid monetary experiment that is reaching its limits. The
U.S. M4 money supply rose an alarming 24% in March alone from a year earlier whereas M1
rose 37%. Notwithstanding these shocking numbers the Fed continues to buy $120bn of
bonds each month and the total amount of money in circulation is exploding at an
unprecedented 40% rate.
Professor William Barnett of the Center for Financial Stability in New York
explained that today's financial collusion between the Fed and the Treasury is much
like the 1940s when the Fed served as a fiscal agent for Democratic administrations.
The chaotic aftermath? By mid-1947 the rate of inflation exceeded 17% per year -
destroying low income households.
Yellen and the Fed are currently repeating one of the most disturbing episodes of
U.S. economic history. It happened during the 1940s following the conclusion of
WWII.
The Fed is riding a tiger by the tail and will likely have great difficulty
extricating itself from a torrid monetary experiment that is reaching its limits.
The U.S. M4 money supply rose an alarming 24% in March alone from a year earlier
whereas M1 rose 37%. Notwithstanding these shocking numbers the Fed continues to
buy $120bn of bonds each month and the total amount of money in circulation is
exploding at an unprecedented 40% rate.
Professor William Barnett of the Center for Financial Stability in New York
explained that today's financial collusion between the Fed and the Treasury is
much like the 1940s when the Fed served as a fiscal agent for Democratic
administrations. The chaotic aftermath? By mid-1947 the rate of inflation
exceeded 17% per year - destroying low income households.
President Biden and Secretary Yellen said this week there is no significant
inflation.
On May 7 of last year, the metric standard of lumber, 1,000 board feet was $360 .
Today it's $1,702 a record high. It broke $1,000 first time ever a month ago on
April 7.
That's a 70% increase in lumber in just the last 30 days.
Copper was $2.33 on May 7 of last year. Today, $4.76 a record high.
Steel Rebar was $3,768 on May 7 of last year. Today: $5,483 , record high. President Biden and Secretary Yellen said this week there is no significant inflation
.
Tell that to a builder, his subcontractors, and the buyer of a newly built home this
summer.
Food prices for Corn, Wheat, Soybeans, Rice, Milk, Coffee, Cocoa are up double digits in just
the last two months.
Vice President Harris ignored a question about inflation with her regular everyday cackle
laughing as she walked away.
We are in month four of this administration that prioritizes its war on the wind and the
weather.
Figures are from Yahoo Finance
President Biden and Secretary Yellen said this week there is no significant
inflation.
On May 7 of last year, the metric standard of lumber, 1,000 board feet was $360 .
Today it's $1,702 a record high. It broke $1,000 first time ever a month ago
on April 7.
That's a 70% increase in lumber in just the last 30 days.
Copper was $2.33 on May 7 of last year. Today, $4.76 a record high.
Steel Rebar was $3,768 on May 7 of last year. Today: $5,483 , record
high. President Biden and Secretary Yellen said this week there is no significant
inflation .
Tell that to a builder, his subcontractors, and the buyer of a newly built home this
summer.
Food prices for Corn, Wheat, Soybeans, Rice, Milk, Coffee, Cocoa are up double digits in
just the last two months.
Vice President Harris ignored a question about inflation with her regular everyday cackle
laughing as she walked away.
We are in month four of this administration that prioritizes its war on the wind and the
weather.
Figures are from Yahoo Finance
Goldman Sachs Group Inc. and bond titan Pacific Investment Management Co. have a simple
message for Treasuries traders fretting over inflation: Relax.
The firms estimate that bond traders who are pricing in annual inflation approaching 3% over
the next handful of years are overstating the pressures bubbling up as the U.S. economy
rebounds from the pandemic.
...the overshoot could be as large as 0.2-to-0.3 percentage point. That gap makes a
difference with key market proxies of inflation expectations for the coming few years surging
this week to the highest in more than a decade. The 10-year measure, perhaps the most closely
followed, eclipsed 2.5% Friday for the first time since 2013, even after unexpectedly weak U.S.
jobs data.
There's at least one market metric that backs up the view that the pressures, which have
been building for months, aren't about to get out of hand and may even prove temporary. A swaps
instrument that reflects the annual inflation rate for the second half of the next decade has
been relatively stable in recent months.
...The Federal Reserve has been hammering home that it sees any spike in price pressures as
likely short-lived, and that it's willing to let inflation run above target for a period as the
economy revives.
... ... ...
... Inflation worries have been mounting against a backdrop of soaring commodities prices --
copper, for example, set a record high Friday. It's all happening as lawmakers in Washington
debate another massive fiscal-stimulus package.
...
Korapaty calls the outlook for inflation "benign." His view is that the market is overly
optimistic with its inflation assumptions, with the greatest mismatch to be found on the three-
and five-year horizon. At roughly 2.75% and 2.7%, respectively, those rates are around 20 to 30
basis points higher than they should be, in his estimate.
... ... ...
...Treasury Secretary Janet Yellen stirred markets by saying interest rates will likely rise
as government spending swells and the economy achieves faster growth. She walked back the
remarks hours later.
... "Because we think front-end rates are pricing in a more aggressive Fed path than we
believe, we do like shorter-dated nominal bonds, and think there's value there," she said.
Yves here. Mark Blyth is such a treat. How can you not be a fan of the man who coined "The
Hamptons are not a defensible position"? Even though he's not always right, he's so incisive
and has such a strong point of view that his occasional questionable notions serve as fodder
for thought. And I suspect he'll be proven correct on his topic today, the inflation bugaboo.
Yves here. Mark Blyth is such a treat. How can you not be a fan of the man who coined "The
Hamptons are not a defensible position"? Even though he's not always right, he's so incisive
and has such a strong point of view that his occasional questionable notions serve as fodder
for thought. And I suspect he'll be proven correct on his topic today, the inflation bugaboo.
Even though he's not always right, he's so incisive and has such a strong point of view that
his occasional questionable notions serve as fodder for thought. And I suspect he'll be proven
correct on his topic today, the inflation bugaboo. Even though he's not always right, he's so
incisive and has such a strong point of view that his occasional questionable notions serve as
fodder for thought. And I suspect he'll be proven correct on his topic today, the inflation
bugaboo. By Paul Jay.
... ... ...
Paul Jay
And is the idea that inflation is about to come roaring back one of the stupid
ideas that you're talking about? And is the idea that inflation is about to come roaring back
one of the stupid ideas that you're talking about?
Mark Blyth
I hope that it is, but I'm going to go with Larry on this one. He says it's
about one third chance that it's going to do this. I'd probably give it about one in ten, so
it's not impossible.
So, let's unpack why we're going to see this. Can you generate inflation? Yeah. I mean, dead
easy. Imagine your Turkey. Why not be a kind of Turkish pseudo dictator?
Why not fire the head of your central bank in an economy that's basically dependent on other
people valuing your assets and giving you money through capital flows? And then why don't you
fire the central bank head and put in charge your brother-in-law? I think it was his
brother-in-law. And then insist that low interest rates cure inflation. And then watch as the
value of your currency, the lira collapses, which means all the stuff you import is massively
expensive, which means that people will pay more, and the general level of all prices will go
up, which is an inflation. So, can you generate an inflation in the modern world? Sure, yeah.
Easy. Just be an idiot, right? Now, does this apply to the United States? No. That's where it
gets entirely different. So, a couple of things to think about (first). So, you mentioned that
huge number of 20 trillion dollars. Well, that's more or less about two thirds of what we threw
into the global economy after the global financial crisis, and inflation singularly failed to
show up. All those people in 2010 screaming about inflation and China dumping bonds and all
that. Totally wrong. Completely wrong. No central bank that's got a brass nameplate worth a
damn has managed to hit its inflation target of two percent in over a decade. All that would
imply that there is a huge amount of what we call "˜slack' in the economy. (Also) think
about the fact that we've had, since the 1990s, across the OECD, by any measure, full
employment. That is to say, most people who want a job can actually find one, and at the same
time, despite that, there has been almost no price pressure coming from wages, pushing on into
prices, to push up inflation. So rather than the so-called vertical Phillips curve, which most
of modern macro is based upon, whereby there's a kind of speed bump for the economy, and if the
government spends money, it can't push this curve out, all it can do is push it up in terms of
prices. What we seem to actually have is one whereby you can have a constant level of
inflation, which is very low, and any amount of unemployment you want from 2 percent to 12
percent, depending on where you look and in which time-period.
All of which suggests that at least for big developed, open, globalized economies, where
you've destroyed trade unions, busted up national product cartels, globally integrated your
markets, and added 600 million people to the global labor supply, you just can't generate
inflation very easily. Now, we're running, depending on how much actually passes, a two to five
trillion-dollar experiment on which theory of inflation is right. This one, or is it this one?
That's basically what we're doing just now. Larry's given it one in three that it's his one.
I'd give it one in ten his one's right. Now, if I may just go on just for a seconds longer.
This is where the politics of this gets interesting. Most people don't understand what
inflation is. You get all this stuff talked by economists and central bankers about inflation
and expectations and all that, but you go out and survey people and they have no idea what the
damn thing is. Think about the fact that most people talk about house price inflation.
There is no such thing as house price inflation. Inflation is a general rise in the level of
all prices. A sustained rise in the level of prices. The fact that house prices in Toronto have
gone up is because Canada stopped building public housing in the 1980s and turned it into an
asset class and let the 10 percent top earners buy it all and swap it with each other. That is
singularly not an inflation. So, what's going to happen coming out of Covid is there will be a
big pickup in spending, a pickup in employment. I think it's (going to be) less than people
expect because the people with the money are not going to go out and spend it because they have
all they want already. There are only so many Sub-Zero fridges you can buy. Meanwhile, the
bottom 60 percent of the income distribution are too busy paying back debt from the past year
to go on a spending spree, but there definitely will be a pickup. Now, does that mean that
there's going to be what we used to call bottlenecks? Yeah, because basically firms run down
inventory because they're in the middle of a bloody recession. Does it mean that there are
going to be supply chain problems? Yes, we see this with computer chips. So, what's going to
happen is that computer chips are going to go up in price.
So, lots of individual things are going to go up in price, and what's going to happen is
people are going to go "there's the inflation, there's that terrible inflation," and it's not.
It's just basically short-term factors that will dissipate after 18 months. That is my bet. For
Larry to be right what would have to be true?
That we would have to have the institutions, agreements, labor markets and product markets
of the 1970s. We don't.
... ... ...
So, I just don't actually see what the generator of inflation would be. We are not Turkey
dependent on capital imports for our survival with a currency that's falling off a cliff. That
is entirely different. That import mechanism, which is the way that most countries these days
get a bit of inflation. That simply doesn't apply in the U.S. So, with my money on it, if I had
to bet, it's one in 10 Larry's right, rather one in 3.
Paul Jay
The other point he raises, and we talked a little bit about this in a previous
interview, but let's revisit it, is that the size of the American debt, even if it isn't
inflationary at some point, creates some kind of crisis of confidence in the dollar being the
reserve currency of the world, and so this big infrastructure spending is a problem because of
that. That's part of, I believe, one of his arguments. The other point he raises, and we talked
a little bit about this in a previous interview, but let's revisit it, is that the size of the
American debt, even if it isn't inflationary at some point, creates some kind of crisis of
confidence in the dollar being the reserve currency of the world, and so this big
infrastructure spending is a problem because of that. That's part of, I believe, one of his
arguments.
Mark Blyth
The way political economists look at the financial plumbing, I think, is
different to the way that macro economists do. We see it rather differently. The first thing
is, what's your alternative to the dollar unless you're basically going to go all-in on gold or
bitcoin? And good luck with those. If we go into a crushing recession and our bond market
collapses, don't think that Europe's going to be a safe haven given that they've got half the
US growth rate. And we could talk about what Europe's got going on post-pandemic because it's
not that good. So what's your alternative (to the Dollar)? Buy yen? No, not really. You're
going to buy Chinese assets? Well, good luck, and given the way that their country is being run
at the moment, if you ever want to take your capital out. I'm not sure that's going to work for
you, even if you could. So you're kind of stuck with it. Mechanically there's another problem.
All of the countries that make surpluses in the world make surpluses because we run deficits.
One has to balance the other. So, when you're a Chinese firm selling to the United States,
which is probably an American firm in China with Chinese subcontractors selling to the United
States, what happens is they get paid in dollars. When they receive those dollars in China,
they don't let them into the domestic banking system. They sterilize them and they turn them
into the local currency, which is why China has all these (dollar) reserves. That's their
national savings. Would you like to burn your reserves in a giant pile? Well, one way to do
that would be to dump American debt, which would be equivalent to burning your national
savings. If you're a firm, what do you do? Well, you basically have to use dollars for your
invoicing. You have to use dollars for your purchasing, and you keep accumulating dollars,
which you hand back to your central bank, which then hands you the domestic currency. The
central bank then has a problem because it's got a liability " (foreign) cash rather than an
asset. So, what's the easiest asset to buy? Buy another 10-year Treasury bill, rinse and
repeat, rinse and repeat. So, if we were to actually have that type of crisis of confidence,
the people who would actually suffer would be the Germans and the Chinese, because their
export-driven models only makes sense in terms of the deficits that we run. Think of it as kind
of monetarily assured destruction because the plumbing works this way. I just don't see how you
can have that crisis of confidence because you've got nowhere else to take your confidence.
Paul Jay
If I understand it correctly, the majority of American government debt is held
by Americans, so it's actually really the wealth is still inside the United States. I saw a
number, this was done three or four years ago, maybe, but I think it was Brookings Institute,
that assets after liabilities in private hands in the United States is something like 98
trillion dollars. So I don't get where this crisis of confidence is going to come any time
soon. If I understand it correctly, the majority of American government debt is held by
Americans, so it's actually really the wealth is still inside the United States. I saw a
number, this was done three or four years ago, maybe, but I think it was Brookings Institute,
that assets after liabilities in private hands in the United States is something like 98
trillion dollars. So I don't get where this crisis of confidence is going to come any time
soon.
Mark Blyth
Basically, if your economy grows faster (than the rest of the world because
you are) the technological leader, your stock markets grows faster than the others. If you're
an international investor, you want access to that. (That ends) only if there were actual real
deep economic problems (for the US), like, for example, China invents fusion energy and gives
it free to the world. That would definitely screw up Texas. But short of that, it's hard to see
exactly what would be these game-changers that would result in this. And of course, this is
where the Bitcoin people come in. It's all about crypto, and nobody has any faith in the
dollar, and all this sort of stuff. Well, I don't see why we have faith in something (like that
instead . I think it was just last week. There wasn't much reporting on this, I don't know if
you caught this, but there were some twenty-nine-year-old dude ran a crypto exchange. I can't
remember where it was. Maybe somewhere like Turkey. But basically he had two billion in crypto
and he just walked off with the cash. You don't walk off with the Fed, but you could walk off
with a crypto exchange. So until those problems are basically sorted out, the notion that we
can all jump into a digital currency, which at the end of the day, to buy anything, you need to
turn back into a physical currency because you don't buy your coffee with crypto, we're back to
that (old) problem. How do you get out of the dollar? That structural feature is incredibly
important.
Paul Jay
So there's some critique of the Biden infrastructure plan and some of the
other stimulus, coming from the left, because, one, the left more or less agrees with what you
said about inflation, and the critique is that it's actually not big enough, and let me add to
that. I'm kind of a little bit surprised, maybe not anymore, but Wall Street on the whole, not
Larry Summers and a few others, but most of them actually seem quite in support of the Biden
plan. You don't hear a lot of screaming about inflation from Wall Street. Maybe from the
Republicans, but not from listening to Bloomberg Radio. So there's some critique of the Biden
infrastructure plan and some of the other stimulus, coming from the left, because, one, the
left more or less agrees with what you said about inflation, and the critique is that it's
actually not big enough, and let me add to that. I'm kind of a little bit surprised, maybe not
anymore, but Wall Street on the whole, not Larry Summers and a few others, but most of them
actually seem quite in support of the Biden plan. You don't hear a lot of screaming about
inflation from Wall Street. Maybe from the Republicans, but not from listening to Bloomberg
Radio.
Mark Blyth
You don't even hear a lot of screaming about corporate taxes, which is
fascinating, right? You'd think they'd be up in arms about this? I actually spoke to a business
audience recently about this, and I kind of did an informal survey and I said, "why are you
guys not up in arms about this?" And someone that was on the call said, "well, you know, the
Warren Buffet line about you find out who's swimming naked when the tide goes out? What if a
lot of firms that we think are great firms are just really good at tax optimization? What if
those profits are really just contingent on that? That would be really nice to know this
because then we could stop investing in them and invest in better stuff that actually does
things." You don't even hear a lot of screaming about corporate taxes, which is fascinating,
right? You'd think they'd be up in arms about this? I actually spoke to a business audience
recently about this, and I kind of did an informal survey and I said, "why are you guys not up
in arms about this?" And someone that was on the call said, "well, you know, the Warren Buffet
line about you find out who's swimming naked when the tide goes out? What if a lot of firms
that we think are great firms are just really good at tax optimization? What if those profits
are really just contingent on that? That would be really nice to know this because then we
could stop investing in them and invest in better stuff that actually does things."
Paul Jay
And pick up the pieces of what's left of them for a penny if they have to go
down. And pick up the pieces of what's left of them for a penny if they have to go down.
Mark Blyth
Absolutely. Just one thought that we'll circle back, to the left does not
think it's big enough, etc. Well, yes, of course they wouldn't, and this is one of those things
whereby you kind of have to check yourself. I give the inflation problem a one in ten. But what
I'm really dispassionately trying to do is to look at this as just a problem. My political
preferences lie on the side of "˜the state should do more.' They lie on the side of
"˜I think we should have higher real wages.' They lay on the side that says that
"˜populism is something that can be fixed if the bottom 60 percent actually had some kind
of growth.' So, therefore, I like programs that do that. Psychologically, I am predisposed
therefore to discount inflation. I'm totally discounting that because that's my priors and I'm
really deeply trying to check this. In this debate, it's always worth bearing in mind, no one's
doing that. The Republicans and the right are absolutely going to be hell bent on inflation,
not because they necessarily really believe in (inevitable) inflation, (but) because it's a
useful way to stop things happening. And then for the left to turn around and say, well, it
isn't big enough, (is because you might as well play double or quits because, you know, you've
got Biden and that's the best that's going to get. So there's a way in which when we really are
trying to figure out these things, we kind of have to check our partisan preferences because
they basically multiply the errors in our thinking, I think.
Paul Jay
Now, earlier you said that one of the main factors why inflation is
structurally low now, I don't know if you said exactly those words. Now, earlier you said that
one of the main factors why inflation is structurally low now, I don't know if you said exactly
those words.
Mark Blyth
I would say that yes. I would say that yes.
Paul Jay
Is the weakness of the unions, the weakness of workers in virtually all
countries, but particularly in the U.S., because it matters so much. That organizing of workers
is just, they're so unable to raise their wages over decades of essentially wages that barely
keep up with inflation and don't grow in any way, certainly not in any relationship to the way
productivity has grown. So we as progressives, well, we want workers to get better organized.
We want stronger unions. We want higher wages, but we want it without inflation. Is the
weakness of the unions, the weakness of workers in virtually all countries, but particularly in
the U.S., because it matters so much. That organizing of workers is just, they're so unable to
raise their wages over decades of essentially wages that barely keep up with inflation and
don't grow in any way, certainly not in any relationship to the way productivity has grown. So
we as progressives, well, we want workers to get better organized. We want stronger unions. We
want higher wages, but we want it without inflation.
Mark Blyth
And it's a question of how much room you have to do that. I mean,
essentially, if you quintuple the money supply, eventually prices will have to rise"¦but
that depends upon the velocity of money which has actually been collapsing. So maybe you'd have
to do it 10 times. There's interesting research out of London, which I saw a couple of weeks
ago, that basically says you really can't correlate inflation with increases in the money
supply. It's just not true. It's not the money that's doing it. It's the expectations. That
then begs the question, well, who's actually paying attention if we all don't really understand
what inflation is? So I tend to think of this as basically a kind of a physical process. It's
very easy to understand if your currency goes down by 50 percent and you're heavily dependent
on imports. You're import (prices) go up. All the prices in the shops are going to go up.
That's a mechanism that I can clearly identify that will generate rising prices. If you have
big unions, if you have kind of cartel-like vertically integrated firms that control the
national market, if you have COLA contracts. If you have labor able to do what we used to call
leapfrogging wage claims against other unions, if this is all institutionally and legally
protected, I can see how that generates inflation, that is a mechanism I can point to. That
doesn't exist just now. Let's unpack this for a minute. The sort of fundamental theoretical
assumption on this is based is some kind of "˜marginal productivity theory of wages.' In
a perfectly free market with free exchange, in which we don't live, what would happen is you
would hire me up to the point that my marginal product is basically paying off for you, and
once it produces zero profits, that's kind of where my wages end. I'm paid up to the point that
my marginal product is useful to the firm. This is not really a useful way of thinking about it
because if you're the employer and I'm the worker, and I walk up to you and say, hey, my
marginal productivity is seven, so how about you pay me seven bucks? You just say, shut up or
I'll fire you and get someone else. Now, the way that we used to deal with this was a kind of
"˜higher than your outside option,' on wages. The way we used to think about this was
"why would you pay somebody ten bucks at McDonald's?" Because then you might actually get them
to and flip the burgers because they're outside option is probably seven bucks, and if you pay
them seven bucks, they just won't show up. So we used to have to pay workers a bit more. So
that was, in a sense, (workers) claiming (a bit of the surplus) from productivity. But now what
we've done, Suresh Naidu the economist was talking about this the other day, is we have all
these technologies for surveilling workers (instead of paying them more). So now what we can do
is take that difference between seven and ten and just pocket it because we can actually pay
workers at your outside option, because I monitor everything you do, and if you don't do
exactly what I say I'll fire you, and get somebody else for seven bucks. So all the mechanisms
for the sharing of sharing productivity, unions, technology, now lies in the hands of
employers. It's all going against labor. So (as a result) we have this fiction that somehow
when the economy grows, our productivity goes up, and workers share in that. Again, what's the
mechanism? Once you take out unions and once you weaponize the ability of employers to extract
surplus through mechanisms like technology, franchising, all the rest of it, then it just tilts
the playing field so much that we just don't see any increase in wages. (Now) let's bring this
back to inflation. Unless you see systematic (and sustained) increases in the real wage that
increases costs for firms to the point that they need to push on prices, I just don't see the
mechanism for generating inflation. It just isn't there. And we've underpaid the bottom 60
percent of the U.S. labor market so long it would take a hell of a lot of wage inflation to get
there, with or without unions.
Paul Jay
Yeah, what's that number, that if the minimum wage was adjusted for inflation
and it was what the minimum wage was, what, 30 years ago, the minimum wage would be somewhere
between 25 and 30 bucks, and that wasn't causing raging inflation. Yeah, what's that number,
that if the minimum wage was adjusted for inflation and it was what the minimum wage was, what,
30 years ago, the minimum wage would be somewhere between 25 and 30 bucks, and that wasn't
causing raging inflation.
Mark Blyth
And there is that RAND study from November 2020 that was adeninely entitled, "˜Trends
in Income 1979 to 2020,' and they calculated, and I think this is the number, but even if I'm
off, the order of magnitude is there, that transfers, because of tax and regulatory changes,
from the 90th percentile of the distribution to the 10 percentile, totalled something in the
order of $34 trillion. That's how much was vacuumed up and practically nothing trickled down.
So when you consider that as a mechanism of extraction, why are worrying about inflation
(from wages)? The best story on inflation is actually Charles Goodhart's book that came out
last year. We got a long period of low inflation because of global supply chains, and because
of demographic trends. It's a combination of global supply chains, Chinese labor, and
demographics all coming together to basically push down labor costs, and that's why you get
this long period of deflation, which leads to rising profits and zero inflation. A perfectly
reasonable way of explaining it. And his point is that, well, that's coming to an end. The
demographics are shifting, or shrinking. We're going back to more closed economies. You're
going to create this inflation problem again. OK, what's the timeline on that? About 20
years? A few years ago, we were told we had 12 years to fix the climate problem or we're in
deep shit. If we have to face the climate problem versus single to double-digit inflation,
I'm left wondering what is the real problem here? And there is that RAND study from November
2020 that was adeninely entitled, "˜Trends in Income 1979 to 2020,' and they
calculated, and I think this is the number, but even if I'm off, the order of magnitude is
there, that transfers, because of tax and regulatory changes, from the 90th percentile of the
distribution to the 10 percentile, totalled something in the order of $34 trillion. That's
how much was vacuumed up and practically nothing trickled down. So when you consider that as
a mechanism of extraction, why are worrying about inflation (from wages)? The best story on
inflation is actually Charles Goodhart's book that came out last year. We got a long period
of low inflation because of global supply chains, and because of demographic trends. It's a
combination of global supply chains, Chinese labor, and demographics all coming together to
basically push down labor costs, and that's why you get this long period of deflation, which
leads to rising profits and zero inflation. A perfectly reasonable way of explaining it. And
his point is that, well, that's coming to an end. The demographics are shifting, or
shrinking. We're going back to more closed economies. You're going to create this inflation
problem again. OK, what's the timeline on that? About 20 years? A few years ago, we were told
we had 12 years to fix the climate problem or we're in deep shit. If we have to face the
climate problem versus single to double-digit inflation, I'm left wondering what is the real
problem here? The best story on inflation is actually Charles Goodhart's book that came out
last year. We got a long period of low inflation because of global supply chains, and because
of demographic trends. It's a combination of global supply chains, Chinese labor, and
demographics all coming together to basically push down labor costs, and that's why you get
this long period of deflation, which leads to rising profits and zero inflation. A perfectly
reasonable way of explaining it. And his point is that, well, that's coming to an end. The
demographics are shifting, or shrinking. We're going back to more closed economies. You're
going to create this inflation problem again. OK, what's the timeline on that? About 20
years? A few years ago, we were told we had 12 years to fix the climate problem or we're in
deep shit. If we have to face the climate problem versus single to double-digit inflation,
I'm left wondering what is the real problem here? The best story on inflation is actually
Charles Goodhart's book that came out last year. We got a long period of low inflation
because of global supply chains, and because of demographic trends. It's a combination of
global supply chains, Chinese labor, and demographics all coming together to basically push
down labor costs, and that's why you get this long period of deflation, which leads to rising
profits and zero inflation. A perfectly reasonable way of explaining it. And his point is
that, well, that's coming to an end. The demographics are shifting, or shrinking. We're going
back to more closed economies. You're going to create this inflation problem again. OK,
what's the timeline on that? About 20 years? A few years ago, we were told we had 12 years to
fix the climate problem or we're in deep shit. If we have to face the climate problem versus
single to double-digit inflation, I'm left wondering what is the real problem here? OK,
what's the timeline on that? About 20 years? A few years ago, we were told we had 12 years to
fix the climate problem or we're in deep shit. If we have to face the climate problem versus
single to double-digit inflation, I'm left wondering what is the real problem here? OK,
what's the timeline on that? About 20 years? A few years ago, we were told we had 12 years to
fix the climate problem or we're in deep shit. If we have to face the climate problem versus
single to double-digit inflation, I'm left wondering what is the real problem here? A few
years ago, we were told we had 12 years to fix the climate problem or we're in deep shit. If
we have to face the climate problem versus single to double-digit inflation, I'm left
wondering what is the real problem here? A few years ago, we were told we had 12 years to fix
the climate problem or we're in deep shit. If we have to face the climate problem versus
single to double-digit inflation, I'm left wondering what is the real problem here?
Great piece. He put to words something I've thought about but couldn't articulate: if
wages are stagnant, how could you possibly get broad based inflation?
There is no upward pressure on labor costs anywhere in the economy. The pressures are
all downward.
You would need government spending in the order of magnitudes to drive up wages. Or
release from a lot of debt, like student loan forgiveness or what have you.
I'm not sure you need wage growth to get inflation. As Blyth notes, most of the time
inflation is a currency or a monetary issue. In the 70s, it was initially an oil thing " and
oil flows through a lot of products " and then really went crazy only when Volker started
raising interest rates. I don't think there is an episode of "wage-push" inflation in
history. (The union cost-of-living clauses don't "cause" inflation, they only adjust for past
inflation. If unions can cause wage-push inflation, someone needs to explain how they did
this in the late 70s, when they were much less powerful and unemployment was substantially
higher, than in the 1950s.) One could argue that expansive fiscal policy might drive
inflation but, even then, the mechanism is through price increases, not wage increases. You
do need consumption but that can always come from the wealthy and further debt immiseration
of the rest of us.
Blythe is one of those guys who is *almost* correct. For example he declares that
expectations drive inflation. What about genuine shortages? The most recent U.S. big inflation
stemmed from OPEC withholding oil"a shortage we answered by increasing the price ($1.75/bbl in
1971 -> $42/bbl in 1982). In Germany, the hyperinflation was driven by the French invading
the Ruhr, something roughly like shutting down Ohio in the U.S. A shortage of goods resulted.
Inflation! In Zimbabwe, the Rhodesian (white) farmers left, and the natives who took over their
farms were not producing enough food. A shortage of food, requiring imports, resulted.
Inflation!
I guess you could say people in Zimbabwe "expected" food"¦but that's not standard
English.
JFYI, Blythe is not a fan of MMT. He calls it "annoying." Yep, that's his well-reasoned
argument about how to think about it.
As a *political* economist, he may have a point in saying MMT is a difficult political sell,
but otherwise, I'd say the guy is clueless about it.
Inflation isn't caused by the amount of money in the economy but by the amount of
*spending*.
Like the other commenter, I've wondered this too"if wages have been stagnant for a
generation, then how are we going to get inflation? By what mechanism? It seems like almost all
of the new money just adds a few zeros to the end of the bank account balances of the already
rich (or else disappears offshore).
Still, you just cannot people to understand this because of houses, health care and
education. One might even argue that inflated house and education prices are helping keep
inflation down. If more and more of our meager income is going to pay for these fixed
expenditures, then there's no money left over to pay increased prices for goods and services.
So there's no room to increase the prices of those things. As Michael Hudson would point out,
it's all sucked away for debt service, meaning a lot of the "money printing" is just
subsidizing Wall Street.
But if you pay attention to the internet, for years there have been conspiracy theories all
across the political spectrum that we were really in hyperinflation and the government just
secretly "cooked the books" and manipulated the statistics to convince us all it wasn't
happening. Of course, these conspiracy theories all pointed to the cost of housing, medicine
and education as "proof" of this theory (three things which, ironically, didn't go up
spectacularly during the Great Inflation of the 1970's). Or else they'd point to gas prices,
but that strategy lost it's potency after 2012. Or else they'd complain that their peanut
butter was secretly getting smaller, hiding the inflation (shrinkflation is real, or course,
but it's not a vast conspiracy to hide price increases from the public).
I'm convinced that this was the ground zero for the kind of anti-government conspiratorial
thinking that's taken over our politics today. These ideas was heavy promoted by libertarians
like Ron Paul starting in the nineties, helped by tracts like "The Creature from Jekyll
Island," which argued that the Fed itself was one big conspiracy. I've seen plenty of people
across the political spectrum"including on the far Left"take all of this stuff as gospel.
So if the government is secretly hiding inflation and the Fed itself is a grand conspiracy
to convince us that paper is money (rather than "real" money, aka gold), then is it that hard
to believe they're manipulating Covid statistics and plotting to control us all by forcing us
all to wear masks and get vaccinated? In my view, it all started with inflation paranoia.
Blyth explains why housing inflation isn't really a sign of hyperinflation. But the average
"man on the street" just doesn't get it. To Joe Sixpack, not counting some of the things he has
to pay for is cheating. So are "substitutions" like ground beef when steak gets too pricey, or
a Honda Civic for a Toyota Camry, for example. The complexity of counting inflation is totally
lost on them, making them vulnerable to conspiratorial thinking. Since Biden was elected, the
ZOMG HyPeRiNfLaTiOn!!&%! articles are ubiquitous.
Does anyone have a good way of explaining this to ordinary (i.e. non-economically literate)
people? I'd love to hear it! Thanks.
"There is no such thing as house price inflation. Inflation is a general rise in the level
of all prices. A sustained rise in the level of prices. The fact that house prices in Toronto
have gone up is because Canada stopped building public housing in the 1980s and turned it into
an asset class and let the 10 percent top earners buy it all and swap it with each other. That
is singularly not an inflation."
Maybe I am totally off but, I would say"¦. By your definition, inflation does not exist
in the economic terminology as inflation only exists if generally all prices go up and a
singularity of soaring house prices and education and healthcare do not constitute an inflation
because the number of things inflating do not meet some unknown number of items needed for a
general rise in all prices to create an inflation.
What I read you to say is that if Labor prices go up " that could lead to inflation " but if
house prices go up (as they have) that is not inflation.
Hypothetically " if labor prices do not go up and the "˜nessesities of living' prices go
up (Housing and Med) " would you not have an inflation in the cost of living? " I am convinced
that economists and market experts try to claim that the economy and markets are seperate and
distinct from humans as a science " and that Political science has nothing to do with what they
present. Yet, humans are the only species to have formed the markets and money we all
participate and, the only species, therefore, to have an exclusive asset ownership, indifferent
to any other species " IE " if you can't pay you can't play and have no say.
I submit that one or a few asset price increases that are combined with labor price stasis(the
actual money outlayed for those asset price increased products not moving up) " especially one
that is a basic to living (shelter) and not mobile (like money) is inflation " Land prices
going up will generally increase the prices of all products created thereon.
I think there's two things going on here. There's different inflation indicators, and asset
prices are by definition never a part of inflation
The main indicator of CPI has so many different things in it that the inflation of any one
item is going to have little effect on it. But you can look up BEA's detailed GDP deflator to
see inflation for more specific things like housing expenses (rent) or transportation.
So back to real estate/land: real estate and land are like the stock market. They aren't
subject to inflation. They are subject to appreciation. There is somewhat of a feedback effect
for sure though: Increased real estate prices can drive up inflation. Rent for sure gets driven
up, but also any other good that's built domestically if the owners of capital need to pay more
to rent their factories/farms etc.
As noted in the article though, capitalists can simply move their production overseas so
there's a limit to how much US land appreciation can filter into inflation. Its definitely
happening with rent as housing can't be outsourced. But rent is only one part of overall
inflation
The point he was making is that the price change in housing is the result of a policy
restructuring of the market: no new public housing and financial deregulation.
The price of food is similarly a response to policy changes: industry consolidation and
resulting price setting to juice financial profits.
The point is distinguishing between political forces and market forces. The former is
socially/politically determined while the latter has to do with material realities within a
more or less static market structure.
This is a distinction essential to making good policy but useless from a cost of living
perspective.
One could prevent crossover for awhile, but eventually certain policies are going to affect
certain markets. The policy of giving the rich money drives up asset prices, real estate is a
kind of asset, eventually rising real estate costs affect the market the proles enter when they
have to buy or rent real estate.
If state institutions tell them there is no inflation, the proles learn that the state
institutions lie because they know better from direct experience. Once that gap develops, it's
as with personal relationships: when trust is broken, it is very hard to replace. Once belief
in state institutions is lost, significant political effects ensue. Often they are rather
unpleasant.
Blyth pointed to the lack of systemic drivers of price increases, and how the traditional
ones have disappeared. I think one that he missed, that results in a disconnect with the
evidence of price increases across multiple sectors, is the neoliberal infestation.
Rent-sucking intermediaries have imposed themselves into growing swaths of the mechanisms of
survival, hollowed out productive capacity, and crapified artifacts to the extent that their
value is irredeemably reduced. This is a systemic cause for reduced buying power, i.e.
inflation, but it is not a result of monetary or fiscal policy, but political and ideological
power.
> . . . The fact that house prices in Toronto have gone up is because Canada
stopped building public housing in the 1980s and turned it into an asset class and let the 10
percent top earners buy it all and swap it with each other.
That is a total load of baloney. The eighties were a time when the Conservative government
came up with the foreign investor program and it was people from Hong Kong getting out before
the British hand over to China in 1997.
I was there, trying to save for a house and for every buck saved the houses went up twenty.
I finally pulled the plug in 89 when someone subdivided a one car garage from their house and
sold it for a small fortune. The stories of Hong Kongers coming up to people raking their yard
and offering cash well above supposed market rates and the homeowner dropping their rakes and
handing over the keys were legendary.
It's still that way except now they come from mainland China, CCP members laundering their
loot.
Any government that makes domestic labor compete with foreign richies for housing is
mendacious.
When a Canadian drug dealer "saves up" a million to buy a house and the RCMP get wind of it,
they lose the house. When a foreigner show up at the border with a million, it's all clean.
Many people who talk about avoiding inflation are speaking euphemistically about preventing
wage growth, and only that; dog whistles, clearly heard by the intended audience. Yet they are
rarely confronted directly on this point. Instead we hear that they don't understand what the
word inflation means, and Mark seems to be saying these euphamists (eupahmites?) needn't be so
concerned because wages will not go up anyway. If so, what we are talking about here is merely
helping workers stay afloat without making any fundamental changes. Well, both sides can agree
to that as usual. Guess I'm just worn out by this kind of thing.
The thing that I like about Mark Blyth is how he cuts to the chase and does not waffle. Must
be his upbringing in Scotland I would say. The revelation that the US minimum wage should be
about $25-30 is just mind-boggling in itself. But in that talk he unintentionally put a value
on how much is at stake in making a fairer economic system and it works out to be about $34
trillion. That is how much has been stolen by the upper percentile and why workers have gone
from having a job, car, family & annual vacation to crushing student debt, a job at an
Amazon fulfillment center and a second job being an Uber driver while living out of car.
That $25-30 wage was keeping up with inflation , if it were keeping up with
productivity it would be, IIRC, nearly twice that. It is interesting to see a dollar
figure put on the amount you can reap after a generation or two of growing a middle class, by
impoverishing it.
But now what we've done, Suresh Naidu the economist was talking about this the other day,
is we have all these technologies for surveilling workers (instead of paying them
more) . So now what we can do is take that difference between seven and ten and just
pocket it because we can actually pay workers at your outside option, because I monitor
everything you do, and if you don't do exactly what I say I'll fire you, and get somebody
else for seven bucks.
Praise be the STEM workers. Without them where would the criminal corporate class be?
Every time I listen to the news (without barfing) the story is, we need moar STEM workers,
and I ask myself, what do they do for a living?
If that kind of tidbit excites you:
Before going into economics, Alan Greenspan was a sax and clarinet player who played with the
likes of Stan Getz and Quincy Jones.
And Michael Hudson studied piano and conducting .
Do failed musicians gravitate to economics? Perhaps for the same reason as my bank manager, a
failed bass player (honors graduate from Classy Cdn U in double bass), they see the handwriting
on the wall. He told me his epiphany came when he and his band-mates were trying to make
cup-o-noodles with tap water in a room over the pub in Thunder Bay where they were playing.
The mental gymnastics to get to "everything needed to survive costs more but wages have not
gone up in decades so therefore its all transitory and inflation does not exist" must be
painful. How high does the price for cat food have to get before we stop eating?
Yes! "The Hamptons are not a defensible position" ranks right up there with "It is easier to
imagine the end of the world than the end of (neoliberal) capitalism" by Mark Fisher (and F.
Jameson?).
Very good, Mark. This leads to the next Q. How do we maintain aggregate demand? The rich
guys increasingly Hoover everything up and pay no taxes. So, there is no T. Is the only way to
get cash and avoid deflation deficit spending by the G? There is no I worth a damn. (X-M) is a
total drain on everything since it's all M in the US and no X. The deficits will have to go out
of sight in the future.
You say that there is no velocity of money. Is this because the more money pored into the
economy by the G, the more money the rich guys steal? So, there is a general collapse in C.
Maybe the work around for the rich guy theft is a $2,000 (sorry, $1,400) check every now and
then to the great unwashed. The poors can circulate it a couple of times before the rich guys
steal it. Seems like the macro-economists have a lot of "˜splainin' to do. Oh, right,
they are busy right now measuring the output gap.
I'd like to see Mark go into a discussion on the velocity of money. I remember the old timey
Keynesians lecturing about it, and that's all I remember. I'm guessing that it's related to the
marginal propensity to consume.
I may be getting a bit out over my skis, but the St. Louis Fed calculates the velocity of
money ( https://fred.stlouisfed.org/series/M2V ). It is
defined as
The velocity of money is the frequency at which one unit of currency is used to purchase
domestically- produced goods and services within a given time period. In other words, it is the
number of times one dollar is spent to buy goods and services per unit of time. If the velocity
of money is increasing, then more transactions are occurring between individuals in an
economy.
So as velocity slows, fewer transactions happen. Based on the linked chart, the peak
velocity was 2.2 in mid-1997. In Q1 2021, it was 1.12. By my understanding, although the money
supply continues to increase, the money isn't flowing through the economy in the way it was
over the last 30 years (or even 10 years ago).
It's beyond my level of understanding to say with any certainty as to why the slowdown in
velocity has occurred, but I speculate it's directly related to the ever-growing inequality in
the US economy and the ongoing rentier-ism that Dr. Hudson discusses. [simplistically, if Jeff
Bezos has $1.3 billion more on Monday than on Friday, that money will flow virtually nowhere.
If each of Amazon's employees equally shared that $1.3 billion (about $1,000 each), the
preponderance of the money would flow into the economy in short order].
I've always speculated that money velocity is one of the key indicators of the stagnant
economy since 2008. It certainly has coincided with the dramatic increase in wealth in the top
fraction (not the 1% but the 0.001%) of the US population.
What Blythe has laid out is not a tale about inflation or money, but a tale about power.
If money goes to the non-elite, you get inflation. If it goes to the elite, you don't get
inflation.
If you are a country with little control of your resources (not lack of resources, but control)
and/or loans (think IMF)/debt (think war reparations) that give people with little interest in
whether you live or die control over your countries' finances, you can be prone to inflation or
even hyperinflation.
Yeah, I figured out a long time ago that none of this is any "natural economic law" because
there is no such thing as "nature" in economics. Inflation is all about political decisions and
perceptions.
And I saw this on YouTube a couple of days ago"¦and I still can't think of anything
around me that hasn't gone up on price.
This is a good response to Summers. But I have a quibble and a concern.
My quibble is that he offers no theory of inflation except implicitly aggregate supply
exceeding aggregate demand and there is nothing but hand-waving regarding what he is referring
to that he feels has a one chance in ten of happening versus Summers one in three. A second
part of this quibble is: what does it mean for inflation to "come roaring back." I assume it
means more than just a short-term adjustment to a shot of government spending and gifting. I
believe if he thought this through he would have to conclude that without changes in the
current structure of the global economy there is no way for this to happen. That really is the
case he has made. With labor beaten down not only in the US but worldwide inflation will not
come roaring back, period. That is unless there is a chance either that a labor renewal is a
near-term possibility. I doubt he believes this. Or does he believe there is another way for
inflation to roar back? If so, what is that way, what is the theory behind it?
A more fundamental concern is the part where he relies on marginal productivity theory when
discussing employment and exploitation. Conceptually that far from Marx's fundamental
distinction between labor and labor power.
Hyperinflation doesn't seem to be possible in this age of digital money no matter how much
you conjure up because nobody notices the extreme amount of monies around all of the sudden as
the average joe isn't in the know.
Used houses are always appreciating in value, but none dare call it inflationary, more of a
desired outcome in income advancement if you own a domicile.
There were no shortages of anything in the aftermath of the GFC, and now for want of a
semiconductor, a car sale was lost. Everything got way too complex, and we'll be paying the
price for that.
I think the inflation to come won't be caused by a lack of faith in a given country's money,
but the products and services it enabled us to purchase.
""¦and now for want of a semiconductor, a car sale was lost"¦."
Sometimes car sales are lost because the price of cars has gone up (new and used)"¦just
don't call it inflation"¦
I'm going to let some more time pass, but stimulus or not, we went from all economic
problems being laid at the feet of Covid to now moving on to "shortages"
everywhere"¦
Just enought to make you go"¦hmmmm"¦.unti more time passes.
Used houses always appreciate " or is it that they appreciate due to a combination of
inflation in income over time and the dramatic decrease in interest rates over the last 20
years?
A very quick back of the envelope calc (literally " and all number are approximate):
In June 2000, median US income was $40,500; 30 yr mortgage rate was 8.25%. 28% of monthly
income = $945. That supports a mortgage (30 yr fixed, P&I only " no tax, insurance, etc) of
roughly $125,000.
In June 2005, median US income was $44,000; 30 yr mortgage rate was 5.5%. 28% of monthly
income = $1026. That supports a mortgage (30 yr fixed, P&I only " no tax, insurance, etc)
of roughly $180,000.
In June 2010, median US income was $49,500; 30 yr mortgage rate was 4.69%. 28% of monthly
income = $1155. That supports a mortgage (30 yr fixed, P&I only " no tax, insurance, etc)
of roughly $225,000.
In June 2015, median US income was $53,600; 30 yr mortgage rate was 4.00%. 28% of monthly
income = $1250. That supports a mortgage (30 yr fixed, P&I only " no tax, insurance, etc)
of roughly $260,000.
Finally, In June 2020, median US income was $63,000; 30 yr mortgage rate was 3.25%. 28% of
monthly income = $1470. That supports a mortgage (30 yr fixed, P&I only " no tax,
insurance, etc) of roughly $340,000.
And for fun, if you went to 40% of income in 2020 (payment only), a $2100 monthly payment
will cover nearly a $500,000 mortgage in 2020.
For the vast majority of home buyers, the price isn't the main consideration " it's how much
will it cost per month. So a small increase in median income (roughly 2% per year) combined
with dramatically lower interest rates can drive a HUGE increase in a mortgage " and ultimately
the price that can be paid for a house.
Can't say I really understand this sort of thing but saying rocketing house-prices is
"˜a singularity' rather than "˜house-price inflation' has to me echoes of the
Bourbon's "Bread too expensive? Let them eat cake." And Versailles wasn't a defensive position
either.
In my version of economics-for-the-under-tens you get inflation in two situations. First is
where enough folk have enough cash in their pockets for producers/manufacturers/retailers to
hike their prices without hitting their sales too much and secondly where there's a shortage of
stuff people want and/or need which leads to a bidding war. However I'd agree with Blyth that
neither condition exists now or seems likely to arise for a while, making a "˜spike' in
inflation unlikely.
I am a non-economist, and so my thoughts below may be wrong. However, here goes.
I would say we have had inflation. Roaring inflation. For the past 20 years of so.
Inflation in wages and ordinary costs of living? No, wages have been stagnant. Health care
has led the charge in cost of living increases, but most other living expense increases have
been low.
Inflation in asset prices? We have had massive inflation in the costs of residential housing
where I live.
20 years ago I could buy a 5 br, 3 bath home on a decent block in a good area close to
everything for $270,000 dollars. Sure it needed some renovation, but still"¦. Now to buy
that home it would cost me around $1,250,000. So that home has gone up in value by 500%. Man,
that is inflation.
As I understand it, asset inflation is not counted by governments in the GDP or CPI. It
appears that those who have most of the assets don't want this to be counted, by the very fact
that they control the politicians who control what is counted, and asset inflation isn't
counted in the economic data that the politicians rely upon to prove how prudent they are.
So if you want a day to day example of where all this free money is going, look at housing.
And also have a quick look at the insane increases in the worth of billionaires. They love all
this government spending which magically? seems to end up, via asset purchase and asset price
inflation, in their pockets.
Price is what one pays, value is what one gets. That house is roughly the same, so the value
has not changed, but the price has gone up by a factor of 5
Same with stawks. One share of Amazon stawk is $3,467.42 as of yesterday.
What is its value? If Bezos can work his tools ever harder, monitor them down to the
nanosecond and wring ever moar productivity out of them before throwing them in the tool
dumpster behind every Amazon warehouse, the value proposition is that someone else will believe
the stawk price should be even higher, at which point one can sell it at greater price for a
profit.
What is inflation? Good question. I'd say inflation is fear of monetary devaluation. Not
devaluation, just the fear of it. We'll never overcome this unease if we always deal in
numbers. Dollars, digits, whatever. We need to deal in commodities " let's call just about
everything we live with and use a "commodity". Including unpaid family help/care; and the more
obvious things like transportation. If we simply took a summary of all the necessary things we
need to live decent lives " but not translated into dollars because dollars have no sense " and
then provided these necessities via some government agency so that they were not "inflated" in
the process and thereby provided a stable society, then government could MMT this very easily.
Our current approach is so audaciously stupid it will never make sense let alone balance any
balance sheets. That's a feature, not a bug because it's the best way to steal a profit. The
best way to stop demand inflation or some fake scarcity or whatever is to provide the necessary
availability. That's where uncle Joe is gonna run headlong into a brick wall. He has spent his
entire life doing the exact opposite.
The figure for the upward transfer of wealth from the Rand Study was $50 trillion between
1975-2018. It was adjusted up by the authors from $47 trillion to bring it up to 2020
trends.
Now the interesting thing to me is this " look at the date of the publication in Time
magazine: Sept. 14, 2020, so right in the heart of campaign fever, and it never came up in the
debates, in the press"¦I didn't hear about it until Blyth made one of his appearances on
Jay's show with Rana Foroohar. Long after the election.
As long as 80% of Americans are head over heels in debt and 52% of 18-to-29-year-olds are
currently living with their parents, there never will be the wage inflation of the 1970s. A
majority of the people arrested for the Capitol riot had a history of financial trouble. The
elite blue zones in Washington State and Oregon that prospered from globalism are seeing a
spike in coronavirus cases. North American neoliberal governments have failed dismally. It is
intentional in order to exploit more wealth for the rich from the natural resources and
workers. If the mRNA vaccines do not control coronavirus variants, and a workable national
public health system is not implemented; succession and chaos will bring on Zimbabwe type
inflation.
There is a reason why Portland Oregon has been a center of unrest for the past year. The
Elite just do not want to see it. How can Janet Yellen deal with this? She can't. She is an
Insider. She was paid 7.2 million dollars in speaker and seminar fees in the last two years not
to.
Treasury Secretary walks backs comments she made earlier suggesting that
rates might rise
Treasury Secretary Janet Yellen said Tuesday she is neither predicting nor recommending that
the Federal Reserve raise interest rates as a result of President Biden's spending plans,
walking back her comments earlier in the day that rates might need to rise to keep the economy
from overheating.
"I don't think there's going to be an inflationary problem, but if there is, the Fed can be
counted on to address it," Ms. Yellen, a former Fed chairwoman, said Tuesday at The Wall Street
Journal's CEO Council Summit.
Ms. Yellen suggested earlier Tuesday that the central bank might have to raise rates to keep
the economy from overheating, if the Biden administration's roughly $4 trillion spending plans
are enacted.
The prices of raw materials used to make almost everything are skyrocketing, and the upward trajectory looks set to continue as
the world economy roars back to life.
From steel and copper to corn and lumber, commodities started 2021 with a bang, surging to levels not seen for years. The rally
threatens to raise the cost of goods from the lunchtime sandwich to gleaming skyscrapers. It’s also lit the fuse on the massive
reflation trade that’s gripped markets this year and pushed up inflation expectations. With the U.S. economy pumped up on fiscal
stimulus, and Europe’s economy starting to reopen as its vaccination rollout gets into gear, there’s little reason to expect
a change in direction.
JPMorgan Chase & Co. said this week it sees a continued rally in commodities and that the “reflation and reopening trade will
continue.†On top of that, the Federal Reserve and other central banks seem calm about inflation, meaning economies could be left
to run hot, which will rev up demand even more.
“The most important drivers supporting commodity prices are the global economic recovery and acceleration in the reopening phase,â€
said Giovanni Staunovo, commodity analyst at UBS Group AG. The bank expects commodities as a whole to rise about 10% in the next
year.
The Treasury market's inflation bulls seem to have gotten a green light from Federal Reserve
Chair Jerome Powell to double down on wagers that price pressures will only intensify in the
months ahead.
The renewed mojo for the reflation trade follows Powell's reaffirmation this week of the
central bank's intention to let the world's biggest economy run hot for some time as it
recovers from the pandemic. The Fed's unwavering commitment to ultra-loose policy in the face
of robust economic data is what caught traders' attention. It took on added significance as it
coincided with signs infections are ebbing again in the U.S., and as President Joe Biden
unveiled plans for trillions more in fiscal spending.
Investors eying all this aren't ready to give the Fed the benefit of the doubt in its
assessment that inflationary pressures will prove temporary. A key bond-market proxy of
inflation expectations for the next decade just hit the highest since 2013, and cash has been
pouring into the largest exchange-traded fund for Treasury Inflation-Protected Securities.
Globally, there's been a net inflow into mutual and exchange-traded inflation-linked debt funds
for 23 straight weeks, EPFR Global data show.
The Fed is stressing that inflation's upswing "is transitory, but we likely won't have
better clarity on this assertion until this initial economic wave from reopening has subsided,"
said Jake Remley, a senior portfolio manager at Income Research + Management, which oversees
$89.5 billion. "Inflation is a very difficult macro-economic phenomenon to predict in normal
times. The uncertainty of a global pandemic and a dramatic economic rebound" has made it even
harder.
Ten-year TIPS provide a reasonably priced insurance policy against inflation risk over the
coming decade, Remley said. The securities show traders are wagering annual consumer price
inflation will average about 2.4% through April 2031. The measure has roared back from the
depths of last year, when it dipped below 0.5% at one point in March.
Brian Sozzi ·
Editor-at-Large Sat, May 1, 2021, 6:05 PM
Billionaire Warren Buffett is joining the long list of executives saying serious levels of
inflation are starting to take hold as the U.S. economy roars back from the COVID-19
downturn.
Buffett called out much higher steel costs impacting Berkshire's housing and furniture
businesses.
"People have money in their pocket, and they pay higher prices... it's almost a buying
frenzy," Buffett said, noting that the economy is "red hot."
The Oracle of Omaha isn't alone in battling inflation at the moment from everything to
higher steel prices to runaway copper prices.
The number of mentions of "inflation" during first quarter earnings calls this month have
tripled year-over-year, the biggest jump dating back to 2004, according to fresh research from
Bank of America strategist Savita
Subramanian . Raw materials, transportation, and labor were cited as the
main drivers of inflation .
Subramanian's research found that the number of inflation mentions has historically led the
consumer price index by a quarter, with 52% correlation. In other words, Subramanian thinks
investors could see a "robust" rebound in inflation in coming months in the wake of the latest
round of C-suite commentary.
"Inflation is arguably the biggest topic during this earnings season, with a broad array of
sectors (Consumer/Industrials/Materials, etc.) citing inflation pressures," Subramanian
notes.
The world's biggest companies are taking action, just like Buffett at Berkshire.
Kleenex maker Kimberly-Clark said it will increase prices in the U.S. and Canada on the
majority of its consumer products due to "significant" commodity cost inflation. The percentage
increases will range from mid- to high-single digits and go into effect in June.
By Joseph
Carson , former chief economist of Alliance Bernstein
Federal Reserve Chairman Jerome Powell has played down the current runup in inflation,
arguing it is associated with the reopening of the economy. And as the low inflation readings
of one year ago drop out, the twelve-month calculation (i.e., the so-called base effect) of
reported inflation is likely to move up in the coming months.
Yet, Mr. Powell's "base effect" inflation argument is nonsense. For the "base effect"
argument to be correct, the twelve-month reading of reported inflation should be markedly lower
when the economy was closed than what occurred before the pandemic. But that's not the
case.
Last week, the Bureau of Economic Analysis reported that the twelve-month change ending in
March 2021 in the core personal consumption index (the Fed's preferred price index) was 1.83%.
That compares to the 1.87% reading for the year ending in February 2020 and 1.7% for the year
before that.
The 1.83% reading for twelve months ending March 2021 essentially matches the average
inflation rate of the two prior years. And that 12 month period includes the three months
(April to June) when the economy was closed, and GDP plunged a record 31% annualized. How could
there be a "base effect" on reported inflation when the base year has the same inflation rate
as it did before the pandemic?
Mr. Powell's "base effect" inflation argument has not been questioned or challenged by
analysts or reporters. Regardless of that, investors need to ignore the Fed's rhetoric and
treat upcoming price increases as "new" inflation.
As nonsensical as the explanation for the uptick in inflation, so too is the remedy. Demand
has always been the primary force behind broad inflation cycles. Yet, Mr. Powell argues that
product price inflation will ease once manufacturers increase output and eliminate "supply
bottlenecks," and home inflation will slow once builders build more homes.
It's hard to see how more supply (or growth) will slow inflation anytime soon. Federal Home
Loan Mortgage Company (Freddie Mac) estimates that the US needs almost 4 million new homes to
meet demand. That could take two to three years. Also, it's hard to see how increasing product
output will solve the inflation problem. The supply-side argument solution; fight inflation
with more demand and more commodity inflation.
The Fed's mantra has always been "inflation is everywhere and always a monetary phenomenon."
But nowhere in Mr. Powell's statements or comments do you find any monetary policy role for
increased inflation or any responsibility for containment. Investors forewarned.
I don't share David P. Goldman's ideology and convictions. They are almost the polar
opposite of mine's.
But he has something I don't have, something that only a bourgeois specialist can give:
insider information.
I once hypothesized here that, if the USA were to collapse suddenly (which I don't think
it ever will, but if it do happen), then it would surely involve an uncontrolled growing
spiral of inflation/hyperinflation. That's the logical conclusion of an hypothetical collapse
of the USD standard.
So far, I can only see a mild rise in inflation. I don't think the USA will ever
experience hyperinflation (four-digit) or even true high inflation (two-digit). Goldman is a
rabid neoliberal, and anything above 2% is hyperinflation for him, so we should take these
kind of analyses with a grain of salt.
We've been outlining how the Fed and other central banks have unleashed an inflationary
bubble in all assets truly an Everything Bubble.
We've already assessed the impact this is having on commodities, bonds and other asset
classes. Today I want to assess the impact this will have on stocks.
To do that, we need to look at emerging markets.
Inflation is a common occurrence for emerging markets, primarily because more often than not
they devalue their currencies, whether by choice or because the markets lose faith in their
ability to pay off their debts.
Because of this, emerging markets can provide a glimpse into how inflation affects stocks.
So, let's dig in.
Here is a chart of South Africa's stock market since 2003. As you can see, the stock market
rallied significantly until 2010, but has effectively gone nowhere ever since then.
The reason this chart looks so lackluster is because it is priced in U.S. dollars. The $USD
has been strengthening against the South African currency (the Rand) since 2010.
Watch what happens we price the South Africa stock market in its domestic currency (blue
line). Suddenly, this stock market has been ROARING, rising some 750% since 2003. That means
average annual gains of 41%!!!
Let's use another example.
Below is a chart of the Mexican stock market priced in $USD. Once again, we see a stock
market that has done nothing of note for years.
Now let's price it in pesos (actually the exchange rate of pesos to $USD, but close
enough).
You get the general idea. So if hot inflation is in the U.S. financial system, it would make
perfect sense for stocks (denominated in the $USD which is losing value due to inflation) to
ERUPT higher.
Something like I don't know what's happened since mid-2020?
Look, we all know what's going on here. The stock market is erupting higher as inflation
rips into the financial system based on Fed NUCLEAR money printing. And we all know what comes
when this bubble bursts.
On that note, we just published a Special Investment Report concerning FIVE secret
investments you can use to make inflation pay you as it rips through the financial system in
the months ahead.
The report is titled Survive the Inflationary Storm. And it explains in very simply terms
how to make inflation PAY YOU.
We are making just 100 copies available to the public.
Don't believe your lying eyes, will be the message tomorrow from The Fed's Jay Powell as he
hypnotizes investors to believe that "inflation is transitory" and they have "the tools" to
manage it.
'Bond King' Jeff Gundlach is not buying that line and told BNN Bloomberg in an interview
this morning.
"...more importantly, I'm not sure why they think they know it's transitory... how do they
know that?"
"...there's plenty of money-printing that's been going on, and we've seen commodity prices
going up massively... home prices in the US are inflating very substantially... so there's a
lot of inflation that's already baked in to input prices ."
Gundlach does admit that Powell has a point in the very near term as the prints were about
to see "which could be as high as 4% [for CPI]" are off of year-ago, very depressed levels.
"...what he means by transitory is that the base effect will lead to problems in the next few
months but then the base effect will become less problematic."
But, Gundlach adds, "it's not clear to me that inflation is going to go back down to around
2 to 2.5%... we don't know, nobody knows... but we're most concerned with the fact that The Fed
thinks they know."
This is worrisome because The Fed's track record is anything but inspiring...
"when I go back to the global financial crisis, when we almost had a complete meltdown of
the financial system, Ben Bernanke completely missed all of the problems that led to the
crisis."
Bernanke's infamous "contained to subprime... and subprime is only a sliver of the market"
comments could be about to be trumped by Powell's "inflation is transitory" comments as
Gundlach warns "there's plenty of indicators that suggest inflation is going to go higher and
not just on a transitory basis."
The Fed is "trying to paint the picture" of control, but Gundlach tries to make clear:
"they're guessing."
So, what does that mean for markets?
While some fear "we ain't seen nothing yet" in terms of yields rising (and multiple
contraction), Gundlach notes that "it really depends on just how much manipulation the
authorities are willing to do."
The billionaire fund manager notes that yields are "still very low... well below the current
inflation rate... so we have negative yields everywhere on the yield curve."
It's also "hard to figure out who's going to buy the bonds," he notes, "as we are about to
see issuance like we have never seen before." Foreigners have been selling bonds for years and
domestically there is little demand, so Gundlach notes the only one left to soak up all this
extra supply is The Federal Reserve, which has already expanded its balance sheet massively in
the last 12 months.
"Who's going to buy all these many trillions of dollars of bonds? Foreigners have been
selling for years and they've accelerated their selling in the last several quarters,
domestic buyers are not exactly selling, but they're not adding to their holdings. So what's
left to absorb all of the spawn supply is the Federal Reserve ."
"Left to true, free markets, bond yields at the long-end would obviously be higher than
they are now."
And so who will buy all these bonds with negative real yields - The Fed... "and they have
been transparent about their willingness and ability to buy bonds and expand their balance
sheet with no ceiling."
Gundlach is talking about Yield Curve Control, reminding viewers that "The Fed can set the
long-end wherever they want it... there's a precedent for this from back in the 1940s into the
50s," in order to ease the pain of the debt from World War II.
Of course, Gundlach warns ominously, "once they stopped the yield curve control, we went
into a 27 year massive bear market in bonds, because of 'guns-n'butter' policies... which look
like our policies today."
Simply put, he sees "an echo [in current markets and policies] of what happened in the late
1970s into the early 1980s."
His forecast is that "The Fed will allow the market forces to take yields to higher levels
[10Y 2.25%] before stepping in."
The Bond King also note that the US stock market is very overvalued by virtually every
important metric , and especially so versus foreign markets such as Asia and even Europe.
"I bought European equities a couple of weeks ago, literally for the first time in many
years. I can't remember the last time I did it. And that's largely because I think the U.S.
dollar is almost certain to decline over the intermediate to long term."
There's a lot more in the interview on the impact of Biden's stimmies and potential tax
hikes...
https://webapps.9c9media.com/vidi-player/1.9.19/share/iframe.html?currentId=2189621&config=bnn/share.json&kruxId=&rsid=bellmediabnnbprod,bellmediaglobalprod&siteName=bnnb&cid=%5B%7B%22contentId%22%3A2189621%2C%22ad%22%3A%7B%22adsite%22%3A%22ctv.bnn%22%2C%22adzone%22%3A%22ctv.bnn%22%7D%7D%5D
10,571 48 NEVER
Sound of the Suburbs 26 minutes ago
We are going to train you in this Mickey Mouse economics that doesn't consider private
debt and put you in charge of financial stability at the FED.
They don't stand a chance.
Financial stability arrived in the Keynesian era and was locked into the regulations of
the time.
"This Time is Different" by Reinhart and Rogoff has a graph showing the same thing (Figure
13.1 - The proportion of countries with banking crises, 1900-2008).
Neoclassical economics came back and so did the financial crises.
The neoliberals removed the regulations that created financial stability in the Keynesian
era and put independent central banks in charge of financial stability.
Why does it go so wrong?
Richard Vague had noticed real estate lending balloon from 5 trillion to 10 trillion from
2001 – 2007 and knew there was going to be a financial crisis.
Richard Vague has looked at the data for financial crises going back 200 years and found
the cause was nearly always runaway bank lending.
We put central bankers in charge of financial stability, but they use an economics that
ignores the main cause of financial crises, private debt.
Most of the problems are coming from private debt.
The technocrats use an economics that ignores private debt.
The poor old technocrats don't stand a chance.
WITCH PELOSI 39 minutes ago
42" entry level lawnmower @ Home Depot, spring 2014, $999. Spring 2021 $1549. That's what
I call inflation! And maybe a little greed to boot!
atomp 34 minutes ago
$30 is the new $10.
Sound of the Suburbs 25 minutes ago remove link
In 2008 the Queen visited the revered economists of the LSE and said "If these things were
so large, how come everyone missed it?"
It's that neoclassical economics they use Ma'am, it doesn't consider private debt.
For a third consecutive month, everyday prices moved sharply higher with gains led by
motor fuels prices.
On the core services side, significant increases came from motor vehicle insurance (up
3.3 percent for the month), transportation services (+1.8 percent), and motor vehicle
maintenance services (+1.0 percent).
Energy prices continue to drive the Everyday Price Index higher in the early part of
2021.
For a given time-horizon, it has been conventional for those estimating such a "rational"
market forecast of expected inflation to take the appropriate Treasury security nominal yield
of that time horizon (say 5 years) and simply subtract from it the yield on the same time
horizon TIPS, which covers security holders for inflation. So it has long looked like this
difference is a pretty good estimate of this market expectation of inflation, given that TIPS
covers for it while the same time horizon Treasury security does not.
Well, it turns out that there are some other things involved here that need to be taken
account, one for each of these securities. On the Treasury side, it turns out that the proper
measure of the expected real yield must take into account the expected time path of shorter
term yields up to that time horizon. This time path has associated with it a risk regarding the
path of interest rates throughout the time period. This is called the Treasury risk premium, or
trp. It can be either positive or negative, with it apparently having been quite high during
the inflationary 1979s.
The element that needs to be taken into account with respect to the TIPS is that these
securities are apparently not as liquid in general as regular Treasury securities, and the
measure of this gap is the Liquidity premium, or lp. This was apparently quite high when these
were first issues and also saw a surge during the 2008-09 financial crisis. In principle this
can also be of either sign, although has apparently been positive.
Anyway, the difference between the nominal T security yield and the appropriate TIPS yield
is called the "inflation breakeven," the number that used to be focused on as the measure of
market inflation expectations. But the new view is that this must be adjusted by adding (tpr
– lp).
In a post just put up on Econbrowser by Menzie the current inflation breakeven for five
years out is 2.52%. But according to Menzie the current (tpr – lp) adjustment factor is
-0.64%. So adding these two together gives as the market expected inflation rate five years
from now of 1.88%, although Menzie rounded it out to 1.9%.
If indeed this is what we should be looking at it says the market is not expecting all that
much of an increase in the rate of inflation from its current 1.7% five years from now. The Fed
and others are looking at a short term spike in prices this year, but the market seems to agree
with their apparent nonchalance (shared by Janet Yellen) that this will wain later on, with
that expected 5 year rate of inflation still below the Fed's target of 2%.
Certainly this contrasts with the scary talk coming from Larry Summers and Olivier
Blanchard, not to mention most GOP commentators, regarding what the impact of current fiscal
policies passed and proposed by Biden will do to the future rate of inflation. Not a whole lot,
although, of course, rational expectations is not something that always forecasts all that
well, so the pessimists might still prove to be right.
Barkley Rosser
Likbez , April 14, 2021 6:27 pm
Larry Summers is a puppet of financial oligarchy. Everything that he writes should be
viewed via this prism. He also is highly overrated.
IMHO rates are no longer are determined by only domestic factors.
I think that the size of foreign holdings of the USA debt and their dynamics is another
important factor. FED will do everything to keep inflation less then 2% but this is possible
only as long as they can export inflation.
BTW realistically inflation in the USA is probably 30%-60% higher than the official
figure. Look at http://www.shadowstats.com/ :
March 2021 annual Consumer Price Index inflation hit an unadjusted three-year high of
2.62%, as gasoline prices soared to multi-year highs, not seen since well before the 2020
Oil Price War. -- March Producer Price Index exploded, with respective record annualized
First-Quarter PPI inflation levels of 9.0% in Aggregate, 16.0% in Goods and 5.6% in
Services.
• L A T E S T .. N U M B E R S .. March 2021 unadjusted year-to-year March 2021
CPI-U Inflation jumped 2.62% -- a one-year high -- as gasoline prices soared, not only
fully recovering pre-Oil Price War levels of a year ago, but also hitting the highest
unadjusted levels since May of 2019 (April 13th, Bureau of Labor Statistics –
BLS). Headline March 2021 CPI-U gained 0.62% in the month, 2.62% year-to-year, against
monthly and annual gains of 0.35% and 1.68% in February.
That inflation pickup reflected more than a full recovery in gasoline prices, which
had been severely depressed by the Oil Price War of one year ago. Such had had the
effect of depressing headline U.S. inflation up through February 2021, including
suppressing the 2021 Cost of Living Adjustment (COLA) for Social Security by about
one-percentage point to the headline 1.3%. By major sector, March Food prices gained
0.11% in the month, 3.47% year-to-year (vs. 0.17% and 3.62% in February); "Core" (ex-Food
and Energy) prices gained 0.34% in March, 1.65% year-to-year (vs. 0.35% and 1.28% in
February); Energy prices gained 5.00% in March, 13.17% year-to-year (vs. 3.85% and 2.36% in
February), with underlying Gasoline prices gaining 9.10% in the month, 22.48% year-to-year
(vs. 6.41% and 1.52% in February).
The March 2021 ShadowStats Alternate CPI (1980 Base) rose to 10.4% year-to-year, up
from 9.4% in February 2021 and against 9.1% in January 2021. The ShadowStats Alternate
CPI-U estimate restates current headline inflation so as to reverse the government's
inflation-reducing gimmicks of the last four decades, which were designed specifically to
reduce/ understate COLAs.
Related graphs and methodology are available to all on the updated ALTERNATE DATA
tab above. Subscriber-only data downloads and an Inflation Calculator are available there,
with extended details in pending No. 1460 .
In this sense China and Japanese policies will influence the USA rates. If they cut buying
the US debt the writing for higher rates is on the wall. In a way, recent events might signal
that FED can lose the control over rate if and when foreign actors cut holding of the USA
debt.
Behavior of foreign actors is probably the key factor that will determine the rates in the
future.
[Apr 13, 2021] U.S. Treasury yields slip despite surge in inflation to 2½-year high by very small number of companies. Treasury yields slipped Tuesday after bond investors shrugged off an increase in U.S. consumer prices in March that sent yearly inflation measures to the highest level in two and a half years. Treasury yields slipped Tuesday after bond investors shrugged off an increase in U.S. consumer prices in March that sent yearly inflation measures to the highest level in two and a half years.
The 10-year Treasury note yield
TMUBMUSD10Y,
1.653%
fell
to 1.659%, down from 1.675% at the end of Monday, while the 2-year note
TMUBMUSD02Y,
0.168%
was
steady at 0.169%. The 30-year bond yield
TMUBMUSD30Y,
2.339%
slid
0.9 basis point to 2.336%.
What's driving Treasurys?
The U.S. consumer price index rose
0.6% in March, while the core gauge that strips out for energy and food prices came in
at an 0.3% increase.
The annual rate of inflation climbed to 2.6% from 1.7% in the prior month, marking the highest level since the fall of 2018.
For low-income Americans, it has been a double-whammy of job losses
(the total
number of Americans receiving jobless benefits from the government has basically stagnated for the last four months)...
Source: Bloomberg
...and significant increases in the costs of living.
As
Bloomberg
reports
, while the headline consumer inflation rate in the U.S. remains subdued, at 1.7% - but it
masks
large differences in what people actually buy
.
If you like to eat,
food-price inflation is running at more than double the headline rate
,
and staples like household cleaning products have also climbed.
Source: Bloomberg
if you drive a car,
gas prices have soared
in recent months...
Source: Bloomberg
All of which might explain why confidence among the lowest income Americans is lagging significantly (because
groceries
or gas take up a bigger share of their monthly shopping basket than is the case for wealthier households, and they're items that
can't easily be deferred or substituted
)...
Source: Bloomberg
An analysis by Bloomberg Economics
, which reweighted consumer-price baskets based on the spending habits of different income
groups, found that
the richest Americans are experiencing the lowest level of inflation
.
"On average, higher-income households spend a smaller fraction of their budgets on food,
medical care, and rent, all categories that have seen faster inflation than the headline in recent years, and 2020 in
particular."
The question of who exactly gets hurt most by higher prices could become more urgently concerning as most economists - and even The
Fed itself - expect inflation to accelerate in the next 12 months.
So, in summary, The Fed is telling Americans - ignore "transitory" spikes in non-core inflation (such as food and energy), it's just
temporary and base-effect-driven (oh and we have the "tools" to manage it). However,
despite
all The Fed's pandering and virtue-signaling about "equity" and "fairness", it is precisely this segment of the costs of living that
is crushing most of the long-suffering low-income population ($1400 checks or not)
.
And now all eyes will be on this morning's PPI print which is expected to surge to +3.8% YoY.
Bond markets are firmly in the driving seat. For too long, inflation has disappeared from
investors' radar. The key ones include a hostile environment for trade and globalisation,
business and labour support public programmes and the extraordinary debt burden fuelled by the
pandemic. These are set to create a turning point in the current market regime before long.
...Economists do expect inflation to rise to above 2% as more states reopen and then stay
there. And the St. Louis Fed is forecasting a 2.35% rate for the next 10 years.
...China's economy has dynamics that could raise the U.S. inflation rate over time. Key to
the argument are China's aging population and the value of the country's currency, the Yuan.
First, age. Today, the average age in China is 38, the same as in the U.S. By 2040, though, the
number skyrockets to 47 in China and dips to 37 here.
The shift means fewer Chinese workers and upward pressure on pay. Higher wages probably
would cause Chinese manufacturers to raise prices of exports, which could be passed onto
American consumers.
Now, the Yuan. The currency bottomed at 7.12 per dollar in late 2019 after a more than
five-year down-trend. China wants a weaker currency so its exports are more competitive --
cheaper -- for global buyers. Since the end of 2019, the Yuan has risen to 6.50 per dollar. If
the trend continues, U.S. importers might raise prices because the cost of their imports are
higher.
"Over the next decade, Asia's growth will slow dramatically, its wages will rise, its
factories will close, its surpluses will melt and its currencies will rise sharply," wrote
Vincent Deluard, global macro strategist at StoneX in a note. "For the rest of the world, this
will be a massive and unexpected inflationary shock."
Krugman is is barking on the wrong tree. The question right now is not wage inflation but the
inflation due to weakening dollar as purchases of Treasuries by foreign buyers weakened. That
what probably caused the spike on 10 year Treasuries yield.
Without foreign buyers of the US debt the deficit spending does not work. So it is quite
possible that this time inflationary pressures will come from the weakening of the status of the
dollar as the world reserve currency. As along the this status is unchallenged the USA will be
OK. If dollar is challenged the USA will experience the Seneca cliff.
Paul Krugman argues once's again this morning that any increase in inflation this year as
part of a post-pandemic boom will be transitory:
I agree. I want to elaborate on one point he hasn't emphasized; namely, you can't have a
wage-price inflationary spiral if wages don't participate!
To make my point, let me show you three graphs below, covering wages and prices in three
different periods: (l) the inflationary 1960s and '70's, (2) the disinflationary
Reagan-era 1980s and early '90's, and (3) the low inflation period of the late 1990s to the
present.
In addition to the YoY% change in CPI, I also show CPI less energy (gold), better to show oil
shocks, and also that it takes about a year for inflation in energy prices to filter through to
inflation in other items.
Also, hourly wages were greatly affected (depressed) by the entry of 10,000,000's of women
into the workforce between the 1960s and mid-1990s. This increased median household income, which
would be the better metric, but since that statistic is only released once a year, I've
approximated its impact by adding 1% to the YoY% change in average hourly wages (light blue).
"It took really more than a decade of screwing things up -- year after year -- to get to
that pass, and I don't think we're going to do that again," Krugman said of the inflation
scourge of the 1970s to early 1980s. He spoke in an interview with David Westin for Bloomberg
Television's "Wall Street Week" to be broadcast Friday.
...The worst-case scenario out of the fiscal stimulus package would be a transitory spike in
consumer prices as was seen early in the Korean War, Krugman said. The relief bill is
"definitely significant stimulus but not wildly inflationary stimulus," he said.
...Economists predict that the core inflation measure tied to consumer spending that the Fed
uses in its forecasts will remain under 2% this year and next, a Bloomberg survey shows. A
different gauge, the consumer price index is seen at 2.4% in 2021 and 2.2% next year. The
CPI peaked at over 13% in 1980.
The risk is that policy makers are "fighting the last war" -- countering the undershooting
of the 2% inflation target and limited fiscal measures taken after the 2007-09 financial
crisis, the economists said.
Even so, he argued that "redistributionist" aspects of the pandemic-relief package will
reduce the need for the Fed to keep monetary stimulus too strong for too long in order to
address pockets of high unemployment. Fed Chair Jerome Powell has repeatedly said the central
bank wants to see very broad strengthening in the labor market, not just a drop in the national
jobless rate.
"It's not silly to think that there might be some inflationary pressure" from the fiscal
package, Krugman said. But it was designed less as stimulus than as a relief plan, he
said.
The UBS economics team holds the out-of-consensus view that annual core PCE inflation won't
exceed the Fed's 2% target until 2024. And what will happen with S&P500 if inflation brakes
3% barrier in late 2021 or 2022. Pumping money into stock market is a Ponzi scheme by definition
so at one point mistki moment might arrive.
Biden hailed the new law's focus on
growing the economy "from the bottom up and the middle out," after decades of supply-side,
or "trickle down" tax policies. It "changes the paradigm" for the first time since President
Johnson's Great Society programs, he said.
But the last time free-spending, inflation-permissive "regime shifts for fiscal and monetary
policymakers" coincided, wrote Deutsche Bank economists David Folkerts-Landau and Peter Hooper,
"such shifts touched off a sustained surge in inflation in the U.S.," beginning in 1966.
Growth in core prices, which exclude food and energy, jumped from well under 2% in 1965 to
nearly 3.5% in 1966 and approached 5% by late 1968, Deutsche Bank noted. Inflation remained
elevated into the early 1970s, even before an oil shock hit in 1973. The pickup was
broad-based, but health care inflation played a key role, going from less than 3% to nearly 7%
by early 1967.
The S&P 500 suffered through a bear market in 1966. Another 19-month bear market began
in late 1968. The Dow Jones made a major top in January 1966. It would take the Dow Jones until
1982 to finally break through that ceiling for good.
Almost everyone expects a notable pickup in inflation this year -- including the Fed.
Monetary policymakers expect the personal consumption expenditures (PCE) price index to rise
2.4% this year. That's vs. 1.5% in the 12 months through January.
Fed Chair Jerome Powell said March 17 that the Fed will discount this year's jump in prices
as a transitory bounce from pandemic-induced weakness. What happens in 2022 will be key. Fed
projections show inflation easing back to 2%. But if pressures don't ease, the Fed will have to
reassess its 2024 timetable for the cycle's first rate hike.
It's easy to see how Fed projections might understate next year's inflation. Policymakers
likely are not factoring in any impact from the Democrats' next massive spending package.
Subdued health care prices might help keep inflation in check, depending on what Congress
does. A 2% hike in Medicare reimbursements is scheduled to lapse in April, but lawmakers appear
set to extend it. A 3.75% increase in Medicare fees for physicians could end in January,
Deutsche Bank said.
Democrats also are eyeing spending curbs to help pay for their infrastructure package.
Letting Medicare negotiate prescription drug prices is high on the list of options.
Longer term, the inflation outlook may depend on whether a
post-pandemic productivity boom offsets upward price pressure as globalization
backslides.
10-Year Treasury Yield Surges On U.S. Economy Growth Outlook
This week, the 10-year Treasury yield has eased to 1.66%, after hitting 1.75% last week, the
highest of the Covid era. Still, the 10-year yield is up 66 basis points since Jan. 5.
Financial market pricing now indicates an expectation that inflation will average 2.35% over
the coming decade. That's the difference between the 10-year Treasury yield and the -0.69%
yield on 10-year Treasury Inflation-Protected Securities, or TIPS.
"Negative real yields seem highly incongruous with the robust economic growth in train,"
Moody's Analytics chief economist Mark Zandi wrote. As real yields rebound, Zandi sees the
10-year Treasury yield reaching 2% by year end, 2.5% in 2022 and 3% by late 2023.
What Do
Taxes, Interest Rates Mean For S&P 500?
As the new fiscal and monetary policy regime takes hold, investors will have a lot to
process. If the era of too-little inflation and ultralow interest rates is drawing to an end,
but earnings growth surges as the economy catches fire, what will that mean for the S&P
500? And how might tax hikes affect stock prices?
... ... ...
The UBS economics team holds the out-of-consensus view that annual core PCE inflation won't
exceed the Fed's 2% target until 2024. Chief U.S. economist Seth Carpenter expects the new
stimulus checks to be largely saved. The next fiscal package might likewise have a "muted" bang
for the buck, while adding just $600 billion to the federal deficit.
... ... ...
Interest Rates: Parker finds that a 50-basis-point rise in the 10-year Treasury yield
compresses price-earnings multiples by six-tenths of a point. Based on the S&P 500's
current forward earnings multiple of about 21.5, that would equate to about a 3% decline in the
S&P 500.
Capital Gains Taxes: Biden has proposed hiking the capital gains tax rate from 20% to 39.6%
for high earners. Parker figures that could slice 1.5 points off the S&P 500 P/E multiple,
potentially a 7% hit. However, UBS expects that not quite half the tax plan will become
law.
Parker arrives at a 19.5 forward earnings multiple for the S&P 500. That also factors in
some compression because the fiscal boost to earnings is bound to slacken...
The investment seeks to track the performance of the Bloomberg Barclays U.S. Treasury
Inflation-Protected Securities (TIPS) 0-5 Year Index. The index is a
market-capitalization-weighted index that includes all inflation-protected public obligations
issued by the U.S. Treasury with remaining maturities of less than 5 years. The manager
attempts to replicate the target index by investing all, or substantially all, of its assets in
the securities that make up the index, holding each security in approximately the same
proportion as its weighting in the index.
Vanguard Short-Term Inflation-Protected
Securities Index Fund ETF Shares (VTIP) NasdaqGS - NasdaqGS Real Time Price. Currency in
USD Add to watchlist
WASHINGTON (Reuters) - Inflation will hit 2.5% this year and not fall much in 2022, which
the Federal Reserve should welcome as a way to reaffirm the central bank's inflation target,
St. Louis Federal Reserve Bank President James Bullard said on Tuesday.
" I am not seeing the inflation rate come down very much in 2022 ... maybe just
slightly, " Bullard said in comments that placed him among the more aggressive Fed
officials in terms of willingness to see inflation move higher this year and remain there
without raising interest rates.
"Part of the goal is to take the increase in inflation that we have this year penciled in
and allow some of that to move through to inflation expectations," and keep them cemented at
the Fed's 2% inflation target.
The real inflation for the past 20 years was probably around 5%: that buypoer of$100
dinimisnes by 50% in 20 years. In some areas like education and healthcare much faster that that.
In some areas slower then that. Official inflation was around half of that (and this discrepancy
is systemic -- due to the desire of any regime based of fiat currency to underestimate inflation
and thus diminish additional payment to Social Security and other linked to inflation budget
items) . Thanks to a massive federal deficit inflation might pick up.
Higher inflation in 2021-2023 is now the consensus,
"The Fed has signaled that its dovish monetary policy is here indefinitely," Mr. Toomey
said, noting a recent uptick in commodity prices and a brightening outlook for economic growth.
"I worry that the Fed will be behind the curve when inflation picks up."
Mr. Powell, however, reiterated that he doesn't expect supply-chain bottlenecks or an
expected surge in consumer demand later this year as the economy reopens to change in long-term
price trends. The Fed generally doesn't alter its policies in response to temporary price
pressures.
"In the near term, we do expect, as many forecasters do, that there will be some upward
pressure on prices," Mr. Powell said. "Long term we think that the inflation dynamics that
we've seen around the world for a quarter of a century are essentially intact. We've got a
world that's short of demand with very low inflation and we think that those dynamics haven't
gone away overnight and won't."
Sen. Richard Shelby (R., Ala.) pressed Ms. Yellen on her changing views on the risks of high
and rising federal debt. Government red ink has swelled over the past year as economic activity
stalled and Congress ramped up spending to combat the pandemic.
Lloyd B. Thomas, Ph.D. University of Missouri Columbia, Mo.
The Federal Reserve is capable of nipping any surge of inflation, but it has made clear it
will be behind the curve as inflation rises. It has announced that it will not boost interest
rates until it is confident we have reached full employment and until inflation substantially
exceeds 2% annually for a considerable period.
Ed Kah, l Woodside, Calif,
The Fed's "foresight" in the 1970s sleepwalked us over 10 years into 14.5% inflation,
18.5% mortgage rates, 7.5% unemployment and a severe recession in 1980. The Fed's repression
of interest rates has already inflated asset prices. It is now favoring spending that will
move the national debt held by the public toward 150% of GDP if the Democrats keep passing
multitrillion-dollar stimulus spending bills in a fast recovering economy.
The big risk comes when interest rates regress to higher historic averages that increase
the cost of government debt. Even a very small rise in short-term rates shook the markets
recently. The Fed should at the very least hedge this risk by lengthening the maturity of
most government debt. They should also caution Congress about the sorry history of countries
whose debt exceeds GDP.
Jacob R. Borden , P.E. Trine University, Angola, Ind.
Prof. Blinder uses macroeconomic anecdotes to argue that upward of 4% inflation is no big
deal. But it is a big deal when you recognize that inflation is a tax on the accumulation of
wealth. Sen. Elizabeth Warren must be smiling.
Even worse, inflation is a regressive tax on wealth. The professional class is already
shifting assets to protect against inflationary headwinds. Mary B. Flyover, on the other
hand, has few such assets and instead spends relatively more of her money on fuel and
groceries, the very elements missing from Mr. Blinder's preferred measure of
inflation.
Every year, inflation saps the spending power of a dollar earned, putting future savings
further out of reach for people already being left behind. What little savings is available
is largely in checking and savings accounts that don't even keep up with current inflation,
let alone just a little more. Then add the compounding impact of inflated incomes on inflated
tax bills. Once 4% inflation is baked in, Ms. Flyover's tax bill will be forever higher,
while her purchasing power will trend ever lower.
Thomas Porth, Hockessin, Del.
The facts that Prof. Blinder doesn't cite are what worry me. When I studied economics at
Princeton in 1981 (using Prof. Blinder's textbook), the yield on the 10-year Treasury stood at
14% as of the end of December, while the CPI-U inflation rate stood at 8.9%. The real risk-free
rate of return was therefore a positive 5.1% or so. In contrast, today the CPI-U stands at 1.7%
(March 10), while the yield on the 10-year Treasury stands at 1.71% (March 18), for a real
risk-free rate of return of what is effectively zero.
Even relying on current measures of inflation, the real rate of return has dropped from
positive 5.1% in 1981 to zero or, let's be serious, less than zero today (when I am retired).
Sorry, Prof. Blinder, but I'm starting to panic.
A worry for retirees: Inflation forecasts hit 8-year high
A worry for retirees: Inflation forecasts hit 8-year high
Brett Arends
Mon, March 15, 2021, 10:01 AM
Nobody suffers more from high inflation than retirees. Back in the 1970s, it was those in retirement living
on fixed income that got hit the hardest as prices rose year after year. The investment returns from their
bonds and cash fell way behind.
Real inflation in the USA is probably close to 3-4% a year judging from the dynamic of rental
payments and prices on on food. Annual Food inflation was between 3.93%, to 3.78% in December to
February timeframe.
The February 2021 ShadowStats Alternate CPI (1980 Base) increased 9.4% year-to-year, up from
9.1% in January 2021, 9.0% in December 2020 and against 8.8% in November. The ShadowStats
Alternate CPI-U estimate restates current headline inflation so as to reverse the government's
inflation-reducing gimmicks of the last four decades, which were designed specifically to reduce/
understate COLAs.
Inflation may be on many investors' minds, but it has yet to show up in the numbers.
Moreover, a close reading of the data suggests that inflation won't be a problem for some time,
if ever.
The latest reading of the consumer price index shows that Americans' cost of living was only
1.7% higher in February 2021 than a year earlier. That's the fastest inflation reading since
the pandemic began, but still substantially slower than the pre-pandemic average. Exclude
volatile food and energy prices, and inflation is running at 1.3%...
The understatement of housing inflation in the consumer price index has reached a new
milestone.
As reported, the gap between the actual change in house prices and owners' rent, published by the Bureau
of Labor Statistics (BLS), exceeds the "bubble" levels.
In February, BLS reported owner's rent increased 2% over the last 12 months. House price inflation, as reported by the Federal
Housing Finance Agency (FHFA), increased 11.4%. That gap over 900 basis points exceeds the 800 basis point gap recorded during
the housing bubble peak.
The consumer price index was created and designed to measure prices paid for purchases of specific goods and services by
consumers. The CPI was often referred to as a buyers' index since it only measured prices "paid" by consumers.
The CPI has lost that designation.
It
is no longer measures actual prices.
For the past two decades, BLS imputes the owners' rent series, using data from
the rental market, no longer using price data from the larger single-family market.
Imputing prices for the cost of housing services make the CPI a hybrid index or a cross between a price index and a cost of
living index. A hybrid index is not appropriate as a gauge to ascertain price stability, especially when the hypothetical
measure of owner's rent accounts for 30% of the core CPI.
The CPI missed the price "bubble" of the mid-2000s, and the economic and financial fallout was historic.
History
sometimes repeats itself in economics and finance. Policymakers forewarned.
The FED has been inflating a cheap money bubble for 40 years. The response to every
recession is to cut rates. But the Fed never returns rates to pre-recession levels so the
economy ultimately enters one recession after the next at lower and lower rates. Now at near
zero, the gig is up. Dropping rates by nearly 50 basis points per year for four decades has
created the mother of all bubbles.
Greed is King 1 hour ago remove link
USA, the new Roman Empire and just like the old Roman Empire was, the scourge of the
planet.
A Sovereign debt ridden nation, that only survives due to its enormous military that
enables the USA to pillage the resources of other countries via a foreign policy of threat,
intimidation, invasion and occupation; exactly the same tactics used by the original Roman
Empire.
Unfortunately for the USA, the MIC and American armed forces, are the biggest consumer of
all of the income and resources obtained from pillaging and debt, they are a greedy
insatiable monster that continues to grow and demands more and more to be fed.
We`re now in the ludicrous, unsustainable and unacceptable situation of, all of the
countries who are having their resources stolen by the USA, and all of the American tax
payers who are underwriting the debt incurred by the USA are in fact paying for the MIC and
armed forces to repress them.
Here`s a radical idea; why not stop borrowing to feed the MIC monster, and try treating
the rest of planet Earth with respect and cooperation.
Commenter R.J.S. Discuses CPI Rising led by Food, Energy, and Medical
The consumer price index rose 0.4% in February , as higher prices for fuel, groceries,
utilities, and medical services were only partly offset by lower prices for clothing, used
vehicles, and airline fares the Consumer Price Index Summary from the Bureau
of Labor Statistics indicated that seasonally adjusted prices averaged 0.4% higher in February,
after rising by 0.3% in January, 0.2% in December, 0.2% in November, 0.1% in October, 0.2% in
September, 0.4% in August, by 0.5% in July and by 0.5% in June, after falling by 0.1% in May,
falling by 0.7% in April and by 0.3% in March, but after rising by 0.1% in February of last
year .the unadjusted CPI-U index, which was set with prices of the 1982 to 1984 period equal to
100, rose from 261.582 in
January to 263.014 in February , which left it statistically 1.6762% higher than the
258.678 reading of February of last year, which is reported as a 1.7% year over year increase,
up from the 1.4% year over year increase reported a month ago .with higher prices for energy
and foods both factors in the overall index increase, seasonally adjusted core prices, which
exclude food and energy, were up just 0.1% for the month, as the unadjusted core price index
rose from 269.755 to 270.696, which left the core index 1.2826% ahead of its year ago reading
of 267.268, which is reported as a 1.3% year over year increase, down from the 1.4% year over
year core price increase that was reported for January and the 1.6% the year over year core
price increase that was reported for December
The volatile seasonally adjusted energy price index rose 3.9%
in February , after rising by 3.5% in January, 2.6% in December, 0.7% in November, 0.6% in
October, 1.4% in September, 0.9% in August, 2.1% in July, and by 4.4% in June, but after
falling by 2.3% in May, by 9.5% in April, 5.8% in March, and by 2.5% last February, and hence
is only 2.4% higher than in February a year ago the price index for energy commodities was 6.6%
higher in February, while the index for energy services was 0.9% higher, after falling 0.3% in
January .the energy commodity index was up 6.6% on a 6.4% increase in the price of gasoline and
a 9.9% increase in the index for fuel oil, while prices for other energy commodities, including
propane, kerosene, and firewood, were on average 7.3% higher within energy services, the price
index for utility gas service rose 1.6% after falling 0.4% in January and is now 6.7% higher
than it was a year ago, while the electricity price index rose 0.7% after falling 0.2% in
January .energy commodities are now averaging 1.6% higher than their year ago levels, with
gasoline price averaging 1.5% higher than they were a year ago, while the energy services price
index is now up 3.2% from last February, as electricity prices are also 2.3% higher than a year
ago
The seasonally
adjusted food price index rose 0.2% in February, after rising by 0.1% in January and 0.3%
in December, after being unchanged in November, rising 0.2% in October, rising 0.1% in August
and in September, after falling 0.3% in July, rising 0.5% in June, 0.7% in May, 1.4% in April,
0.3% in March, and by 0.3% last February, as the price index for food purchased for use at home
was 0.3% higher in January, after falling 0.1% in January, while the index for food bought to
eat away from home was 0.1% higher, as average prices at fast food outlets rose 0.4% and prices
at full service restaurants rose 0.3%, while food prices at employee sites and schools averaged
12.2% lower notably, the price index for food at elementary and secondary schools was down
13.7% and is now down 32.5% from a year ago
The understatement of housing inflation in the consumer price index has reached a new
milestone.
As reported, the gap between the actual change in house prices and owners' rent, published by the Bureau
of Labor Statistics (BLS), exceeds the "bubble" levels.
In February, BLS reported owner's rent increased 2% over the last 12 months. House price inflation, as reported by the Federal
Housing Finance Agency (FHFA), increased 11.4%. That gap over 900 basis points exceeds the 800 basis point gap recorded during
the housing bubble peak.
The consumer price index was created and designed to measure prices paid for purchases of specific goods and services by
consumers. The CPI was often referred to as a buyers' index since it only measured prices "paid" by consumers.
The CPI has lost that designation.
It
is no longer measures actual prices.
For the past two decades, BLS imputes the owners' rent series, using data from
the rental market, no longer using price data from the larger single-family market.
Imputing prices for the cost of housing services make the CPI a hybrid index or a cross between a price index and a cost of
living index. A hybrid index is not appropriate as a gauge to ascertain price stability, especially when the hypothetical
measure of owner's rent accounts for 30% of the core CPI.
The CPI missed the price "bubble" of the mid-2000s, and the economic and financial fallout was historic.
History
sometimes repeats itself in economics and finance. Policymakers forewarned.
The consumer-price index rose 0.4% in February from the prior month, as the pace of the
economic recovery increased following a winter lull, buoyed by higher gasoline and energy
costs.
I worry that people cannot survive this. Real, warm blooded, caring, loving people can be
broken by this. And that's what makes me angry. Because this is unnecessary. The money to
deliver a decent society exists.
All that we need to make the lives of the vast majority of people in this country is a real
understanding of economics, of money, of how it interacts with tax, and how we can use that for
the common good.
But no political party seems to get that as yet. And until they do, this unnecessary
suffering will continue. And that makes me very angry. Pointless pain is what we're enduring.
And all for the sake of accepting that money is not a constraint on our potential, and never
will be.
Let me have a go.
If prosperity and wealth can be created by printing more money, why there is still poverty
in the world?
After all, isn't every country equipped with a central bank that can print as much money as
they want?
Real wealth is not denominated in dollars, only in what those dollars can buy. Devaluing
the dollar doesn't hurt the wealthy, most of their wealth is in the form of equity and real
assets, not dollars.
The average person's wealth is measured mostly in his future labor, how much he is going to
earn. He will earn less because the Fed devalues his labor through its manipulation of the
dollar. He will see this in the rising cost of living without an increase in his pay. Sure
perhaps the value of labor will at some point catch up to the devalued dollar, but in the
interim he will earn less and will never catch up to what he would have earned otherwise.
It doesn't hurt the wealthy, it hurts the middle class, and will for years to come.
Your macroeconomic ignorance is duly noted, featuring as it does the usual "commodity
money" and mercantilist shibboleths.
MMT describes fiat monetary operations which have been in effect since the Nixon
shock and the abandonment of Bretton Woods almost 50 years ago . Do catch up.
honest question, wouldn't MMT (in a hypothetical universe run by committed MMTers) in
the UK likely will produce vastly different results than MMT in relatively autarkic
economics like the USA or Russia?
The UK relies on imports to one degree or another for virtually every physical good
necessary for a first-world living standard (food -- even basic foodstuffs like wheat,
medicine, spare parts, petrol, apparel, even steel, etc).
While the UK's economy tilts to exporting services education, finance, media,
medicinal/technological intellectual property, tourism, etc.
Would a weaker UK pound encourage more service exports? Or merely increase inflation,
particularly for the bottom 50%?
Because MMT analysts tend to be mostly US or Australian, the applicability of it to
smaller, more open economies has not, I think, had the attention thats needed (although to
be fair, Richard Murphy has done quite a lot of writing on this). While the UK is a large
economy, its also very open (although increasingly less so, thanks to Brexit). So it
clearly has much less room to manoeuvre in terms of monetary or fiscal policy than a more
autarkical nation. Its not just with MMT and inflation – things like Keynesian
multipliers tend to be lower in more open economies as the benefits of fiscal expansion get
exported out. The Labour party under Corbyn did put together some very interesting and well
thought through MMT-influenced policies, but of course that all got thrown out with
Corbyn.
As Yves has pointed out before, the UK has a particular problem in that it has little
spare physical capacity in its economy to take advantage of a weaker currency. In the past,
it has been unable to increase output when the pound has been weaker. So a weakening pound
is likely to be more inflationary than in many other economies.
I think that in a general sense, MMT makes sense in all economies in a Covid scenario of
a massive drop in output thanks to a black swan event. As Murphy points out, you just need
to shove the cash into the economy through monetary means and forget about having to repay
it. Inflation just isn't a problem in those circumstances, and it has the benefit of
maintaining productive capacity within the economy. But in more 'normal' times, MMT needs
to be applied with far more care in an economy like the UK than in a US or China or Russia
or EU.
Kind of wondering here what would happen if all the poor and unemployed/welfare
recipients and even the precarious middle class also decided to offshore their money. Why
not? Say in every country; say it became a global movement. The neoliberal nightmare should
inform us all. Just because a small country doesn't have spare capacity or idle resources
is not really a contraindication for MMT. It is more a factor of having an intrinsic
imbalance due to decades if not centuries of grift and graft by those in a position to help
themselves. And it creates confused politics. As you mentioned above – the Tories in
the UK seem to have also usurped the opposition. Well, to my thinking, that is exactly what
Trump did. And it is almost a crazy hope of "If you can't beat them, join them." And just
exactly where does that leave a functional economy? My first image is a junkyard.
First, apropos the applicability of Modern Money Theory to relatively open economies
like that of the U.K., see the discussion of the prerequisites for monetary sovereignty as
outlined by Robert Hockett and Aaron James in their 2020 book, Money for Nothing .
In addition to the well-known requirements (nation must issue its own currency; currency
not pegged to metal or any other currency; no borrowing in foreign currencies), Hockett and
James add others, including "limited trade dependence in essential goods such as food or
energy sources, in order to mitigate foreign exchange and inflation risk ." (274)
Second, apropos the applicability of MMT to smaller economies, I am pleased to note that
Fanny Pigeaud and Ndongo Samba Sylla's 2018 book, L'Arme Invisible de la
Françafrique: Une Histoire du Franc CFA , has at last been published in English
as Africa's Last Colonial Currency: The CFA Franc Story . (Your search engine will
take you either to the
publisher or to an internet behemoth where you can order it.)
Pigeaud and Sylla's book is a history and analysis of the political economy of the CFA
zone: the countries of central and west Africa which were French colonies and which
continue to use a common currency imposed on them by the French imperialists in 1945.
This book is, in my estimation, the best book we have so far in applying the insights of
Modern Money Theory to non-monetarily sovereign economies. You have to love any book that
starts out by translating Hyman Minsky's most famous aphorism into French: Tout un
chacun peut creér de la monnaie: le problème est de la faire
accepter.
"limited trade dependence in essential goods such as food or energy sources, in order
to mitigate foreign exchange and inflation risk ."
Again, we/they have choices based on resource constraints. But, as usual, they are
political. Most of these choices seem impossible now, but remember Victory Gardens ?
Alas, such things are not looked upon favourably by Big Ag and the supermarket chains, but
my depression-era grandparents grew most of their own food for their very large (by our
standards) families. Maternal side, farmers -- my mother, born 1923, said that she never
even knew there was a depression until she read about it later in high school. Grandpa paid
his property taxes by driving snowplow for the county in the winter. Father's side -- my
father, born 1922, grew up in a village (5-bedroom two story house built by his father, a
shoemaker, and friends/relatives/contractors) on a biggish, maybe 1-2 acre? lot, which was
part of a grant to the family for Civil War service. Grandma still had apple, peach, cherry
and walnut trees, raspberry and currant bushes when I knew her, and had grown beans,
tomatoes, potatoes and all that stuff before the 7 kids got married. Obviously, the kids
did a lot of the work, too. Sewing room -- made most of the clothes for family, Dad says
the kids' diapers were made of sugar sacks.
IOW, this is not rocket science. We did this sort of thing for millions of years,
omitting the last 200 or so, and can very likely do it again. People explored the whole
round world, and conquered a lot of it, without electricity or the internal combustion
engine. We're not all gonna die!
Unless we as a species continue to act on maximizing shareholder value rather than
surviving.
I think that you might be onto something here. I suspect that the lives of our
grandchildren as they grow older will resemble the lives of our grandparents from your
description. Of course that may mean a lot off decentralization from out of big cities but
it can be done – especially if there is no other choice. And it's not like in the US
that there is not the land to do this with.
It is an excellent article, with one small exception, the words, "I accept that creating
money this way is inflationary."
Contrary to popular wisdom, inflation is not caused by money creation . All
inflations are caused by shortages , most often shortages of food or energy.
That includes hyperinflations. Consider, for one, the Zimbabwe hyperinflation. The
government took farmland from farmers and gave it to non-farmers. The inevitable food
shortages caused inflation. The government's "money-printing" was merely the wrongheaded
response to the inflation, not the cause.
In fact, the hyperinflation could have been cured by more money creation, had that money
been used to cure the food shortage, by purchasing food from abroad and distributing it, or
by teaching the non-farmers how to farm.
In the past year, the U.S. has spent an astounding $4 trillion, and soon it will spend
another $2 trillion, Yet, there will be no inflation so long as there are no shortages of
food, oil, or labor.
Bottom line: Scarcity, not money creation, causes inflation.
In the US, as in the UK, planned inequality and (managed) unequal access to the benefits
of the money system are two of the most salient activities of our (US) three government
branches.
So are ye telling me the reason conservatives don't (for example) want to raise the
minimum wage is not because of some economic or monetary reason or law but instead just to
keep people in their place, i.e. preserve the status quo? Amazing! And I guess them
conservatives that "havenot" go along because of that "relative advantage" thing –
they are so fixated on keeping those below in their place that they are blind to the upside
of a more democratic and social monetary policy. Well I'll be. Now I git it!
Then the MMT School are conservatives since they'd use taxation to curb inflation (by
some undisclosed means that does not curb consumption).
But why should price inflation be a problem so long as:
1) It does not exceed income gains for ALL citizens;
2) the means that produce it do not violate equal protection under the law;
and
3) it is not extreme?
The only reason I can think of, and it's a contemptible one, is that large fiat
hoarders* would see their hoards diminish in value in real terms.
*not to disparage those saving for a home, initial capital formation, legitimate
liquidity needs, etc.
One point of inflation is to restrain creditors (rhymes with "predators").
Meanwhile, "printing" money does not initiate inflation. Most inflation–even
hyperinflation–is "cost push," i.e. related to shortages of goods. In Zimbabwe, the
Rhodesian farmers left, and the people to whom Mugabe gave their land were not as
productive. Result: a shortage of food requiring imports (balance of payments problem).
In Weimar Germany, the French army invaded the Ruhr, shutting down Germany's industrial
heartland, making a shortage of goods. They already had a balance of payments problems with
WWI reparations.
it was always thus.
the real Burkean Conservatives behind it all, who yes want to keep everyone in their
place.
as i've lamented many times, it's hard to get a read on who the real Bosses are, since they
don't go on TV and brag, generally(various rightwing billionaires in the last 15 years,
notwithstanding)
C.Wright Mills and Domhoff are the only taxonomists of that cohort that i'm aware of
Diannah Johnstone, perhaps.
Maybe Pepe Escobar when they hide the rum.
otherwise, every attempt i've seen in the last 30 years has had elements of tinfoil and
illuminatii/NWO scattered throughout.
I reckon this is by design, at some level.
whatever there exists a demographic cohort of humanity that is exceedingly wealthy, thinks
it's in charge and mostly really is and that is truly cosmopolitiain citizens of the
world.
their most defining feature is that they pretend real hard not to exist and most of us
little people give them no mind, and pretend right along.
This cohort is not monolithic, nor all powerful they each are as prone to tunnel vision and
stupidity as any of us but they have better connected steering wheels, and cleaner
windshields, and mirrors that work.
One hopes that, like in FDR Times, they will feel threatened enough by the results of their
long term policy preferences to allow a few larger crumbs to fall from the table, so as to
mollify the ravening hordes .ere those hordes notice who the real Hostis Humani Generis
are.
But it looks like they're more likely to double down on the diversionary division of the
Bewildered Herd hence, Cancel Seuss! and Sinema's little antoinette dance .and an hundred
other mostly unimportant things that happened just yesterday to keep us'n's riled up about
the wrong things.
I actually talked about this with Kuppy last week.
He considers HFT a problem but not crippling; he says they cost him $10K to $25K a day
but apparently this isn't enough to deter his hedge fund activities. He said that up to 70%
of trading volume activity in any stock is HFT (!).
As for scam: well - the value of the front running exists only so long as the herd is in
the market. Every single market crash - whether bitcoin or the stock market or whatever -
sees the vast majority of players exit (or bankrupt). At that point, the trading volumes
and numbers of people participating plummet dramatically.
How valuable do you think RH's model is then?
Sounds to me that HFT is a scam in itself. Am I to believe that algorithms trading against
each other repetitively at high speed is anything other than machine driven gambling on one
algorithm's interpretation of the behaviour of another algorithm, mostly outside of the human
buy and sell in the market place. Are the humans just strapped on for the ride through a
cabal of trading companies?
@ uncle t # 168 who wrote
"
I was looking back at some earlier reports to gain an insight into the means by which the USA
gave the game away and the means that might restore its place in the economic world. It has
allowed itself to be completely captive to global private finance AND ownership of the keys
to its salvation. If it does not nationalize its key industries then it can rest assured of
its doom.
"
I continue to posit that the key industry that needs to be "nationalized/made totally
sovereign" is finance. If humanity can follow China's lead, the motivations in the other
industries will revert to doing what is right, rather than what is profitable.
In regards to your HFT comment in # 172, you have calling HFT a scam correct. It is
programmed/manufactured theft under the guise of AI.
When guys like Michael Saylor put a half a billion into bitcoin they have done their
homework. Seems to me a scam is an operation containing a lot of lies. I don't see how
bitcoin falls into that category.
As far as a Ponzi scheme I also do not see the connection. It is nothing like a Ponzi.
There are no promises of big returns or large dividends.
When people follow 'guys like Michael Saylor [and see him] put a half a billion into bitcoin
they [think] have done their homework [and follow like fish chasing a lure] THEN they have
been sucked into a ponzi scheme where the lure is a fast buck if they follow the (smart?)
leader. Then the smart leader progressively sells out at a sweet peak and the chumps watch it
dip for a month or two. Unless of course there are lots of paid journalists and bloggers and
facebook praise singers pumping the lure of the endless profit of bitcoin.
Sounds like rumours of gold in them thar hills.
There are a large number of lies (or exaggeration?) in bitcoin and all spun within a
sheath of mystery and complexity and even 'mining' to smear some credible lipstick on the
scheme.
There is a sucker born every minute and they invest in BS and love a veneer of mystique
and bitcoin falls squarely into the category of lies and scams and fancy imaginings and the
lure that suckers are forever chasing. Yes, people buy and sell and some make a profit - same
as any ponzi scheme.
Russia-China "Dedollarization" Reaches "Breakthrough Moment" As Countries Ditch Greenback
For Bilateral Trade by Tyler Durden Thu, 08/06/2020 - 21:55
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Late last year, data released by the PBOC and the Russian Central Bank shone a light on a
disturbing - at least, for the US - trend: As the Trump Administration ratcheted up sanctions
pressure on Russia and China, both countries and their central banks have substantially
"diversified" their foreign-currency reserves, dumping dollars and buying up gold and each
other's currencies.
Back in September, we wrote about the PBOC and RCB building their reserves of gold bullion
to levels not seen in years. The Russian Central Bank became one of the world's largest buyers
of bullion last year (at least among the world's central banks). At the time, we also
introduced this chart.
We've been writing about the impending demise of the greenback for years now, and of course
we're not alone. Some well-regarded economists have theorized that the fall of the greenback
could be a good thing for humanity - it could open the door to a multi-currency basket, or
better yet, a global current (bitcoin perhaps?) - by allowing us to transition to a global
monetary system with with less endemic instability.
Though, to be sure, the greenback is hardly the first "global currency".
Falling confidence in the greenback has been masked by the Fed's aggressive buying, as
central bankers in the Eccles Building now fear that the asset bubbles they've blown are big
enough to harm the real economy, so we must wait for exactly the right time to let the air out
of these bubbles so they don't ruin people's lives and upset the global economic apple cart. As
the coronavirus outbreak has taught us, that time may never come.
But all the while, Russia and China have been quietly weening off of the dollar, and instead
using rubles and yuan to settle transnational trade.
Since we live in a world where commerce is directed by the whims of the free market (at
least, in theory), the Kremlin can just make Russian and Chinese companies substitute yuan and
rubles for dollars with the flip of a switch:
as Russian President Vladimir Putin once exclaimed , the US's aggressive sanctions policy
risks destroying the dollar's reserve status by forcing more companies from Russia and China to
search for alternatives to transacting in dollars, if for no other reason than to keep costs
down (international economic sanctions can make moving money abroad difficult).
In 2019, Putin gleefully revealed that Russia had reduced the dollar holdings of its central
bank by $101 billion, cutting the total in half.
And according to new data from the Russian Central Bank and Federal Customs Service, the
dollar's share of bilateral trade between Russia and China fell below 50% for the first time in
modern history.
Businesses only used the greenback for roughly 46% of settlements between the two countries.
Over the same period, the euro constituted an all-time high of 30%. While other national
currencies accounted for 24%, also a new high.
As one 'expert' told the Nikkei Asian Review, it's just the latest sign that Russia and
China are forming a "de-dollarization alliance" to diminish the economic heft of Washington's
sanctions powers, and its de facto control of SWIFT, the primary inter-bank messaging service
via which banks move money from country to country.
The shift is happening much more quickly than the US probably expected. As recently as 2015,
more than 90% of bilateral trade between China and Russia was conducted in dollars.
Alexey Maslov, director of the Institute of Far Eastern Studies at the Russian Academy of
Sciences, told the Nikkei Asian Review that the Russia-China "dedollarization" was
approaching a "breakthrough moment" that could elevate their relationship to a de facto
alliance.
"The collaboration between Russia and China in the financial sphere tells us that they are
finally finding the parameters for a new alliance with each other," he said. "Many expected
that this would be a military alliance or a trading alliance, but now the alliance is moving
more in the banking and financial direction, and that is what can guarantee independence for
both countries."
Dedollarization has been a priority for Russia and China since 2014, when they began
expanding economic cooperation following Moscow's estrangement from the West over its
annexation of Crimea. Replacing the dollar in trade settlements became a necessity to
sidestep U.S. sanctions against Russia.
"Any wire transaction that takes place in the world involving U.S. dollars is at some
point cleared through a U.S. bank," explained Dmitry Dolgin, ING Bank's chief economist for
Russia. "That means that the U.S. government can tell that bank to freeze certain
transactions."
The process gained further momentum after the Donald Trump administration imposed tariffs on
hundreds of billions of dollars worth of Chinese goods. Whereas previously Moscow had taken
the initiative on dedollarization, Beijing came to view it as critical, too.
"Only very recently did the Chinese state and major economic entities begin to feel that
they might end up in a similar situation as our Russian counterparts: being the target of the
sanctions and potentially even getting shut out of the SWIFT system," said Zhang Xin, a
research fellow at the Center for Russian Studies at Shanghai's East China Normal
University.
The MMTers reading your article will take umbrage at your use of finance .
According to MMT, all government spending is financed by creating money. The
problem of where to get the money is a non-problem.
Once the government has spent money into existence, the real problem is how to distribute
the social opportunity cost of the spending, especially if the government has spent money to
allocate real resources away from the production of private goods and services.
MMT makes this distinction precisely because they (we?) want to eliminate the rich as a
veto point for spending. We don't need to get their money in order to spend it, and they
cannot (or we should not let them) essentially restrict spending by obstructing the
government's taxation of their wealth.
If we want to get the money belonging to the rich (and we do!), we want to do so because
we don't want them to have it, for whatever reason.
There's another reason to be explicit about the difference between financing and
distributing opportunity costs. If the rich have a lot of money that is not in circulation
(in the national economy), and the government taxing that money to "pay for" its spending
will do nothing to control inflation or distribute opportunity costs. Removing money that is
not circulating has no effect on prices. It seems theoretically possible to balance the
budget financially but still see price-level inflation.
I haven't done any specific investigation into the GND, but it seems uncontroversial that
it will involve allocating substantial real resources to the creation of a nonpolluting
power, transportation, and agricultural infrastructure. However, the effect on the real
economy and the price level seems uncontroversially complicated. Some of the real resources
will be previously unallocated, and we will simply be transferring demand from
welfare-supported to work-supported, with no effect on the price level. Some of the demand
created will indirectly cause an increase in private production, putting unused industrial
capacity to work; the increase in circulating money will cause a corresponding increase in
real private production, and again have no net effect on the price level. And some of the
real resources will indeed be transferred from private production with no corresponding
offset; taxes, "enforced" borrowing, and other monetary interventions will be needed to keep
price inflation manageable.
I don't know of (and, like Lee A. Arnold above, would very much like to see) a model
showing what effect something like the GND would have on the real economy. Under
normal circumstances, the fiscal impact is a good proxy for the real impact. But
circumstances are far from normal, so think that the fiscal impact is no longer a valuable
proxy for modeling the real impact.
"The ultimate constraint on money creation is inflation. That hasn't been a problem lately
and (as I'll argue in more detail later) the world is in need of a fair bit of inflation,
probably at an annual rate of about 4 per cent for the foreseeable future. It's unclear how
much expansion of the monetary base would generate this outcome, while avoiding the risk of a
resurgence of inflation like that of the 1970s"
I don't agree that this is the problem: IMO the direct cause of [keynesian] inflation is
the wage-price spiral, and not money creation per se (this also implies a problem, which is
that if we want an high level of employment because we want an higer bargaining power for
workers we can't really avoid wage-price spirals and therefore inflation).
Money creation by itself creates wealth, not income, and the kind of economic policies we
had in recent decades caused an increase in the wealth/income ratio (or in other words the
creation of a lot of fictitious capital) more than inflation.
So the real problem of "money creation" today is that it generates financial bubbles, rather
than inflation.
The difference between money printing and government debt, from this point of view, is just
that money is a 0% interest financial asset, whereas bonds bear at least some interest, so
money creation pushes the general interest rate down more than bond creation, but this again
is a consequence of the increase of the wealth/income ratio (since more wealth extracts
profits from the same quantity of income).
"Substantial reductions in private consumption and investment will be needed to make room
for the required public expenditure, and that can only be achieved through a combination of
taxation and debt."
In my view the problem is that taxation is needed to avoid bubbles, and therefore what we
need is to tax income from wealth and wealth itself (in order to push down the wealth/income
ratio).
To put it in more familiar keynesian terms, the problem is that the ex-ante saving rate is
too high, so that currently we need an increase in debt levels (bubbles) to ricycle ex-ante
savings into consumption; we need taxation to push down the ex-ante saving rate.
But, the problem is, is it possible to have a capitalist economy running without economic
crises while the wealth/income ratio goes down (which means that a lot of people see their
relative wealth go down)?
IMO this is really difficult, and also explains the political problem for policieswhose
purpose is to push down the wealth/income ratio, since these policies look like just some way
to be mean against wealth owners, without an immediate economic reason, and when the bubble
pops everyone blames the banks and the financial sector, not the excessively high ex-ante
saving rate, that is instead perceived as a virtue.
Recent quantitative easing of only 2% of GDP doesn't provide much of a bound on how much
can be tolerated without causing too much inflation. Inflation is still up against the zero
lower bound, and it seems plausible that we could get more than a factor of two more money
creation. Which does get us into the green new deal range.
@1 The Green part is (comparatively) easy and low cost. It's the New Deal (free college
tuition, Job Guarantee, single-payer health etc) that will require a bit transfer of
resources.
@6 Transfers of real resources or financial resources? Single-payer requires an expansion
of suppliers in the healthcare sector to meet the uncovered demand, and those suppliers will
be new taxpayers. College learning will be going more on-line, a tendency accelerated by this
pandemic and anticipating the next pandemic, so we need, not many more buildings, but more
professors, but they too will be new taxpayers. The jobs guarantee could be structured to
generate sector expansions, not merely makework. So couldn't all of these eventuate in
expanded sectors, ergo more taxes? Government investment at rock-bottom interest rates?
Only too much is enough, we want to print and spend enough to change expectations.
Currently, the dollar is the reserve currency I think largely for "safe haven" reasons,
i.e. the oligarchs who have all the assets believe the US will be the last place to inflate,
devalue, or elect an expropriating left-wing gov't.
After 40+ years of capital share gains and worker immiseration in terms of real and social
wages and labour solidarity, and assuming we have under President S Kelton control only of
printing and spending but no ability to raise progressive redistributive taxes how much MMT
financed spending will it take to have the average worker believe that her real wages, social
wages, standard of living, opportunities etc will improve relative to capital and the rich
for the next forty years? And have the oligarchs also believe it?
That's how much.
Alan White 07.19.20 at 1:21 am (no link)
John, what say you about US/global military spending, which if cut and reallocated in the
low double digits could transform society? Do you think it's just politically untouchable? If
the US cut its military budget by say 25% it would still be formidable, especially given its
nuclear deterrent. For the life of me I can never understand why military budgets are
sacrosanct. Is it just WW2 and Cold War hangover? Couldn't the obvious effects of climate
change and the fragility of the economy subject to natural threats like the pandemic change
attitudes about overfunding the military (like the debacle of the F-35 program)?
@Tim Worstall: The political poles shifted, but less than you might think. Southern pols
were overwhelmingly opposed, and nearly all of them were D (the entire old Confederacy had
only 11 R Reps and only 1 R Senator). Northern pols, including Dirksen, were overwhelmingly
in favor, and they were split between the two parties. But if you break it down by party
and region, a larger percentage of Ds than Rs voted for the bill within each region.
https://www.theguardian.com/commentisfree/2013/aug/28/republicans-party-of-civil-rights
An interesting example of Simpson's paradox.
I don't know about the Democratic Party, but there was an important shift in the
Republican Party: the thing is, that shift took place in the nineteenth century, not the
twentieth. At the end of the Civil War, the Republican Party really was the party of civil
rights, with champions of equality prominent within it; after the end of the Reconstruction
this ceased to be true. Of course the Republican Party has changed further since then,
because everything changes; but it hasn't changed as rapidly since the late nineteenth
century as it did after the Civil War.
Alan White @13 Military spending is about 3.4 per cent of US GDP, compared to 2 per cent
or less most places. So that's a significant and unproductive use of resources that could be
redirected to better effect. But the income of the top 1 per cent is around 20 per cent of
total income. If that was cut in half, there would be little or no reduction in the
productive services supplied by this group. If you want big change, that's where you need to
look.
I think some of the reluctance to cut military spending in the US is the extent to which
it acts as a politically unassailable source of fiscal stimulus and "welfare" in a country
where such things are otherwise anathema. Well, that and all of the grift it represents for
the donor class.
As Joe Biden tries to split the difference between the midwestern swing-state voters and the
Sanders faithful,
he's released an economic plan - a plan that bears the imprimatur of his one-time foe
Bernie Sanders - that, in its attempt to be everything to every one, effectively promises
everything to every one.
Buy American. Green New Deal. Corporate tax hikes. Trillions of dollars spent on
infrastructure to install the latest eco-nonsense with money that should be going to roads,
bridges, rails and airports. Docks and highways. Things people actually need and use. And who
knows? Depending on his running mate, maybe we'll get a massive student-debt jubilee, too. All
on the federal government's tab.
Now that MMT has gone from fringe idea to mainstream, making Stephanie Kelton, a
cryptomarxist who believes that the link between value and money can be completely severed, so
long as we tax the wealthiest among us enough to keep inflation low. It doesn't take a genius
to suspect that an 'economic theory' grounded in the idea that governments can take on
unlimited amounts of debt and never stick anybody with the tab sounds absurd - even
dangerous.
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We say dangerous because Kelton's greatest sin is offering pandering politicians more cover
to encourage their spendthrift ways. During a recent interview with Macro Hive, former Central
Bank of India Governor and University of Chicago Professor Raghuram Rajan delivered a succinct
and insightful explanation of why MMT is so dangerous.
"We talked about sustainability and one of the big topics in markets at least is this
whole idea of QE MMT infinity, the ability of sovereigns to borrow. Now in developed
countries, they have historical capital they've built up and credibility," Rajan's
interviewer began. "But you're starting to also see this idea...you're starting to see more
emerging market countries experiment with it, including Indonesia and several others."
But at the same time "yields are very low, and if you look at emerging market spreads,
they're very low...so markets are telling you that they aren't worried. Yet we know debt levels
are high, and there's more talk in debt markets of QE and MMT."
Does the fact that markets seem content with the status quo (at least for now) validate
Kelton's argument?
Of course not, Rajan explained. Because while the complexities of the global financial
system, and the dollar's role within it, have allowed the Fed to spearhead this great monetary,
as the veteran central banker explained, there's no such thing as a free lunch.
"We know that markets can be complacent until a certain point and then they turn on a
time. We are at this point in a benign phase supported by an enormous amount of central bank
liquidity emanating from the primary reserve currencies, the euro area, the US Fed and to
some extent the Bank of Japan and the Bank of England."
"But we must also recognize is that there are no free lunches. If there's one statement
you want to keep to pound into the head of every policy maker, it's that there are no free
lunches. If you borrow today, there is a presumption that it will be repaired at some point,
so you are in a sense taking away resources from somebody else in the future."
" Now it may be a generation or two down the line will be on the hook for this ...whether
they can pass it on to their children is an open question...but you're definitely taking away
their ability to borrow by borrowing today."
.While burdening future generations doesn't seem to come up much in cryptomarxist essays
about the moral imperative of expansive fiscal spending - some have gone so far as to argue
that the federal government has a moral obligation to forgive student debt - Rajan acknowledges
that the idea is "seductive" for all the wrong reasons.
"So the idea that there are free lunches...which certainly is what the lay person takes
away from MMT...is very sort of attractive, seductive - but it's absolute nonsense."
If that's the message that's going to be communicated, then that's wrong.
Asked to elaborate, he continued...
"There are times when you can spend a little bit more, but you are still making a trade off
and evaluating this trade off well...I think that's the right thing to do. If that's the
message from MMT, then I'm fine with that. There are periods where you have more leeway."
"The message can't be 'Don't Worry, Be Happy' it has to be 'yes take advantage of periods
when you have a little more spending capacity but use it wisely, because there's no such thing
as a free lunch and you will have to repay it at some point... that's what any sensible
economic theory will tell you, and I think that's what we understand now."
"When banks aren't lending, when inflation is low, it is possible for the central bank to
expand its balance sheet somewhat ...and finance more activities that the government wants to
undertake. That doesn't mean it's free debt it's equivalent to debt issued by the government -
think of the central bank issuing debt as the same as the government issuing debt: it's the
consolidated balance sheet you're looking at."
"Somebody is responsible for payment, it's either the central bank or the government."
"At low interest rates it doesn't really matter who it is, but as inflation picks ups it
does matter a little more who it is because the central bank often is financing itself with
effectively forced loans from the banking sector, and there's a limit to how much the banking
sector is willing to do that, especially as economic activity picks up."
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"So my sense is yes there is some room now but it doesn't mean the debt level doesn't matter
and it doesn't mean that we should just keep spending without thought of who's going to repay.
And I think the big philosophical issues are how much are you going to bail out companies...why
should Joe Schmoe...why should his taxes go to bail out a capital owner? After all, neither of
them saw the pandemic coming...neither is responsible for the pandemic...so why should one bail
out the property rights of another?"
"It strikes me these guys who want to open up the government wallet and spend to protect
everybody from the consequences of the pandemic don't realize that there's one person who's
bearing the hit: it may not be you, but it might be your children."
"And the question is: Why do they have to pay when they have no part in this?"
Remember: As Rajan explains, we must recognize that our resources are limited and use them
wisely. Keep that in mind when Democratic politicians are trying to spend trillions of dollars
of public money to outfit private buildings with solar panels or whatever 'Green New Deal'
infrastructure travesty AOC & Co come up with.
The Fed is just following the Congressional mandate of supporting the people who fund our
political system.
It should be clear that the stock market doesn't care about Main Street when you see it
still going up with massive levels of unemployment.
MMT states that the Fed can create these funds that are handed out to business by the
trillions but that is not what MMT 'policy' would want.
Most MMT people are actually against handouts to people in the form of a basic guaranteed
income.
A major cornerstone of MMT policy though is a Job Guarantee. In times like these they
would very much like to see employment supported by these government funds. Not only the
basic job pool of a minimum wage job but also supporting more highly paid skilled employment
such as supervising infrastructure projects etc.
MMT is more concerned with resources than money per se. It doesn't help to have money if
people aren't making stuff, providing food and services etc.
Some will know who Hyman Minsky was, some won't. Hudson gives him the primary credit for
providing the foundation for Modern Monetary Theory, and he gets praise from Keen, Wolfe and
many others too. On the occasion of his 100th birthday, here's a
long essay that seeks the following:
"But the question still stands: Was Minsky in fact a communist? Of course not. But, a
century after his birth, it is useful to clarify often neglected aspects of his intellectual
biography."
Since Minsky's referenced so often by Hudson particularly, I think this piece will be
helpful for those of us following the serious economic issues now in play. I'd reserve an
hour for a critical read.
MMT is brilliant and it's really embarrassing that it took The Deadliest Pandemic™ for
some folks to come round to it. We all collectively print an extra bit of money - and give it
to each other!
There are historic examples documented of successful applications of the concept, look no
further than to the earnest witness of Baron Munchausen pulling himself out of a swamp by his
own hair. https://en.wikipedia.org/wiki/Baron_Munchausen
Hudson also has another video posted to
his site , "An interview on the Radical Imagination: Imagining How Financial Parasites
and Debt Bondage Are Destroying Us," which is based on his book Killing the Host .
It's a recent video interview that's @50 minutes long prefaced by the Occupy Wall Street
Anthem and introduction.
One aspect of MMT that must be made clear is it advocates the use of public banking or the
Treasury to pump capital in the form of money into the productive economy , not the
parasitic economy the Fed supports--the difference is huge and vital. For MMT to succeed
within the Outlaw US Empire, the Fed must be liquidated. For more, please read the essay I
linked to @35.
Musburger @ 3 : "What do you folks think about MMT?"
Re-inflation of a depressed economy can be achieved by government spending into:
public investment
employment
income transfers
income support
labour
tangible capital
infrastructure.
This is "good" MMT.
"Bad" MMT, or fake MMT, is government spending into WallStreet, handouts to:
the banks
large corporations
speculators
bondholders.
The March 2020 CAREs Act is bad MMT as was the 2008 bailout. This one is same as that one
but "on steroids."
Both bailouts further empower(ed):
rentiers (the landlord class),
monopolies,
the financial creditor class
and cast most of the rest of the US population into reduced circumstances, poverty and/or
debt servitude. They burden the working economy with overhead and debt that cannot be paid.
Bad MMT.
While the MMT school has a healthy diversity within it, USG applications have flipped the
theory on its head, says Hudson. See below for link.
(Remember Cheney's, "We are all Keynesians now"? )
Worse, Bad MMT does more than simply bailout the top 1%. It also increases the parasitic
power of financialization on the real economy. As we have repeatedly seen, now most
dramatically, the financial sector is incapable of planning for anything other than its own
fictional valorization.
Libertarians' freedom from government dogma excoriates against centralized planning and
yet, ironically, the end result of their "government is bad" path forced upon us in USA led
directly to central 'planning' by default -- by parasitic-on-the real-economy privatized
finance sector, a form of fascism not democracy or liberty.
USA'ns public health crisis occurs as states, which are required by law to not run
deficits, face huge costs that will force more austerity on their populations. More callous,
they are forced to compete against each other as they purchase essential equipment and
technology (from for-profit privateers) to deal with the highly infectious novel virus, and
the fed indemnifies the privateer mask makers!!!
What is the root of inequality today? Debt and the monopolization of real estate.
What are solutions?
Wipe out and roll back debt overhead on production and consumption.
This is "good" MMT.
Bad MMT furthers the debt burden on society, concentrates monopolization and cements in
central planning by parasitic private finance sector.
"... The budget deficit is simply a ruse to make you believe that government funding is limited when in reality they create money on demand with a few keystrokes. ..."
"... Thus there is always money for corporate welfare, the military, tax relief and benefits for the oligarchy but never money for health care, education, infrastructure, etc. ..."
In the broadest sense the US deficit is a measure of how much money the govt has created (not entirely accurate as the creation
of money - really debt - has been largely outsourced to private banks). If the national debt was 'paid off' It would suck all
the money out of society and the economy would collapse.
The Fed doesn't need taxes as revenue as it just creates whatever money it needs. The budget deficit is simply a ruse to
make you believe that government funding is limited when in reality they create money on demand with a few keystrokes.
Thus there is always money for corporate welfare, the military, tax relief and benefits for the oligarchy but never money
for health care, education, infrastructure, etc. The deficit is 1/2 of a balance sheet, the deficit on the govt side is balanced
by a surplus (money in circulation) in the economy. Note that states are revenue constrained and depend on taxes and federal outlays
to operate as they cannot create their own money on demand.
But what about inflation? Too much money in circulation lowers its value. Taxes are the real federal economic regulatory mechanism.
When there is inflation, higher taxes directly remove money from circulation. The disinformation campaign is that interest rates
control inflation, which has a) repeatedly been demonstrated false and b) is simply another system of rewards for the banking
cartel.
The best metaphor is a sink. The faucet is the creation of money, the basin is the economy, and the drain is taxes. When the
sink starts to overflow (inflation) the solution is to open up the drain (raise taxes).
Note also that this is for a sovereign economy, one that is controlled by the government. The EU has effectively destroyed
all the sovereign economies in Europe with its central bank. Thus Greece, Italy, Spain, etc. have no control of their own economies
and as such are unable to economically regulate themselves and subject to foreign predatory forces.
[.]
While it is still popular to claim that the United States has never defaulted on its debt,
this is a myth. The US has been forced to default a couple of times throughout history, the
last of which being when Richard Nixon&rsquo closed the gold window. By cutting the
ability of foreign governments to redeem US dollars for gold, America was allowed to pay
back past debt with devalued fiat money. This form of default has long been a popular
option for governments with debt obligations it can't or won't honor.
Of course, as Peter Klein wrote last week, even Trump's suggestion of the US
restructuring its debt isn't the doomsday scenario CNBC talking heads have made it out to
be, noting that:
[T]he idea that the US can never restructure or even repudiate the national debt -- that
US Treasuries must always be treated as a unique and magical "risk-free" investment -- is
wildly speculative at best, preposterous at worst.
Murray Rothbard himself advocated for outright repudiating the national debt,
arguing:
The government is an organization, so why not liquidate the assets of that organization
and pay the creditors (the government bondholders) a pro-rata share of those assets? This
solution would cost the taxpayer nothing, and, once again, relieve him of $200 billion in
annual interest payments. The United States government should be forced to disgorge its
assets, sell them at auction, and then pay off the creditors accordingly.
Trump himself has even touched on the possibility of selling of assets held by the
Federal government as a form of debt reduction.[.]
c1ue dear friend, the current level of US debt is unsustainable. Never mind the happy
cheerleaders promoting mighty U.S. is the wealthiest nation on earth. Have no fear our dollar
is good as gold, backed by the full faith and credit of Uncle Sam.
Here is a brief history of U.S.defaults starting with year 1790- LINK
Hal,
Could you please comment on Dylan Ratigan's comment about $128
Billion being automatically pumped into the banker's hands without
public comment by Dodd Frank?
Is it the same thing as a repo? I'm a non-economist, just a
simple fellow, that's getting the hang of this con game.
I watched the Ratigan video on your recommendation and agree
it is a fundamental retelling that pulls the elements together
better than anything I'd previously seen. And I completely
agree with his assessment that this was the biggest theft in
mankind's history.
The Fed's highest stated purpose is "the integrity and
stability of the banking system". Problem is, that mission
justifies anything and everything beneath it. They are not in
the business of ensuring a bank obeys the law, and if they
break the law, even the "business law" of making terrible
business decisions, all the Fed thinks they are required to do
is make them whole.
So you have a radically anti-capitalist structure at the
tippy top of a supposedly "capitalist" system. And that's even
before you even get to any discussion of secrecy, subterfuge or
malfeasance.
Why are we not allowed to know who the recipients were of
the *$21 trillion* (GAO number) of free Fed money after 2009?
All we can do is follow the bread crumbs: we do know, for
example, that 2/3rds of those dollars went to European
institutions, including non-bank corporations. Huh? Q: That
benefits the Main St U.S. economy how, again? A: It doesn't.
This means you can pay no attention whatsoever to the ancillary
Fed "missions" around U.S. employment and economic growth.
The $128B Ratigan mentions re Dodd-Frank is just a trickle
in the tsunami of funds reaching bank coffers. Free money of
course is funding massive share buybacks, the *only* cause of
stock "rises" since 2009, but what completely infuriates me is
what banks are doing around buybacks. It's one thing if
buybacks benefit *all* shareholders, but the latest trick (esp
by Jamie Dimon) is to take free money, buy back JPM shares,
*but those shares are only given to Jamie himself and his top
managers*.
(Of course until 1982 companies borrowing money to buy back
their own shares was completely illegal since it's effect is
stock price manipulation).
Repo is just a shorter term version of all of these other
diverted flows. Completely under all radars, with no
Congressional hearings or public scrutiny or oversight.
I always love to be wrong because it means I get to
be right again. I'm not a funding market expert either,
but I hope you're just correctlng Ratigan's views on
the $128B, not the entirety of my ramble? Thx Yves
I don't write about the repo mess because the commentary on it
is generally terrible. This is not "monetizing debt". This is
"providing liquidity to the money markets" which is what the Fed is
supposed to do!!!
The Fed got itself into a corner with super low rates and QE. It
also stupidly decided to manage short term rates via interest on
reserves. Prior to 2008, the Fed intervened in the repo markets
every bloody day to hit the target rate and no one cared.
The Fed drained liquidity too fast. It's been caught out and has
had to go into reverse big time. Its refusal to admit that is why
everyone is overreacting to the liquidity injections.
Yes, MMT proponents oppose a UBI (or BGI). They want a Job
Guarantee. They argue that setting a floor on the price of labor is a
much more important way to regulate the economy than diddling with
interest rates, plus it increases the productive capacity of an
economy, which increases prosperity.
The will accept a UBI that is lower than a JG as a sort of
disability income.
Thank you for that link. It certainly sounds like real life, and they say their
models predict inequality in various countries to within 1%. Any single agent in this economy could have become the oligarch -- in fact, all
had equal odds if they began with equal wealth. In that sense, there was equality
of opportunity. But only one of them did become the oligarch, and all the others
saw their average wealth decrease toward zero as they conducted more and more
transactions. To add insult to injury, the lower someone's wealth ranking, the
faster the decrease. once we have some variance in wealth, however minute, succeeding transactions
will systematically move a "trickle" of wealth upward from poorer agents to richer
ones, amplifying inequality until the system reaches a state of oligarchy. If the
economy is unequal to begin with, the poorest agent's wealth will probably decrease
the fastest. Where does it go? It must go to wealthier agents because there are no
poorer agents. Things are not much better for the second-poorest agent. In the long
run, all participants in this economy except for the very richest one will see
their wealth decay exponentially.
the presence of symmetry breaking puts paid to arguments for the justness of wealth
inequality that appeal to "voluntariness" -- the notion that individuals bear all
responsibility for their economic outcomes simply because they enter into
transactions voluntarily -- or to the idea that wealth accumulation must be the
result of cleverness and industriousness. It is true that an individual's location
on the wealth spectrum correlates to some extent with such attributes, but the
overall shape of that spectrum can be explained to better than 0.33 percent by a
statistical model that completely ignores them.
It will be interesting to see how China responds in reality to the naked hegemony of the US
law just passed and signed by Trump about HK. Is China ready to stand up to the bully of dying
empire or be cowed into slicing their response even thinner and thinner but not saying NO
MORE!
We do live in interesting times.
Transferring my post to this thread, about the decline of US fertility rates:
As we all know, constant population growth is essential for the survival of
capitalism, since it is one of the main factors that slow down its tendency of the profit
rate to fall. The article seems to agree with this:
Birthrates have been trending downward overall since 2005, sparking concern about
potential economic and cultural ramifications. Keeping the number of births within a
certain range, called the "replacement level," ensures the population level will remain
stable. A low birthrate runs the risk that the country will not be able to replace the
workforce and have enough tax revenue, while a high birthrate can cause shortages of
resources.
Another related article approaches the issue from another angle:
Virginia Commonwealth University professor Dr. Steven H. Woolf and Eastern Virginia
Medical School student Heidi Schoomaker analyzed life expectancy data for the years
1959-2016 and cause-specific mortality rates for 1999-2017. The data shows that the
decline in life expectancy is not a statistical anomaly, but the outcome of a
decades-long assault on the working class.
So, this is not an "anomaly". If it isn't, then there's an underlying cause, which the
same article hypothetizes:
Obamacare was part of a deliberate drive by the ruling class to lower the life
expectancy of working people. As far as the strategists of American capitalism are
concerned, the longer the lifespan of elderly and retired workers, who no longer
produce profits for the corporations but require government-subsidized medical care to
deal with health issues, the greater the sums that are diverted from the coffers of the
rich and the military machine.
A 2013 paper by Anthony H. Cordesman of the Washington think tank Center for
Strategic and International Studies (CSIS) frankly presented the increasing longevity
of ordinary Americans as an immense crisis for US imperialism. "The US does not face
any foreign threat as serious as its failure to come to grips with the rise in the cost
of federal entitlement spending," Cordesman wrote, saying the debt crisis was driven
"almost exclusively by the rise in federal spending on major health care programs,
Social Security, and the cost of net interest on the debt."
Meanwhile, conditions for the rich have never been better. This is reflected in the
growing life expectancy gap between the rich and the poor. The richest one percent of
men live 14 years longer than the poorest one percent, and the richest one percent of
women 10 years longer than the poorest.
I wasn't aware of this CSIS report. If true, then this is indeed a very interesting
hypothesis.
--//--
The thing I don't understand in the WSWS article linked above is this:
The first nodal point, in the early 1980s, corresponds to the initiation of the social
counterrevolution by the administration of Ronald Reagan, which involved union busting,
strikebreaking, wage-cutting and plant closings on a nationwide scale, combined with cuts
in education, health care and other social programs.
So, Ronald Reagan did a "counterrevolution". That means there was a revolution before
him, which I suppose is the post-war "Keynesian consensus", the "golden age of
capitalism" of 1945-1975.
I really can't understand the logic behind the Trotskyists: they condemn the USSR and
China as "stalinists", i.e. as counterrevolutionaries. But Harry Truman was a
revolutionary? Dwight Eisenhower was a revolutionary? Clement Attlee was a revolutionary?
De Gaulle was revolutionary?
What kind of nonsense is this?
What is most funny is that these same Trotskyists from the same WSWS website use the
rise of labor strikes in China to argue China is a capitalist empire -- but uses the same
strikes as evidence there was a revolution in the West during the post-war (by negative,
since Reagan's "counterrevolution" was characterized by "union busting, strikebreaking,
wage-cutting and plant closings on a nationwide scale, combined with cuts in education,
health care and other social programs").
I think Trotskyism is having an identity crisis. They don't know if they are
essentially a movement whose objective is essentially to tarnish Stalin's image or if
they are closeted social-democrats. They forgot Trotsky fought for the revolution, not
personal vendetta.
'Dr Doom' economist Nouriel Roubini in Bitcoin battle
3 July 2019
Outspoken economist Nouriel Roubini, nicknamed Dr Doom for his gloomy warnings, has caused a
stir with his latest attack on Bitcoin and its fellow cryptocurrencies.
Prof Roubini, who foresaw the financial crisis, says Bitcoin is "overhyped".
At a summit in Taiwan on Tuesday, he likened it to a "cesspool".
But his sparring partner at the event, who runs a cryptocurrency exchange, has angered the
professor by blocking the release of video of the event.
Arthur Hayes, the chief executive of the BitMex exchange, controls the rights to footage
of their debate, which took place during the Asia Blockchain Summit.
In a post on Twitter, Prof Roubini said he "destroyed" Mr Hayes in the debate and called him
a "coward" for not making it available...
Cryptocurrencies have given rise to an entire new criminal industry, comprising unregulated
offshore exchanges, paid propagandists, and an army of scammers looking to fleece retail
investors. Yet, despite the overwhelming evidence of rampant fraud and abuse, financial
regulators and law-enforcement agencies remain asleep at the wheel.
NEW YORK – There is a good reason why every civilized country in the world tightly
regulates its financial system. The 2008 global financial crisis, after all, was largely the
result of rolling back financial regulation. Crooks, criminals, and grifters are a fact of
life, and no financial system can serve its proper purpose unless investors are protected
from them...
*
[Go get 'em Doctor Doom. Does he know that this is a feature and not a bug?]
Wild traders are always here, as Doctor Doom points out. They are there when we use rocks,
when we used sea shells, when we used paper and now crypto, the wild traders remain.
Regulate as much as Dr. Doom thinks regulators should regulate. But do not deploy
government bean counters looking for stone age rocks under our matress, we are using digital
crypto instead.
Just yesterday Daimler announce a completely independent hard wallet for crypto use, in a
car. They are giving a car all the freedom to hold bearer assets in crypto form. The car
needs this to automate much of the car industry functions from gas taxes to used car sales.
So tell Dr. Doom to complain about car industry violating financial regulations.
The crypto casino was created so that speculators could profit from the money laundering
industry that provides investor liquidity to the back end of the human and illegal narcotics
trafficking industry. It was built on the anti-bank angst that emerged after the financial
crisis. It gives organized crime the legitimacy that they need to spend their enormous wealth
that is generated by so many ruined lives. Fools have always run with dicks. They just do not
know any better.
The crypto casinos were created to automate trading. Crypto insures that a bot trading obeys
the prior contract, and thus great simplifies transactions everywhere, from the Fed down to
you and me with significant savings, at least 1% increase in productivity.
We have a technology change happening. You get the wildcatters, they don't scare me, so
Dr. Doom is likely missing something here. More than likely he is short sided, looking at
this one thing and ignoring the fact that this is our 7th or 8th time we have changed money
tech. How did we do it last time? Wildcatters, hysterics, and failure to read history. Worked
fine then.
Crypto currencies are not money. They are just private scrip. Only demand give them exchange
value and only crooks and speculators have any demand for scrip born of the daughters of
ENIAC. To believe otherwise is to be a sovereign fool.
The Empire, in all its wisdom, has declared some countries as illegal, unworthy of using the
banking system. And then, sanctioned anyone who does business with those illegals. So, it is
illegals all the way down, in our ever-expanding WOE (War On Everyone).
This has generated interest in cryptocurrencies from some of those crooks and criminals
(aka "other countries").
You are too focused on the technology. Banks are not there just to conduct transactions, they
are there to track them and report to the government. They are required to know something
about the people behind the transactions.
Joe appears to miss the significance of underlying technology as much as anything else. Joe's
focus is directed somewhere inside his own mind that is separated from any reality that I am
aware of.
No, we are using cryptography everywhere, from cars to toys to wallets. Dr. Doom fails to see
this happening, happening as sure as we switched from metal to paper. Dr. Doom wants more
regulation of shadow banking, fine, why not say that out loud?
His ability to regulated shadow bankers has nothing to do with technology. Crypto is no
different than the embedded water mark on paper, same technology. Both regulators and
regulated have to adapt.
He has created a red Herring, a useless talking point to fool the delusionals, give them
some worthless talking point.
"Crypto insures that a bot trading obeys the prior contract, and thus great simplifies
transactions everywhere, from the Fed down to you and me with significant savings, at least
1% increase in productivity."
Huh?
How does crypto ensure that my wages producing a thousand meals as a food worker will
allow me to buy a thousand meals in the future? What I've seen is crypto turning a thousand
meals produced into a contracct that will buy two thousand one day, but only 500 the next
day.
Crypto really just wastes a bunch of computing power to solve a problem that only exists if
you are trying to hide illegal transactions from governments. Crypto currency is a solution
in search of problem unless you are engaged in laundering money, selling large quantities of
drugs/guns/people/animals/other illegal products, or buying same. Governments should make it
prosecutable wire fraud to use them.
Thanks. I referred to Judy Shelton's book for the reasons to support the gold standard. But,
I can list some of them here:
1) The gold standard was the core mechanism of Bretton-Woods that worked so well at keeping
world prices stable, promoting growth, and tying the money supply to the real economy.
2) Free market currencies have led to speculation taking over from market exchange rates to
support trade. Currency trading is ~100x the underlying trade in goods and services.
3) The exchange rates of currencies fluctuate far greater under a free market fiat currency
system than under the gold standard
4) Fiat currencies are always subject to political intervention.
5) gold can't be faked or conjured into existence.
6) The gold supply grows about 2%/year, which has been stable for many decades.
7) gold, as a real commodity, ties money to the real economy rather than the financial
markets.
2. This has what to do with the gold standard? There was lots of currency trading under
the gold standard. This is primarily a result of algorithmic trading.
3. True - but this is good. Why would this be bad?
4. This is why you have an independent central bank.
5. No but gold can also be hoarded. Please see Krugman's Baby Sitter Klatch article.
6. This is utterly absurd. Gold production stops when the price is too low, ramps up when
it is high.
7. How is gold a commodity? 99% of the gold in the world sits in a basement being guarded
by governments. It's only value is in making shiny things and the current supply is wildly
more than there is demand for said shiny things. Ohhhh, Shiny! does not make something a
commodity. If there were any large industrial applications for the metal maybe - but there
really isn't.
Thanks for the good points. Some clarification:
1) By world prices this means the exchange rate. Under Bretton-Woods the price of gold was
set at $35/oz and other currencies were pegged to the dollar.
2) If the purpose of currency exchange is to facilitate trade, then this is the tail wagging
the dog, and indicates a currency trading system that has become disconnected from its core
purpose.
3) Price stability is a core goal of money. So that tomorrow I will be confident of what that
money will be worth.
4) Independence is not disinterest. Central banking has shown itself to sway with political
winds such as the German central bank in the 1990s, and the US central bank under Nixon.
5) Hoarding of gold, in the sense of cornering the market, is essentially impossible because
of the wide distribution of gold in the world and because moving to gold in general would
indicate a loss of confidence in a currency, which is good. (as long as we're saying good v.
bad).
6) True. production is not that stable, but on average it is fairly constant. See Fig 1. :
https://pubs.usgs.gov/of/2002/of02-303/OFR_02-303.pdf
7) Not true. Again see the USGS publication. Most gold goes into jewelry, and so is held by
the public. Much of the other gold goes into industry, dental
The reason to prefer gold, besides the above, is that most money created since 1971 has
gone into the financial sector rather than the real economy. Thus, workers don't get a real
raise, but financial instruments just keep going up with no limit.
David,
tell me now, how did George Soros get so rich, and why was the Bretton Woods system
abandoned?
5. Shows that you don't understand the issue. Hoarding doesn't have to corner the market
to be an issue, it's just that rewards people who are creating a problem and so can create a
vicious circle.
P.S. 2% is way too low. Money needs to expand at least enough to match nominal GDP - and that
assumes that the rate of savings and circulation velocity are constant. And if prices are
absolutely constant how will people ever pay off debts. People have to pay back the nominal
capital of a loan. If income/head in nominal terms is relatively constant (in some countries
at some times there will be actual deflation) then compared to the current situation in
situations of absolute price stability delinquency rates will rise. You quote the 50/60s as a
golden - what were inflation rates like then (answer >2% with real growth of >5% so
>7% nominal GDP growth)?
Gold is not a great system for a money supply, but its the best one we have so far. Other
commodities could be used as the means of value and settlement, but they are far less
convenient and have other properties that are not as good as gold.
Perhaps a global crypto currency will take the place of gold in the future? It would need
to be of a fixed amount that does not change over time, and secure against hacking. So, maybe
not.
[Great answer inasmuch as changing the question is always the best answer when one has no
answer to some obvious questions.
OTOH, the US dollar based global reserve currency is a problem, although mostly for the US
in just general economic terms, but a problem for the entire world in terms of limiting the
use of carbon based fuels. Cheap oil is good for the dollar hegemon, but bad for supporting
continued human existence on Earth.
Internationally managed reserve currency and FOREX institutional arrangements along the
lines of Keynes's Bancor might be a better idea. Crypto currency is an invitation to black
market traffickers and hackers. Primary support is from drug and sex trafficking. So, what is
not to love?
The hard money crew in the US defeated Keynes's Bancor proposal at the Bretton Woods
conference and basically all of the problems that the gold bugs complain about today have
been the results of following their preferred policy path after WWII.]
How John Maynard Keynes' most radical idea could save the world
As the Second World War was drawing to a close, the economic experts of the Allies met in
a New Hampshire resort to try to hammer out an international monetary system that would help
prevent a recurrence of the Great Depression. The ensuing debate centered around two main
proposals, one from the British delegation and one from the American. John Maynard Keynes,
the greatest economist of the 20th century, presented the British case while Harry Dexter
White, one of FDR's key economic advisers, presented the American one.
Keynes lost on many key points. The result was the Bretton Woods system, named after the
small town in which the conference was held. As part of the agreement, it also created what
would later become the International Monetary Fund and the World Bank. That served as the
system of managing international trade and currencies for nearly three decades. Today the IMF
and World Bank survive, but Bretton Woods was broken in 1971 when Nixon suspended the
convertibility of the dollar into gold.
Yet most of the problems that spurred the creation of Bretton Woods have since returned in
only somewhat less dire form. It's worth returning to Keynes' original, much more ambitious
idea for an international institution to manage the flow of goods and money around the
globe.
The basic problem with international trade is that imbalances can develop: Some countries get
big export surpluses, while others necessarily develop big trade deficits (since the world
cannot be in surplus or deficit with itself). And because countries typically must borrow to
finance trade deficits, it's a quick and easy recipe for a crash in those countries when
their ability to take on more debt reaches its limit. It's not as bad for surplus countries,
since they will not have a debt crisis or a collapse in the value of their currency, but they
too will be hurt by the loss of export markets. This problem has haunted nations since well
before the Industrial Revolution.
Nations like Germany with a large export surplus often portray it as resulting from their
superior virtue and technical skill. But the fundamental reality of such a surplus is that it
requires someone to buy the exports. As Yanis Varoufakis points out in his new book, without
some sort of permanent mechanism to recycle that surplus back into deficit countries, the
result will be eventual disaster. It's precisely what caused the initial economic crisis in
Greece that is still ongoing.
Bretton Woods addressed this problem with a set of rather ad hoc measures. The dollar
would be pegged to a particular amount of gold, and semi-fixed exchange rates for other
currencies were to be fixed around that. In keeping with White's more orthodox economic
views, all trade imbalances were to be solved on the deficit side. There was no limit to the
surplus nations could build up (importantly, at the time the U.S. was a huge exporter), and
the IMF was tasked with shoring up countries having serious trade deficit problems by
enforcing austerity and tight money. (This would lead to repeated disaster for developing
countries.)
Keynes' idea, by contrast, was substantially more ambitious. He proposed an overarching
"International Clearing Union" that potentially every country in the world could join. It
would create a new reserve currency, the "bancor," that could only be used for settling
international accounts, and member nations would pay a membership quota in proportion to
their total trade. Countries in surplus would receive bancor credit, while those in deficit
would have a negative account.
The union was also explicitly aimed at facilitating increased trade overall (also unlike
Bretton Woods). And critically, it would incentivize nations to keep their trade balanced on
both sides -- surplus and deficit. Run too far into deficit, and a country would be required
to devalue to reduce imports. But run too far into surplus, and a country's currency would be
required to appreciate so as to increase imports. A bancor tax would also be levied at an
increasing rate on anyone with a large trade imbalance.
There's much more to the story, but the fundamental idea is fairly simple. As Keynes wrote in
his original proposal, the basic "principle is the necessary equality of credits and debits,
of assets and liabilities. If no credits can be removed outside the clearing system but only
transferred within it, the Union itself can never be in difficulties."
For the postwar generation, Bretton Woods worked tolerably well -- and it certainly was a
vast improvement on the prewar gold standard. But its mechanisms were far less legible, and
required constant good-faith efforts from various nations, particularly Germany and the U.S.,
to work properly. More importantly, it relied on large American surpluses to soak up the huge
aid that was being sent to Europe under the Marshall Plan, a goodly portion of which was used
to buy American-made exports. When the U.S. moved to deficit, the system broke down within
only a few years.
Keynes' plan, by contrast, would likely have had the flexibility to adapt to a massive 180
degree shift in the balance of trade. It is also far more transparent and comprehensible to
average people, perhaps disrupting the excessive pride of surplus countries to some extent.
And if it were to be created in the future, it would be under effective supervision from the
member states. The vast carnage inflicted by the unaccountable, supranational European
Central Bank is too stark to ignore.
It would undoubtedly take years and years to build and update Keynes proposal to where it
might be implemented. But the problems it is designed to address will always keep cropping
up. Perhaps after the eurozone implodes, the world will get another chance to do it
right.
*
[The rallying cry of the gold bugs is "Idiots of the world unite," which is very effective
given the considerable majority held by idiots in the electorates of republics and among
their controlling elites both public and private.]
Under Bretton-Woods no trade imbalances were possible because of the settlement mechanism in
gold. The deficit nations (that imported more than exported) would have to settle by
transferring gold out in the amount of the deficit. Thus, in effect selling the commodity of
gold for the excess imports. This all works well if the imbalances are periodically settled
by the gold transfers, which didn't happen as many countries simply held onto the currencies,
and if trade is balanced.
Balance of trade is the key to stable trade. All imbalances eventually come back into
balance. The question is: will this happen in a smooth orderly manner, like under
Bretton-Woods, or in a calamity where for example the dollar crashes?
"...This all works well if the imbalances are periodically settled by the gold transfers,
which didn't happen as many countries simply held onto the currencies, and if trade is
balanced..."
*
[You are getting warmer, but still no cigar and a whole lot of cart before the horse. What
happened under the original Bretton Woods agreement was that surplus traders held onto their
US dollar reserves while convertibility (more to silver than gold - which we hold) kept the
US dollar from becoming overvalued under the simultaneous pressures of what remained small US
trade deficits and growing foreign reserves of US dollars. This was not a gold standard per
se, but rather the establishment of the US dollar, the currency of the dominant global
economic power, as the global reserve currency for foreign held reserves and also the
dominant currency of international trade exchange. Trade remained relatively well balanced
because convertibility limited how overvalued the dollar could maintain itself under trade
deficits despite its broadly held status as the dominate global reserve currency.
The end of Bretton Woods US dollar convertibility saw growing US trade deficits with
simultaneous growth in US dollar denominated foreign reserves and an over-valued dollar which
just accelerated US trade deficits even further. Bigger US trade deficits just fed into even
larger USD foreign reserves. It was a vicious cycle of dollar over-valuation despite growing
US trade deficits because surplus partners had relatively secure means of holding large USD
reserves. The world's high demand for dollars was great for rentiers, arbitrage seekers, and
global corporations. Trading partners could hold USD reserves to keep their currencies
undervalued relative to the USD more successfully than with convertibility. OTOH, the US
gained cheap access to global oil reserves and also US multinational corporations gained
global price arbitrage advantages if they were willing to offshore much labor to countries
with currencies undervalued relative to the dollar or merely countries with lower standards
of living (i.e., real wages) and environmental protection standards for industrial
production. Winning all three together on the same US dollar capital flow was the global
price arbitrage trifecta. ]
The US could have had it both ways in the sense that it could have run budget deficits by
monetizing the dollar and causing inflation as it was starting to do in the late 1960s and
maintain the international exchange rate. The mechanism to do this is US tariffs. This would
have made imports to the US expensive and kept all those excess dollars from flowing
overseas. The rational is balance of trade. As long as the current account is balanced the
Bretton-Woods system would continue to function.
The US went all in on free trade and eliminating tariffs when it implemented the income tax
system to finance government operations spending in 1913. At the time the US dollar was
underpriced against most European currencies in FOREX, particularly the pound sterling, and
the US had a growing trade surplus which eventually contributed significantly to the
settlements crisis under the gold standard that was a major cause for precipitating the Great
Depression. Once that path was taken it became difficult to turn back since the wealthy build
their rentier and arbitrage systems upon the world that is rather than some world that might
be. Policy makers rely upon the stock of wealth both for campaign contributions and to raise
their miserable lives into something of elite significance because of who they hang out with
and in turn whose interests that they serve.
I understand it that if a frog had wings then it would not bump its ass every time that it
leaped.
The US consistently ran a trade surplus during the Bretton Woods period, but Bretton Woods
was based on US dollars. So the world was being drained of US dollars (or the rest of the
world of Gold). That is clearly not sustainable. There is a problem with unbalanced trade if
it is either direction. Under Bretton Woods there was no penalty for mercantilism. You just
need to know history to no that financial crises are nothing new and that a gold standard
didn't prevent them, but in fact exacerbated them. I don't where you get your ideas from, but
you should go back and read some history.
The real questions are:
1) During Bretton-Woods worker compensation grew with growth in productivity, but since the
withdrawal in 1971, worker compensation has been flat. Why? And how to re-mediate this?
2) Why has so much of GDP shifted to financial speculation and away from the productive
economy? And how to shift economic activity back to the productive sector?
3) Given our use of fiat currency, what limits the growth of the money supply in the
financial sector? That is, what prevents financial instruments that are disconnected from the
productive economy from creating an endless cycle of: new instruments drives new money to buy
them, rinse and repeat...
The second one in particular lays out the issue quite clearly. It literally forms an arrow
with the tip pointing to the divergent point where something major happened to create such a
stark and durable systematic change.
This is classical cargo cult thinking, these two things are correlated so one must have
caused the other. There were lots of things changed at that time, I was there, I followed the
debates (in which the world basically decided to follow some of what Milton Friedman said -
and ignored some other things that he said - like negative interest rates and that money
supply expansion should come mostly from expanding the central bank balance sheet - see also
Robert Waldmann's explanation that Lucas and Friedman are methodical opposites and yet both
belong to the "Chicago School"). You have to not only note a correlation, but also show the
mechanism and control for other factors. Get to it.
1. Other things happened at the same time (see tariffs, changes in laws related to unions,
containerization and also relaxation of capital controls and banking regulation). You went
from a world of relatively isolated economies (especially the US) to a world of tightly
integrated economies. Bretton Woods fall had almost nothing to do with it.
2. Washington consensus that budget deficits are bad and monetary policy (i.e. encouraging
private debt) are good. We need to expand the central bank balance sheet in line with nominal
GDP and reduce private indebtedness again.
True, but whatever the cause, to have such a sharp and clear divergence, one or more
significant changes had to happen in a short span of time. Do those things mentioned above
add up to enough of a cumulative durable change?
But it wasn't a SHARP divergence at all. I actually wish that Anne had done the chart in
terms of rates of change. Having it in terms of levels hides more than it shows. But think
about this - there was a reason that Bretton Woods was abandoned - it didn't happen in a
vacuum. Maybe you should ask why that happened.
And as commodities go gold has a number of advantages
Over say concrete blocks or diamonds
Lots of clever souls would like to use an exchange medium that
Wasn't subject to modern state financial casuistry
And usually they aren't overly focused on the existing
Unregulated market systems hitches and loops
and
Perversities
Cold mining costs have always tracked the monetary price of gold. Aka, the marginal price of
a new ounce is the monetary price.
To get the cost of mining goold down to $20 in the late 20s, food, housing prices had tlo
fall by slashing wages which cut demand for food forcing prices of food down by forcing wages
down, thus gold miners could eat enough food to mine an ounce of gold.
When FDR set the price government paid for gold to $35 dollars, the number of gold miners,
and gold ounces mined doubled in less than a year, and stayed up until government prohibited
gold mining to reallocate labor to the war industrial production.
What we don't see is the actual marginal costs of gold mining in either the short or long
run. The global gold mining cartel keeps all the data secret, eg, South Africa, Russia, which
produce about half the gold aannually. They can easily bankrupt a big corporation investing
in a new big mineing and refining operation by releasing some of their massive gold hoard at
prices just below the corporation marginal cost plus debt service. The big driver of gold
demand is Asia and Muslim consumption for gold hoops and rings so people, especially women
have their wealth with them at all times.
MULP made an assertion a couple of days ago that there were far more empty beds in the
country now that several decades ago. I questioned the assertion, since there was no
supporting data, but now I am finding the data in Census tracts and know MULP was correct.
Family and household sizes have been declining for decades.
Regarding money, and the difference between private and public money.
As with all things public and private, public money is not required to make a profit, but
in contrast, private money has no other reason to exist than to make a profit.
What we call money in the US, is privately owned. It is actually a promissory note, the
signifier of a loan made to those who hold the note. This is how US money comes into
existence.
We could trade coconut shells, or beads, but we trade promissory notes. They are legal
tender by law. And they fulfill the role of money pretty well. But we the people do not
ultimately own those obligations.
Public money is issued out of the same thin air as private money, but not as a debt,
simply as an issuance. The bills do their job for exchange and storage, and circulate until
being retired as taxes and the like. No one pays interest on that money.
Public money doesn't charge interest. Private money charges interest. This is the only
difference, and this difference is killing us and destroying the entire world.
~~
Professor Richard Werner illustrates nicely how a mortgage comes into existence through a
bank, which doesn't actually create money in this loan, but purchases a promissory note from
the home buyer. It is this promissory note that then enters the public record as new money,
which we then trade like sea shells - happy children, except that we now will pay interest of
more than 100 percent over the next 30 years. This interest is the profit on the private
money.
You'll find the mortgage part specifically around 16:15.
~~
As to all the rest, there is much more collateral, including the flagship work by Helen
Brown. Sorry I have no time to supply more links.
But I'm surprised to see so much wordy ignorance here on the subject, which is actually
very simple (although obfuscated, of course). Thanks to psychohistorian and karlof1 and
others who show that the good economists are all calling for public money which charges no
interest. And the communists and socialists do this as a matter of course.
As Hudson ended in his address cited by b and discussed here: "nations face a choice
between socialism and barbarism" .
Neoliberal economics and private finance is this very barbarism. It is accompanied by
fascism, oppression and the utter loss of freedom. As I cited in my previous comment, Dambisa
Moyo suggests very cogently that economic sufficiency undergirds democratic freedom. The
corollary is obvious: as we get more impoverished, freedom flees away.
~~
Interest charged on a loan is a claim on wealth that it doesn't create. It therefore
steals existing wealth in order to be redeemed. That's where our wealth went, and why we're
all so broke.
A loan for a productive purpose that will create new wealth can hopefully afford to slice
some of this new wealth off to pay the interest. It's still usury. But any loan at interest
that doesn't create wealth - such as a mortgage that simply buys an existing asset - is
something vastly more wicked.
"... As Mael Colium says, the US picks off individual countries by isolating them. ..."
"... there's a fundamental difference between debt in the past and debt today. In the past debt was owed to the state, today it's owed to some wealthy corporations. Good luck with debt jubilees in the absence of violent uprisings. ..."
"... The difference is they internalize profit and externalize cost. And that's fundamentally different from all other epochs in the past. Even the birth of nation state was out of their rationalization of how to maximize profit extraction and cost externalization in the 1st place. Good luck with debt jubilees. ..."
"... How would this occur aside from a repudiation of the almighty buck one wonders, and would it be based on reserves in the vault, or actual use as money? ..."
"... The Eurozone and China could run trade deficits, thereby creating an opportunity for their currencies to become reasonably viable alternative reserves. But they don't because they don't want to cede control of their manufacturing and export-driven economic bases away. ..."
"... The sine qua non of our economic empire (which I learned here) is that a global currency requires global trade deficits, which must grow as quickly as the global economy to fulfill its role. ..."
"... So American deficits are structural. Our debt-ceiling controversies are theater. And our dollar is exceptional until the instant it isn't–then the Fed electron-tranfers trillions more to the speculators whose notional dollars just evaporated, keeping the currencies in the air with their new casino chips. Is this a loan? A gift? An electron cloud? It's the fog of war by other means . . . ..."
"... Resources and the critical health of the planet bother me a lot. Money and "gold" are, in the end, both fictitious obsessions. ..."
"... You'll find few authors willing to provide their seminal work for free online– 2nd Edition PDF . I think it fair for those unfamiliar with Hudson's work to read his analysis prior to being judgmental. ..."
"On a similar note, I've wondered why Russia has not defaulted on it's considerable USD and
EUR debt (also too, why is Russia still doing debt in USD and thus strengthening U.S.?)"
It should be noted that Russia has almost zero foreign public debt and that the private foreign
debt has been much reduced and now amounts to US dollars 450 billion.
As Russia has a surplus of more than US dollars 100 billion on the current account the total
foreign debt amounts to 4 years current account surplus only.
Ad to this that Russias international currency reserves amounts to ca. US dollars 500
billion which meens that Russia is in a very strong fiscal position as it is capable of paying
off its entire foreign debt any time it chooses.
Along the same lines, the summary starts with, "The first existential objective is to avoid the current threat of war by
winding down U.S. military interference in foreign countries and removing U.S. military bases as relics of neocolonialism."
Either would be
taken as proof of evil anti-US intentions, leading to sanctions, coups, assassinations,
regime change, and eventually outright war. As Mael Colium says, the US picks off individual
countries by isolating them.
When we have MMT paying for arts, history, journalism and particularly editors, I won't be
so irritated by these kinds of criticisms.
We live in a very advanced world of Bernaysian propaganda where the communicative
industries are privately owned and directed to ensure deep criticisms of the
hyper-exploitative current reality CANNOT be published and promoted.
When someone takes the effort to produce something, like this or the book other commenters
on this thread are also slighting, at great personal expense to themselves without corporate
backing or institutional support, a decent reply would be "Thank you!", rather than tasking
them or our hosts here at this site to "go back and clean up this mess??"
If you had any decency, you might suggest clarifying edits in comments, like changing
"– so that it can taxing its own citizens." at the end of the 23rd paragraph to,
"– so that it can avoid taxing its own citizens", to help the people you are
criticizing for making things so difficult for you.
Michael Hudson is a modern day Saint! Who cares about a few typos when his ideas are truly REVOLUTIONARY!
For example, i had no idea about Debt Jubilees in early civilizations 3000 years ago! The
pyramids built by FREE MEN! Liberty and Freedom originating from canceling debts! Torches and
Beacons of light as representatives of said Debt Jubilees!
If you ask me, the #HudsonHawk is trying to awaken the Workers of the World in
Forgiveness, Peace, Love, and Solidarity.
I didn't know that until I read anthropologist David Graeber's Debt: The First 5,000
Years.
But there's a fundamental difference between debt in the past and debt today. In the past
debt was owed to the state, today it's owed to some wealthy corporations. Good luck with debt
jubilees in the absence of violent uprisings.
The difference is they internalize profit and externalize cost. And that's fundamentally
different from all other epochs in the past. Even the birth of nation state was out of their
rationalization of how to maximize profit extraction and cost externalization in the 1st
place. Good luck with debt jubilees.
That is why Russia, China and other powers that U.S. strategists deem to be strategic
rivals and enemies are looking to restore gold's role as the preferred asset to settle
payments imbalances.
How would this occur aside from a repudiation of the almighty buck one wonders, and would
it be based on reserves in the vault, or actual use as money?
Keep in mind that there isn't a human alive now who ever proffered a monetized gold coin
in order to purchase something, and increasingly relatively few that have ever used a
monetized silver coin for the same purpose.
I don't have a huge amount of sympathy. The Eurozone and China could run trade deficits,
thereby creating an opportunity for their currencies to become reasonably viable alternative
reserves. But they don't because they don't want to cede control of their manufacturing and
export-driven economic bases away.
The US doesn't mind and doesn't care about the domestic repercussions. For how much longer
that can continue, especially as Trump's America First policy is putting that under
some strain, is an open question. But for now, it's willing to be satisfied with a little
rowing back rather than wholesale reversal (back to, for example, an immediate-post war
position of significant trade surpluses although the article is correct to point out this was
due to the US being the last man standing, in terms of having a manufacturing base still
intact).
The Eurozone and China are not only not showing any signs of a policy change, they've
continued embedding and strengthening the current modus operandi. You pays your money, you
takes your choices. Here as elsewhere. If they'd rather not have the US$ having a
more-or-less monopoly position in then global financial system as a reserve currency, they'll
need to make the compromises needed to set up these challenger currencies as viable
alternatives.
But they can't have their economic cakes and eat them, too.
And it's not just currencies. You need legal systems which are deemed to be (which can
only come through real, observational experience) investor-friendly -- not just prone to
supporting or at the very least given an easy ride to domestic stalwarts. Again, this has
repercussions if you then have to stop cosseting domestic "champions". The US legal system is
ridiculously business friendly. But it doesn't, overtly, differentiate between US and non-US
companies in a commercial dispute.
The sine qua non of our economic empire (which I learned here) is that a global currency requires global trade
deficits, which must grow as quickly as the global economy to fulfill its role. Tell that to Germany! If your silly little euro or yen or renminbi tries to go
global, the dollar-based currency speculators will shrivel it like Soros did the pound in the
90s.
So American deficits are structural. Our debt-ceiling controversies are theater. And our
dollar is exceptional until the instant it isn't–then the Fed electron-tranfers
trillions more to the speculators whose notional dollars just evaporated, keeping the
currencies in the air with their new casino chips. Is this a loan? A gift? An electron cloud?
It's the fog of war by other means . . .
It may have been Hudson who explained that a quarter (or was it half?) of all corporate
profits after WWII went to American companies, when our economy was that much of the world's.
Now we're a much smaller fraction of the global economy, but our corporate sector still
profits as much as it did when it was producing, rather than marketing, real goods. Another
exceptional achievement.
Really all we know is that such a plan would create a different order. That so many
countries have continued to pauper their populations long after the obviousness that
"development" is a sham doesn't bode well for their intentions even after the USA is brought
to heel.
Agreed. The likes of the Regional Comprehensive Economic Partnership are still under
negotiation and still, like every other multilateral investment agreement of recent vintage,
apparently primarily concerned with creating supranational rights for landlords, especially
of the absentee variety, at the expense of citizens in their collective capacity.
This is a good summary of our irrational world. MMT and the GND can save the situation but
only if we industrialized humans forego any more fossil fuels except for long-term survival
purposes. Ration it with draconian discipline. That in turn will discipline our military and
turn our energies to things we can no longer ignore. Money doesn't bother me much. Resources
and the critical health of the planet bother me a lot. Money and "gold" are, in the end, both
fictitious obsessions.
Thanks for providing this transcript prior to Hudson posting it to his own website. He was
the first political-economist to lay out the Outlaw US Empire's game plan when he published
Super Imperialism: The Economic Strategy of American Empire in 1972.
You'll find few
authors willing to provide their seminal work for free online– 2nd Edition
PDF . I think it fair for those unfamiliar with Hudson's work to read his analysis prior
to being judgmental.
I think Calvin and his role in today's debt based monetary system is much underestimated.
The meteoric rise of the seven provinces and what was to become the Dutch colonial empire was
in no small part funded and financed by this debt based system in the latter half of the 16th
century. The same applied shortly afterwards to the UK. The book passage I quoted from is
from Devaluing the Scholastics: Calvin's Ethics of Usury .
I read the Michael Hudson piece and shake my head at the manifest obfuscation at play
The world is in WWIII which is between private and public finance. To characterize the
private finance side as being just the US is obfuscation
Global private finance exists outside the bounds of any one nation state and the US is
just the current face of the centuries of empires under this model.
Why is the West unable to have a discussion about the core component to the world war we
are engaged in?
Sad comment on the successful brainwashing at work here.....that is why I call the web
site Michael Hudson's writing is provided at ALMOST Naked Capitalism
Wake the rest of the way up fellow humans of the West.
The essential problem is that money functions as a contract, with one side an asset and
the other a debt, but as we experience it as quantified hope and security, we try to save and
store it. Thus Econ 101 tells us it is both medium of exchange and store of value. Even
though one is dynamic and the other is static, like blood and fat, or roads and parking
lots.
Necessarily then, in order to store the asset side, generally equal amounts of debt have
to be manufactured and this creates a centripetal effect, as positive feedback pulls the
asset side to the center of the economy, while negative feedback accumulates the debt on the
fringes.
The ancients used debt jubilees to push the reset button, but since we have been conditioned
to think of money as private property, not a public medium, now the only way to reset is for
societal collapse.
Value, as a savings for the future, needs to be stored in tangibles, like strong social
and environmental networks, not as abstractions in the financial circulation system. The
functionality of money is in its fungibility. We own it like we own the section of road we
are using, or the fluids passing through our bodies.
We are also conditioned to think of ourselves as individuals, not as parts of a larger
community, so this social atomization enables finance to mediate most transactions and tax
them. A figurative version of The Matrix.
I was pretty much banned from NC for questioning MMT. Yves called me a troll. The exchange
is jan 6, in the links post.
Consequently I'll only try posting very occasionally and one or two have gone through
moderation.
My view in MMT is that either these people are extremely naive, or operatives for the
oligarchy, as there is no free lunch and the public issuing ever more promises only drives it
further into debt. Which is then accumulated by the oligarchy and eventually traded for
remaining public assets. It's basic predatory lending/disaster capitalism and has been going
on since the dawn of civilization.
Not that people are not often incredibly stupid, but I suspect some recognize the dynamic.
When you start having to pay tolls on most roads, you will know we are way down that rabbit
hole.
John Merryman @7: Sure there are free lunches, Uncle Sugar has been getting lots of free
lunches ever since WWII. The thing about free lunches is those situations cannot be permanent
in a growth economy. To have permanent free lunches you have to have an ecologically stable
economy and a stable population consuming it. In other words, you can't get too greedy.
What's ridiculous is to fall for the "public vs. private" scam, one of the most potent
divide-and-conquer scams of the corporate state, where in reality there's zero distinction
between public and private power.
Power is power, and the finance sector is purely wasteful, purely destructive, serves zero
legitimate purpose, and needs to be abolished as a necessary part of any kind of human
liberation.
Of course the Mammon religion has brainwashed almost everyone into believing, among other
lies, that the dominion of money is necessary for human existence. Never mind that the vast
majority of societies didn't use money for more than a few special transactions, and many
didn't use it at all. Almost all of those societies were humanly more wholesome than this
one, and all of them were less ecologically destructive by many orders of magnitude.
"The ancients used debt jubilees to push the reset button, but since we have been conditioned
to think of money as private property, not a public medium, now the only way to reset is for
societal collapse."
John Merryman @4
There are compromises in this business: debt repudiation being an obvious one.
It is easy enough to make a case for declaring large parts of the public debt, odious. This
is particularly true of the enormous debts run up by Public-Private Partnerships of the sort
that the former UK Premier Brown promoted so enthusiastically. But it is generally true of
debts contracted for purposes which contradict the public interest.
Debt used to make deposits in private bank accounts in the Caymans for example can
justifiably be repudiated by the public, particularly when the creditor was well aware that
its loans were going to be employed for corrupt purposes.
Most of the US Debt, contracted to finance the MIC, is not only odious on general grounds
(Defending what against whom?) but on a contract to contract basis, most contracts being
padded to ensure the ability to provide kickbacks: when Congressmen receive funds from
government contractors and 'public servants', including military types, get jobs/sinecures
from the same, then any money borrowed to finance such contracts is, clearly, odious.
It would be revolutionary no doubt but perfectly practicable to push a 'reset' button on
the Public Debt by proclaiming that, in future, all borrowing for purposes not approved or
understood the putative taxpayer would be found to be odious.
Another possible course would be to stop paying interest on public debt and issue bonds to
repay the capital amounts lent.
The fact that such options are understood would make the regular claims, by neo-liberals
pushing austerity, that there is no money for such things as social security or living wages,
an obvious trigger for debt reduction measures designed to impact the rich rather than their
victims.
Predators and Prey. But the prey believe themselves to be predators also, or at least to have
the potential to become predators should they win the lotto.
"... Aditya Chakrabortty ( It's reckless. But a Tory cash splurge could win an election , 3 July) is right to point out the hypocrisy of the political right about public expenditure. While progressive proposals for public spending are decried as burdening the hard-pressed taxpayer, the right is happy to use public money to rescue the banks or boost their electoral chances. ..."
"... As I explain in my book Money: Myths, Truths and Alternatives, neoliberal economics is built on a fairytale about money that distorts our view of how a contemporary public money system operates. It is assumed that public spending depends on extracting money from the market and that money (like gold) is always in short supply. Neither is true. Both the market and the state generate money – the market through bank lending and the state through public spending. Both increase the money supply, while bank loan repayments and taxation reduce it. There is no natural shortage of money – which today mainly exists only as data. ..."
Neoliberal economics and other fairytales about money Politics is not about a
struggle over a fixed pot of money, says Mary Mellor, and the best way to end austerity is to
reject it as an ideology, says Peter McKenna
Aditya Chakrabortty (
It's reckless. But a Tory cash splurge could win an election , 3 July) is right to point
out the hypocrisy of the political right about public expenditure. While progressive proposals
for public spending are decried as burdening the hard-pressed taxpayer, the right is happy to
use public money to rescue the banks or boost their electoral chances.
As I explain in my book Money: Myths, Truths and Alternatives, neoliberal economics is built
on a fairytale about money that distorts our view of how a contemporary public money system
operates. It is assumed that public spending depends on extracting money from the market and
that money (like gold) is always in short supply. Neither is true. Both the market and the
state generate money – the market through bank lending and the state through public
spending. Both increase the money supply, while bank loan repayments and taxation reduce it.
There is no natural shortage of money – which today mainly exists only as data.
The case for austerity missed the point. Politics is not about a struggle over a fixed pot
of money. What is limited are resources (particularly the environment) and human capacity. How
these are best used should be a matter of democratic debate. The allocation of money should
depend on the priorities identified. In this the market has no more claim than the public
economy to be the source of sustainable human welfare.
Professor Mary Mellor Newcastle upon Tyne
• Over the years Aditya Chakrabortty has provided us with powerful critiques of
austerity. His message now – that EU membership "is the best way to end austerity"
– overlooks the fact that the UK was in the EU all that time.
Moreover, the EU's stability and growth pact requires that budget deficits and public debt
be pegged below 3% and 60% of GDP respectively.
Such notions are the beating heart of austerity, and the European commission's excessive
deficit procedure taken against errant states has almost universally resulted in swingeing
austerity programmes. These were approved and monitored by the commission and council, with the
UK only taken off the naughty step in 2017 after years of crippling austerity finally reduced
the deficit to 2.3% of GDP.
The best way to end austerity – and to sway voters – is to reject austerity as
an ideology regardless of remain or leave, and rehabilitate the concept of public investment in
a people's economy.
Peter McKenna
"... The purpose of a military conquest is to take control of foreign economies, to take control of their land and impose tribute. The genius of the World Bank was to recognize that it's not necessary to occupy a country in order to impose tribute, or to take over its industry, agriculture and land. Instead of bullets, it uses financial maneuvering. As long as other countries play an artificial economic game that U.S. diplomacy can control, finance is able to achieve today what used to require bombing and loss of life by soldiers ..."
"... It was set up basically by the United States in 1944, along with its sister institution, the International Monetary Fund (IMF). Their purpose was to create an international order like a funnel to make other countries economically dependent on the United States ..."
"... American diplomats insisted on the ability to veto any action by the World Bank or IMF. The aim of this veto power was to make sure that any policy was, in Donald Trump's words, to put America first. "We've got to win and they've got to lose." ..."
"... The World Bank was set up from the outset as a branch of the military, of the Defense Department. John J. McCloy (Assistant Secretary of War, 1941-45), was the first full-time president ..."
"... Many countries had two rates: one for goods and services, which was set normally by the market, and then a different exchange rate that was managed for capital movements. That was because countries were trying to prevent capital flight. They didn't want their wealthy classes or foreign investors to make a run on their own currency – an ever-present threat in Latin America. ..."
"... The IMF and the World Bank backed the cosmopolitan classes, the wealthy. Instead of letting countries control their capital outflows and prevent capital flight, the IMF's job is to protect the richest One Percent and foreign investors from balance-of-payments problems ..."
"... The IMF enables its wealthy constituency to move their money out of the country without taking a foreign-exchange loss ..."
"... Wall Street speculators have sold the local currency short to make a killing, George-Soros style. ..."
"... When the debtor-country currency collapses, the debts that these Latin American countries owe are in dollars, and now have to pay much more in their own currency to carry and pay off these debts. ..."
"... Local currency is thrown onto the foreign-exchange market for dollars, lowering the exchange rate. That increases import prices, raising a price umbrella for domestic products. ..."
"... Instead, the IMF says just the opposite: It acts to prevent any move by other countries to bring the debt volume within the ability to be paid. It uses debt leverage as a way to control the monetary lifeline of financially defeated debtor countries. ..."
"... This control by the U.S. financial system and its diplomacy has been built into the world system by the IMF and the World Bank claiming to be international instead of an expression of specifically U.S. New Cold War nationalism. ..."
"... The same thing happened in Greece a few years ago, when almost all of Greece's foreign debt was owed to Greek millionaires holding their money in Switzerland ..."
"... The IMF could have seized this money to pay off the bondholders. Instead, it made the Greek economy pay. It found that it was worth wrecking the Greek economy, forcing emigration and wiping out Greek industry so that French and German bondholding banks would not have to take a loss. That is what makes the IMF so vicious an institution. ..."
"... America was able to grab all of Iran's foreign exchange just by the banks interfering. The CIA has bragged that it can do the same thing with Russia. If Russia does something that U.S. diplomats don't like, the U.S. can use the SWIFT bank payment system to exclude Russia from it, so the Russian banks and the Russian people and industry won't be able to make payments to each other. ..."
"... You can't create the money, especially if you're running a balance of payments deficit and if U.S. foreign policy forces you into deficit by having someone like George Soros make a run on your currency. Look at the Asia crisis in 1997. Wall Street funds bet against foreign currencies, driving them way down, and then used the money to pick up industry cheap in Korea and other Asian countries. ..."
"... This was also done to Russia's ruble. The only country that avoided this was Malaysia, under Mohamed Mahathir, by using capital controls. Malaysia is an object lesson in how to prevent a currency flight. ..."
"... Client kleptocracies take their money and run, moving it abroad to hard currency areas such as the United States, or at least keeping it in dollars in offshore banking centers instead of reinvesting it to help the country catch up by becoming independent agriculturally, in energy, finance and other sectors. ..."
"... But in shaping the World Trade Organization's rules, the United States said that all countries had to promote free trade and could not have government support, except for countries that already had it. We're the only country that had it. That's what's called "grandfathering". ..."
"The purpose of a military conquest is to take control of foreign economies, to take control of their land and impose
tribute. The genius of the World Bank was to recognize that it's not necessary to occupy a country in order to impose tribute,
or to take over its industry, agriculture and land. Instead of bullets, it uses financial maneuvering. As long as other countries
play an artificial economic game that U.S. diplomacy can control, finance is able to achieve today what used to require bombing
and loss of life by soldiers."
I'm Bonnie Faulkner. Today on Guns and Butter: Dr. Michael Hudson. Today's show: The IMF and World Bank: Partners In Backwardness
. Dr. Hudson is a financial economist and historian. He is President of the Institute for the Study of Long-Term Economic Trend,
a Wall Street Financial Analyst, and Distinguished Research Professor of Economics at the University of Missouri, Kansas City.
His most recent books include " and Forgive them Their Debts: Lending, Foreclosure and Redemption from Bronze Age Finance
to the Jubilee Year "; Killing the Host: How Financial Parasites and Debt Destroy the Global Economy , and J Is for
Junk Economics: A Guide to Reality in an Age of Deception . He is also author of Trade, Development and Foreign Debt
, among many other books.
We return today to a discussion of Dr. Hudson's seminal 1972 book, Super Imperialism: The Economic Strategy of American Empire
, a critique of how the United States exploited foreign economies through the IMF and World Bank, with a special emphasis on
food imperialism.
... ... ...
Bonnie Faulkner : In your seminal work form 1972, Super-Imperialism: The Economic Strategy of American Empire ,
you write: "The development lending of the World Bank has been dysfunctional from the outset." When was the World Bank set up and
by whom?
Michael Hudson : It was set up basically by the United States in 1944, along with its sister institution, the International
Monetary Fund (IMF). Their purpose was to create an international order like a funnel to make other countries economically dependent
on the United States. To make sure that no other country or group of countries – even all the rest of the world – could not
dictate U.S. policy. American diplomats insisted on the ability to veto any action by the World Bank or IMF. The aim of this
veto power was to make sure that any policy was, in Donald Trump's words, to put America first. "We've got to win and they've got
to lose."
The World Bank was set up from the outset as a branch of the military, of the Defense Department. John J. McCloy (Assistant
Secretary of War, 1941-45), was the first full-time president. He later became Chairman of Chase Manhattan Bank (1953-60).
McNamara was Secretary of Defense (1961-68), Paul Wolfowitz was Deputy and Under Secretary of Defense (1989-2005), and Robert Zoellick
was Deputy Secretary of State. So I think you can look at the World Bank as the soft shoe of American diplomacy.
Bonnie Faulkner : What is the difference between the World Bank and the International Monetary Fund, the IMF? Is
there a difference?
Michael Hudson : Yes, there is. The World Bank was supposed to make loans for what they call international development.
"Development" was their euphemism for dependency on U.S. exports and finance. This dependency entailed agricultural backwardness
– opposing land reform, family farming to produce domestic food crops, and also monetary backwardness in basing their monetary system
on the dollar.
The World Bank was supposed to provide infrastructure loans that other countries would go into debt to pay American engineering
firms, to build up their export sectors and their plantation sectors by public investment roads and port development for imports
and exports. Essentially, the Bank financed long- investments in the foreign trade sector, in a way that was a natural continuation
of European colonialism.
In 1941, for example, C. L. R. James wrote an article on "Imperialism in Africa" pointing out the fiasco of European railroad
investment in Africa: "Railways must serve flourishing industrial areas, or densely populated agricult5ural regions, or they must
open up new land along which a thriving population develops and provides the railways with traffic. Except in the mining regions
of South Africa, all these conditions are absent. Yet railways were needed, for the benefit of European investors and heavy industry."
That is why, James explained "only governments can afford to operate them," while being burdened with heavy interest obligations.
[1] What was "developed" was Africa's
mining and plantation export sector, not its domestic economies. The World Bank followed this pattern of "development" lending without
apology.
The IMF was in charge of short-term foreign currency loans. Its aim was to prevent countries from imposing capital controls to
protect their balance of payments. Many countries had a dual exchange rate: one for trade in goods and services, the other rate
for capital movements. The function of the IMF and World Bank was essentially to make other countries borrow in dollars, not in
their own currencies, and to make sure that if they could not pay their dollar-denominated debts, they had to impose austerity on
the domestic economy – while subsidizing their import and export sectors and protecting foreign investors, creditors and client
oligarchies from loss.
The IMF developed a junk-economics model pretending that any country can pay any amount of debt to the creditors if it just impoverishes
its labor enough. So when countries were unable to pay their debt service, the IMF tells them to raise their interest rates to bring
on a depression – austerity – and break up the labor unions. That is euphemized as "rationalizing labor markets." The rationalizing
is essentially to disable labor unions and the public sector. The aim – and effect – is to prevent countries from essentially following
the line of development that had made the United States rich – by public subsidy and protection of domestic agriculture, public
subsidy and protection of industry and an active government sector promoting a New Deal democracy. The IMF was essentially promoting
and forcing other countries to balance their trade deficits by letting American and other investors buy control of their commanding
heights, mainly their infrastructure monopolies, and to subsidize their capital flight.
BONNIE FAULKNER : Now, Michael, when you began speaking about the IMF and monetary controls, you mentioned that there
were two exchange rates of currency in countries. What were you referring to?
MICHAEL HUDSON : When I went to work on Wall Street in the '60s, I was balance-of-payments economist for Chase Manhattan,
and we used the IMF's monthly International Financial Statistics every month. At the top of each country's statistics would
be the exchange-rate figures. Many countries had two rates: one for goods and services, which was set normally by the market,
and then a different exchange rate that was managed for capital movements. That was because countries were trying to prevent capital
flight. They didn't want their wealthy classes or foreign investors to make a run on their own currency – an ever-present threat
in Latin America.
The IMF and the World Bank backed the cosmopolitan classes, the wealthy. Instead of letting countries control their capital
outflows and prevent capital flight, the IMF's job is to protect the richest One Percent and foreign investors from balance-of-payments
problems.
The World Bank and American diplomacy have steered them into a chronic currency crisis. The IMF enables its wealthy constituency
to move their money out of the country without taking a foreign-exchange loss. It makes loans to support capital flight out
of domestic currencies into the dollar or other hard currencies. The IMF calls this a "stabilization" program. It is never effective
in helping the debtor economy pay foreign debts out of growth. Instead, the IMF uses currency depreciation and sell-offs of public
infrastructure and other assets to foreign investors after the flight capital has left and currency collapses. Wall Street speculators
have sold the local currency short to make a killing, George-Soros style.
When the debtor-country currency collapses, the debts that these Latin American countries owe are in dollars, and now have
to pay much more in their own currency to carry and pay off these debts. We're talking about enormous penalty rates in domestic
currency for these countries to pay foreign-currency debts – basically taking on to finance a non-development policy and to subsidize
capital flight when that policy "fails" to achieve its pretended objective of growth.
All hyperinflations of Latin America – Chile early on, like Germany after World War I – come from trying to pay foreign debts
beyond the ability to be paid. Local currency is thrown onto the foreign-exchange market for dollars, lowering the exchange
rate. That increases import prices, raising a price umbrella for domestic products.
A really functional and progressive international monetary fund that would try to help countries develop would say: "Okay, banks
and we (the IMF) have made bad loans that the country can't pay. And the World Bank has given it bad advice, distorting its domestic
development to serve foreign customers rather than its own growth. So we're going to write down the loans to the ability to be paid."
That's what happened in 1931, when the world finally stopped German reparations payments and Inter-Ally debts to the United States
stemming from World War I.
Instead, the IMF says just the opposite: It acts to prevent any move by other countries to bring the debt volume within
the ability to be paid. It uses debt leverage as a way to control the monetary lifeline of financially defeated debtor countries.
So if they do something that U.S. diplomats don't approve of, it can pull the plug financially, encouraging a run on their currency
if they act independently of the United States instead of falling in line. This control by the U.S. financial system and its
diplomacy has been built into the world system by the IMF and the World Bank claiming to be international instead of an expression
of specifically U.S. New Cold War nationalism.
BONNIE FAULKNER : How do exchange rates contribute to capital flight?
MICHAEL HUDSON : It's not the exchange rate that contributes. Suppose that you're a millionaire, and you see that your
country is unable to balance its trade under existing production patterns. The money that the government has under control is pesos,
escudos, cruzeiros or some other currency, not dollars or euros. You see that your currency is going to go down relative to the
dollar, so you want to get our money out of the country to preserve your purchasing power.
This has long been institutionalized. By 1990, for instance, Latin American countries had defaulted so much in the wake of the
Mexico defaults in 1982 that I was hired by Scudder Stevens, to help start a Third World Bond Fund (called a "sovereign high-yield
fund"). At the time, Argentina and Brazil were running such serious balance-of-payments deficits that they were having to pay 45
percent per year interest, in dollars, on their dollar debt. Mexico, was paying 22.5 percent on its tesobonos .
Scudders' salesmen went around to the United States and tried to sell shares in the proposed fund, but no Americans would buy
it, despite the enormous yields. They sent their salesmen to Europe and got a similar reaction. They had lost their shirts on Third
World bonds and couldn't see how these countries could pay.
Merrill Lynch was the fund's underwriter. Its office in Brazil and in Argentina proved much more successful in selling investments
in Scudder's these offshore fund established in the Dutch West Indies. It was an offshore fund, so Americans were not able to buy
it. But Brazilian and Argentinian rich families close to the central bank and the president became the major buyers. We realized
that they were buying these funds because they knew that their government was indeed going to pay their stipulated interest charges.
In effect, the bonds were owed ultimately to themselves. So these Yankee dollar bonds were being bought by Brazilians and other
Latin Americans as a vehicle to move their money out of their soft local currency (which was going down), to buy bonds denominated
in hard dollars.
BONNIE FAULKNER : If wealthy families from these countries bought these bonds denominated in dollars, knowing that they
were going to be paid off, who was going to pay them off? The country that was going broke?
MICHAEL HUDSON : Well, countries don't pay; the taxpayers pay, and in the end, labor pays. The IMF certainly doesn't want
to make its wealthy client oligarchies pay. It wants to squeeze ore economic surplus out of the labor force. So countries are told
that the way they can afford to pay their enormously growing dollar-denominated debt is to lower wages even more.
Currency depreciation is an effective way to do this, because what is devalued is basically labor's wages. Other elements of
exports have a common world price: energy, raw materials, capital goods, and credit under the dollar-centered international monetary
system that the IMF seeks to maintain as a financial strait jacket.
According to the IMF's ideological models, there's no limit to how far you can lower wages by enough to make labor competitive
in producing exports. The IMF and World Bank thus use junk economics to pretend that the way to pay debts owed to the wealthiest
creditors and investors is to lower wages and impose regressive excise taxes, to impose special taxes on necessities that labor
needs, from food to energy and basic services supplied by public infrastructure.
BONNIE FAULKNER: So you're saying that labor ultimately has to pay off these junk bonds?
MICHAEL HUDSON: That is the basic aim of IMF. I discuss its fallacies in my Trade Development and Foreign Debt
, which is the academic sister volume to Super Imperialism . These two books show that the World Bank and IMF were viciously
anti-labor from the very outset, working with domestic elites whose fortunes are tied to and loyal to the United States.
BONNIE FAULKNER : With regard to these junk bonds, who was it or what entity
MICHAEL HUDSON : They weren't junk bonds. They were called that because they were high-interest bonds, but they weren't
really junk because they actually were paid. Everybody thought they were junk because no American would have paid 45 percent interest.
Any country that really was self-reliant and was promoting its own economic interest would have said, "You banks and the IMF have
made bad loans, and you've made them under false pretenses – a trade theory that imposes austerity instead of leading to prosperity.
We're not going to pay." They would have seized the capital flight of their comprador elites and said that these dollar bonds were
a rip-off by the corrupt ruling class.
The same thing happened in Greece a few years ago, when almost all of Greece's foreign debt was owed to Greek millionaires
holding their money in Switzerland. The details were published in the "Legarde List." But the IMF said, in effect that its
loyalty was to the Greek millionaires who ha their money in Switzerland. The IMF could have seized this money to pay off the
bondholders. Instead, it made the Greek economy pay. It found that it was worth wrecking the Greek economy, forcing emigration and
wiping out Greek industry so that French and German bondholding banks would not have to take a loss. That is what makes the IMF
so vicious an institution.
BONNIE FAULKNER : So these loans to foreign countries that were regarded as junk bonds really weren't junk, because
they were going to be paid. What group was it that jacked up these interest rates to 45 percent?
MICHAEL HUDSON : The market did. American banks, stock brokers and other investors looked at the balance of payments of
these countries and could not see any reasonable way that they could pay their debts, so they were not going to buy their bonds.
No country subject to democratic politics would have paid debts under these conditions. But the IMF, U.S. and Eurozone diplomacy
overrode democratic choice.
Investors didn't believe that the IMF and the World Bank had such a strangle hold over Latin American, Asian, and African countries
that they could make the countries act in the interest of the United States and the cosmopolitan finance capital, instead of in
their own national interest. They didn't believe that countries would commit financial suicide just to pay their wealthy One Percent.
They were wrong, of course. Countries were quite willing to commit economic suicide if their governments were dictatorships propped
up by the United States. That's why the CIA has assassination teams and actively supports these countries to prevent any party coming
to power that would act in their national interest instead of in the interest of a world division of labor and production along
the lines that the U.S. planners want for the world. Under the banner of what they call a free market, you have the World Bank and
the IMF engage in central planning of a distinctly anti-labor policy. Instead of calling them Third World bonds or junk bonds, you
should call them anti-labor bonds, because they have become a lever to impose austerity throughout the world.
BONNIE FAULKNER : Well, that makes a lot of sense, Michael, and answers a lot of the questions I've put together to ask
you. What about Puerto Rico writing down debt? I thought such debts couldn't be written down.
MICHAEL HUDSON : That's what they all said, but the bonds were trading at about 45 cents on the dollar, the risk of their
not being paid. The Wall Street Journal on June 17, reported that unsecured suppliers and creditors of Puerto Rico, would
only get nine cents on the dollar. The secured bond holders would get maybe 65 cents on the dollar.
The terms are being written down because it's obvious that Puerto Rico can't pay, and that trying to do so is driving the population
to move out of Puerto Rico to the United States. If you don't want Puerto Ricans to act the same way Greeks did and leave Greece
when their industry and economy was shut down, then you're going to have to provide stability or else you're going to have half
of Puerto Rico living in Florida.
BONNIE FAULKNER : Who wrote down the Puerto Rican debt?
MICHAEL HUDSON : A committee was appointed, and it calculated how much Puerto Rico can afford to pay out of its taxes.
Puerto Rico is a U.S. dependency, that is, an economic colony of the United States. It does not have domestic self-reliance. It's
the antithesis of democracy, so it's never been in charge of its own economic policy and essentially has to do whatever the United
States tells it to do. There was a reaction after the hurricane and insufficient U.S. support to protect the island and the enormous
waste and corruption involved in the U.S. aid. The U.S. response was simply: "We won you fair and square in the Spanish-American
war and you're an occupied country, and we're going to keep you that way." Obviously this is causing a political resentment.
BONNIE FAULKNER : You've already touched on this, but why has the World Bank traditionally been headed by a U.S. secretary
of defense?
MICHAEL HUDSON : Its job is to do in the financial sphere what, in the past, was done by military force. The purpose of
a military conquest is to take control of foreign economies, to take control of their land and impose tribute. The genius of the
World Bank was to recognize that it's not necessary to occupy a country in order to impose tribute, or to take over its industry,
agriculture and land. Instead of bullets, it uses financial maneuvering. As long as other countries play an artificial economic
game that U.S. diplomacy can control, finance is able to achieve today what used to require bombing and loss of life by soldiers.
In this case the loss of life occurs in the debtor countries. Population growth shrinks, suicides go up. The World Bank engages
in economic warfare that is just as destructive as military warfare. At the end of the Yeltsin period Russia's President Putin said
that American neoliberalism destroyed more of Russia's population than did World War II. Such neoliberalism, which basically is
the doctrine of American supremacy and foreign dependency, is the policy of the World Bank and IMF.
BONNIE FAULKNER : Why has World Bank policy since its inception been to provide loans for countries to devote their land
to export crops instead of giving priority to feeding themselves? And if this is the case, why do countries want these loans?
MICHAEL HUDSON : One constant of American foreign policy is to make other countries dependent on American grain exports
and food exports. The aim is to buttress America's agricultural trade surplus. So the first thing that the World Bank has done is
not to make any domestic currency loans to help food producers. Its lending has steered client countries to produce tropical export
crops, mainly plantation crops that cannot be grown in the United States. Focusing on export crops leads client countries to become
dependent on American farmers – and political sanctions.
In the 1950s, right after the Chinese revolution, the United States tried to prevent China from succeeding by imposing grain
export controls to starve China into submission by putting sanctions on exports. Canada was the country that broke these export
controls and helped feed China.
The idea is that if you can make other countries export plantation crops, the oversupply will drive down prices for cocoa and
other tropical products, and they won't feed themselves. So instead of backing family farms like the American agricultural policy
does, the World Bank backed plantation agriculture. In Chile, which has the highest natural supply of fertilizer in the world from
its guano deposits, exports guano instead of using it domestically. It also has the most unequal land distribution, blocking it
from growing its own grain or food crops. It's completely dependent on the United States for this, and it pays by exporting copper,
guano and other natural resources.
The idea is to create interdependency – one-sided dependency on the U.S. economy. The United States has always aimed at being
self-sufficient in its own essentials, so that no other country can pull the plug on our economy and say, "We're going to starve
you by not feeding you." Americans can feed themselves. Other countries can't say, "We're going to let you freeze in the dark by
not sending you oil," because America's independent in energy. But America can use the oil control to make other countries freeze
in the dark, and it can starve other countries by food-export sanctions.
So the idea is to give the United States control of the key interconnections of other economies, without letting any country
control something that is vital to the working of the American economy.
There's a double standard here. The United States tells other countries: "Don't do as we do. Do as we say." The only way it can
enforce this is by interfering in the politics of these countries, as it has interfered in Latin America, always pushing the right
wing. For instance, when Hillary's State Department overthrew the Honduras reformer who wanted to undertake land reform and feed
the Hondurans, she said: "This person has to go." That's why there are so many Hondurans trying to get into the United States now,
because they can't live in their own country.
The effect of American coups is the same in Syria and Iraq. They force an exodus of people who no longer can make a living under
the brutal dictatorships supported by the United States to enforce this international dependency system.
BONNIE FAULKNER : So when I asked you why countries would want these loans, I guess you're saying that they wouldn't,
and that's why the U.S. finds it necessary to control them politically.
MICHAEL HUDSON : That's a concise way of putting it Bonnie.
BONNIE FAULKNER : Why are World Bank loans only in foreign currency, not in the domestic currency of the country to which
it is lending?
MICHAEL HUDSON : That's a good point. A basic principle should be to avoid borrowing in a foreign currency. A country
can always pay the loans in its own currency, but there's no way that it can print dollars or euros to pay loans denominated in
these foreign currencies.
Making the dollar central forces other countries to interface with the U.S. banking system. So if a country decides to go its
own way, as Iran did in 1953 when it wanted to take over its oil from British Petroleum (or Anglo Iranian Oil, as it was called
back then), the United States can interfere and overthrow it. The idea is to be able to use the banking system's interconnections
to stop payments from being made.
After America installed the Shah's dictatorship, they were overthrown by Khomeini, and Iran had run up a U.S. dollar debt under
the Shah. It had plenty of dollars. I think Chase Manhattan was its paying agent. So when its quarterly or annual debt payment came
due, Iran told Chase to draw on its accounts and pay the bondholders. But Chase took orders from the State Department or the Defense
Department, I don't know which, and refused to pay. When the payment was not made, America and its allies claimed that Iran was
in default. They demanded the entire debt to be paid, as per the agreement that the Shah's puppet government had signed. America
simply grabbed the deposits that Iran had in the United States. This is the money that was finally returned to Iran without interest
under the agreement of 2016.
America was able to grab all of Iran's foreign exchange just by the banks interfering. The CIA has bragged that it can do
the same thing with Russia. If Russia does something that U.S. diplomats don't like, the U.S. can use the SWIFT bank payment system
to exclude Russia from it, so the Russian banks and the Russian people and industry won't be able to make payments to each other.
This prompted Russia to create its own bank-transfer system, and is leading China, Russia, India and Pakistan to draft plans
to de-dollarize.
BONNIE FAULKNER : I was going to ask you, why would loans in a country's domestic currency be preferable to the country
taking out a loan in a foreign currency? I guess you've explained that if they took out a loan in a domestic currency, they would
be able to repay it.
MICHAEL HUDSON : Yes.
BONNIE FAULKNER : Whereas a loan in a foreign currency would cripple them.
MICHAEL HUDSON : Yes. You can't create the money, especially if you're running a balance of payments deficit and if
U.S. foreign policy forces you into deficit by having someone like George Soros make a run on your currency. Look at the Asia crisis
in 1997. Wall Street funds bet against foreign currencies, driving them way down, and then used the money to pick up industry cheap
in Korea and other Asian countries.
This was also done to Russia's ruble. The only country that avoided this was Malaysia, under Mohamed Mahathir, by using capital
controls. Malaysia is an object lesson in how to prevent a currency flight.
But for Latin America and other countries, much of their foreign debt is held by their own ruling class. Even though it's denominated
in dollars, Americans don't own most of this debt. It's their own ruling class. The IMF and World Bank dictate tax policy to Latin
America – to un-tax wealth and shift the burden onto labor. Client kleptocracies take their money and run, moving it abroad
to hard currency areas such as the United States, or at least keeping it in dollars in offshore banking centers instead of reinvesting
it to help the country catch up by becoming independent agriculturally, in energy, finance and other sectors.
BONNIE FAULKNER : You say that: "While U.S. agricultural protectionism has been built into the postwar global system at
its inception, foreign protectionism is to be nipped in the bud." How has U.S. agricultural protectionism been built into the postwar
global system?
MICHAEL HUDSON : Under Franklin Roosevelt the Agricultural Adjustment Act of 1933 called for price supports for crops
so that farmers could earn enough to invest in equipment and seeds. The Agriculture Department was a wonderful department in spurring
new seed varieties, agricultural extension services, marketing and banking services. It provided public support so that productivity
in American agriculture from the 1930s to '50s was higher over a prolonged period than that of any other sector in history.
But in shaping the World Trade Organization's rules, the United States said that all countries had to promote free trade
and could not have government support, except for countries that already had it. We're the only country that had it. That's what's
called "grandfathering". The Americans said: "We already have this program on the books, so we can keep it. But no other country
can succeed in agriculture in the way that we have done. You must keep your agriculture backward, except for the plantation crops
and growing crops that we can't grow in the United States." That's what's so evil about the World Bank's development plan.
BONNIE FAULKNER : According to your book: "Domestic currency is needed to provide price supports and agricultural extension
services such as have made U.S. agriculture so productive." Why can't infrastructure costs be subsidized to keep down the economy's
overall cost structure if IMF loans are made in foreign currency?
MICHAEL HUDSON : If you're a farmer in Brazil, Argentina or Chile, you're doing business in domestic currency. It doesn't
help if somebody gives you dollars, because your expenses are in domestic currency. So if the World Bank and the IMF can prevent
countries from providing domestic currency support, that means they're not able to give price supports or provide government marketing
services for their agriculture.
America is a mixed economy. Our government has always subsidized capital formation in agriculture and industry, but it insists
that other countries are socialist or communist if they do what the United States is doing and use their government to support the
economy. So it's a double standard. Nobody calls America a socialist country for supporting its farmers, but other countries are
called socialist and are overthrown if they attempt land reform or attempt to feed themselves.
This is what the Catholic Church's Liberation Theology was all about. They backed land reform and agricultural self-sufficiency
in food, realizing that if you're going to support population growth, you have to support the means to feed it. That's why the United
States focused its assassination teams on priests and nuns in Guatemala and Central America for trying to promote domestic self-sufficiency.
BONNIE FAULKNER : If a country takes out an IMF loan, they're obviously going to take it out in dollars. Why can't they
take the dollars and convert them into domestic currency to support local infrastructure costs?
MICHAEL HUDSON : You don't need a dollar loan to do that. Now were getting in to MMT. Any country can create its own currency.
There's no reason to borrow in dollars to create your own currency. You can print it yourself or create it on your computers.
BONNIE FAULKNER: Well, exactly. So why don't these countries simply print up their own domestic currency?
MICHAEL HUDSON : Their leaders don't want to be assassinated. More immediately, if you look at the people in charge of
foreign central banks, almost all have been educated in the United States and essentially brainwashed. It's the mentality of foreign
central bankers. The people who are promoted are those who feel personally loyal to the United States, because they that that's
how to get ahead. Essentially, they're opportunists working against the interests of their own country. You won't have socialist
central bankers as long as central banks are dominated by the International Monetary Fund and the Bank for International Settlements.
BONNIE FAULKNER : So we're back to the main point: The control is by political means, and they control the politics and
the power structure in these countries so that they don't rebel.
MICHAEL HUDSON : That's right. When you have a dysfunctional economic theory that is destructive instead of productive,
this is never an accident. It is always a result of junk economics and dependency economics being sponsored. I've talked to people
at the U.S. Treasury and asked why they all end up following the United States. Treasury officials have told me: "We simply buy
them off. They do it for the money." So you don't need to kill them. All you need to do is find people corrupt enough and opportunist
enough to see where the money is, and you buy them off.
BONNIE FAULKNER : You write that "by following U.S. advice, countries have left themselves open to food blackmail." What
is food blackmail?
MICHAEL HUDSON : If you pursue a foreign policy that we don't like -- for instance, if you trade with Iran, which we're
trying to smash up to grab its oil -- we'll impose financial sanctions against you. We won't sell you food, and you can starve.
And because you've followed World Bank advice and not grown your own food, you will starve, because you're dependent on us, the
United States and our Free World Ó allies. Canada will no longer follow its own policy independently of the United States,
as it did with China in the 1950s when it sold it grain. Europe also is falling in line with U.S. policy.
BONNIE FAULKNER : You write that: "World Bank administrators demand that loan recipients pursue a policy of economic dependency
above all on the United States as food supplier." Was this done to support U.S. agriculture? Obviously it is, but were there other
reasons as well?
MICHAEL HUDSON : Certainly the agricultural lobby was critical in all of this, and I'm not sure at what point this became
thoroughly conscious. I knew some of the World Bank planners, and they had no anticipation that this dependency would be the result.
They believed the free-trade junk economics that's taught in the schools' economics departments and for which Nobel prizes are awarded.
When we're dealing with economic planners, we're dealing with tunnel-visioned people. They stayed in the discipline despite its
unreality because they sort of think that abstractly it makes sense. There's something autistic about most economists, which is
why the French had their non-autistic economic site for many years. The mentality at work is that every country should produce what
it's best at – not realizing that nations also need to be self-sufficient in essentials, because we're in a real world of economic
and military warfare.
BONNIE FAULKNER : Why does the World Bank prefer to perpetrate world poverty instead of adequate overseas capacity to
feed the peoples of developing countries?
MICHAEL HUDSON : World poverty is viewed as solution , not a problem. The World Bank thinks of poverty as low-priced
labor, creating a competitive advantage for countries that produce labor-intensive goods. So poverty and austerity for the World
Bank and IMF is an economic solution that's built into their models. I discuss these in my Trade, Development and Foreign Debt
book. Poverty is to them the solution, because it means low-priced labor, and that means higher profits for the companies bought
out by U.S., British, and European investors. So poverty is part of the class war: profits versus poverty.
BONNIE FAULKNER : In general, what is U.S. food imperialism? How would you characterize it?
MICHAEL HUDSON : Its aim is to make America the producer of essential foods and other countries producing inessential
plantation crops, while remaining dependent on the United States for grain, soy beans and basic food crops.
BONNIE FAULKNER : Does World Bank lending encourage land reform in former colonies?
MICHAEL HUDSON : No. If there is land reform, the CIA sends its assassination teams in and you have mass murder, as you
had in Guatemala, Ecuador, Central America and Columbia. The World Bank is absolutely committed against land reform. When the Forgash
Plan for a World Bank for Economic Acceleration was proposed in the 1950s to emphasize land reform and local-currency loans, a Chase
Manhattan economist to whom the plan was submitted warned that every country that had land reform turned out to be anti-American.
That killed any alternative to the World Bank.
BONNIE FAULKNER : Does the World Bank insist on client governments privatizing their public domain? If so, why, and what
is the effect?
MICHAEL HUDSON : It does indeed insist on privatization, pretending that this is efficient. But what it privatizes are
natural monopolies – the electrical system, the water system and other basic needs. Foreigners take over, essentially finance them
with foreign debt, build the foreign debt that they build into the cost structure, and raise the cost of living and doing business
in these countries, thereby crippling them economically. The effect is to prevent them from competing with the United States and
its European allies.
BONNIE FAULKNER : Would you say then that it is mainly America that has been aided, not foreign economies that borrow
from the World Bank?
MICHAEL HUDSON : That's why the United States is the only country with veto power in the IMF and World Bank – to make
sure that what you just described is exactly what happens.
BONNIE FAULKNER : Why do World Bank programs accelerate the exploitation of mineral deposits for use by other nations?
MICHAEL HUDSON : Most World Bank loans are for transportation, roads, harbor development and other infrastructure needed
to export minerals and plantation crops. The World Bank doesn't make loans for projects that help the country develop in its own
currency. By making only foreign currency loans, in dollars or maybe euros now, the World Bank says that its clients have to repay
by generating foreign currency. The only way they can repay the dollars spent on American engineering firms that have built their
infrastructure is to export – to earn enough dollars to pay back for the money that the World Bank or IMF have lent.
This is what John Perkins' book about being an economic hit man for the World Bank is all about. He realized that his job was
to get countries to borrow dollars to build huge projects that could only be paid for by the country exporting more – which required
breaking its labor unions and lowering wages so that it could be competitive in the race to the bottom that the World Bank and IMF
encourage.
BONNIE FAULKNER : You also point out in Super Imperialism that mineral resources represent diminishing assets,
so these countries that are exporting mineral resources are being depleted while the importing countries aren't.
MICHAEL HUDSON : That's right. They'll end up like Canada. The end result is going to be a big hole in the ground. You've
dug up all your minerals, and in the end you have a hole in the ground and a lot of the refuse and pollution – the mining slag and
what Marx called the excrements of production.
This is not a sustainable development. The World Bank only promotes the U.S. pursuit of sustainable development. So naturally,
they call their "Development," but their focus is on the United States, not the World Bank's client countries.
BONNIE FAULKNER : When Super Imperialism: The Economic Strategy of American Empire was originally published in
1972, how was it received?
MICHAEL HUDSON : Very positively. It enabled my career to take off. I received a phone call a month later by someone from
the Bank of Montreal saying they had just made $240 million on the last paragraph of my book. They asked what it would cost to have
me come up and give a lecture. I began lecturing once a month at $3,500 a day, moving up to $6,500 a day, and became the highest-paid
per diem economist on Wall Street for a few years.
I was immediately hired by the Hudson Institute to explain Super Imperialism to the Defense Department. Herman Kahn said
I showed how U.S. imperialism ran rings around European imperialism. They gave the Institute an $85,000 grant to have me go to the
White House in Washington to explain how American imperialism worked. The Americans used it as a how-to-do-it book.
The socialists, whom I expected to have a response, decided to talk about other than economic topics. So, much to my surprise,
it became a how-to-do-it book for imperialists. It was translated by, I think, the nephew of the Emperor of Japan into Japanese.
He then wrote me that the United States opposed the book being translated into Japanese. It later was translated. It was
received very positively in China, where I think it has sold more copies than in any other country. It was translated into Spanish,
and most recently it was translated into German, and German officials have asked me to come and discuss it with them. So the book
has been accepted all over the world as an explanation of how the system works.
BONNIE FAULKNER : In closing, do you really think that the U.S. government officials and others didn't understand how
their own system worked?
MICHAEL HUDSON : Many might not have understood in 1944 that this would be the consequence. But by the time 50 years went
by, you had an organization called "Fifty Years Is Enough." And by that time everybody should have understood. By the time Joe Stiglitz
became the World Bank's chief economist, there was no excuse for not understanding how the system worked. He was amazed to find
that indeed it didn't work as advertised, and resigned. But he should have known at the very beginning what it was all about. If
he didn't understand how it was until he actually went to work there, you can understand how hard it is for most academics to get
through the vocabulary of junk economics, the patter-talk of free trade and free markets to understand how exploitative and destructive
the system is.
BONNIE FAULKNER : Michael Hudson, thank you very much.
MICHAEL HUDSON : It's always good to be here, Bonnie. I'm glad you ask questions like these.
I've been speaking with Dr. Michael Hudson. Today's show has been: The IMF and World Bank: Partners in Backwardness. Dr.
Hudson is a financial economist and historian. He is president of the Institute for the Study of Long-Term Economic Trend, a Wall
Street financial analyst and Distinguished Research Professor of Economics at the University of Missouri, Kansas City. His 1972
book, Super Imperialism : The Economic Strategy of American Empire , a critique of how the United States exploited foreign economies
through the IMF and World Bank, the subject of today's broadcast, is posted in PDF format on his website at michael-hudson.com.
He is also author of Trade, Development and Foreign Debt , which is the academic sister volume to Super Imperialism. Dr. Hudson
acts as an economic advisor to governments worldwide on finance and tax law. Visit his website at michael-hudson.com.
Guns and Butter is produced by Bonnie Faulkner, Yarrow Mahko and Tony Rango. Visit us at
gunsandbutter.org to listen to past programs, comment on shows, or join
our email list to receive our newsletter that includes recent shows and updates. Email us at
[email protected]. Follow us
on Twitter at #gandbradio.
There is nothing natural about money. There is no link to some scarce essential form of money that sets a limit to its creation.
It can be composed of base metal, paper or electronic data – none of which is in short supply. Similarly – despite what you may have
heard about the need for austerity and a lack of certain cash-generating trees – there is no "natural" level of public expenditure.
The size and reach of the public sector is a matter of political choice.
Which puts austerity, the culling of expenditure in the public economy, under some question. For some countries, such as
Greece , the impact of austerity has been devastating. Austerity policies still persist despite numerous
studies arguing that they were entirely misconceived,
based on political choice rather than economic logic. But the economic case for austerity is equally mistaken: it is based on what
can best be described as fairytale economics.
So what were the justifications? Britain, for example, has lived under an austerity regime since 2010, when the incoming Tory-Liberal
Democrat government reversed the Labour policy of raising the level of public expenditure in response to the 2007-8 financial crisis.
The crisis had created a perfect storm: bank rescue required high levels of public spending while economic contraction reduced tax
income. The case for austerity was that the higher level of public expenditure could not be afforded by the taxpayer. This was supported
by "
handbag economics ", which adopts the analogy of states as being like households, dependent on a (private sector) breadwinner.
Under handbag economics, states are required to restrict their expenditure to what the taxpayer is deemed to be able to afford.
States must not try to increase their spending by borrowing from the (private) financial sector or by "printing money" (although
the banks were rescued by doing so by another name – quantitative
easing , the creation of electronic money).
The ideology of handbag economics claims that money is to be generated only through market activity and that it is always in short
supply. Request for increased public expenditure is almost invariably met with the response "where's the money to come from?" When
confronted by low pay in the NHS, the British prime minister, Theresa May, famously declared, "there is no magic money tree".
So where does money come from? And what is money
anyway? What is money?
Until the last 50 years or so the answer seemed to be obvious: money was represented by cash (notes and coin). When money was
tangible, there seemed no question about its origin, or its value. Coins were minted, banknotes were printed. Both were authorised
by governments or central banks. But what is money today? In richer economies the use of cash is
declining rapidly . Most monetary transactions are based on transfers between accounts: no physical money is involved.
In the run up to the financial crisis, the state's role in relation to money held in bank accounts was ambiguous. Banking was
a monitored and licensed activity with some level of state guarantee of bank deposits, but the actual act of creating bank accounts
was, and is, seen as a private matter. There may be regulations and limitations, but there is
no detailed scrutiny of bank accounts and bank lending.
Yet, as the 2007-8 financial crisis showed, when bank accounts came under threat as banks teetered on the edge of bankruptcy,
states and central banks had to step in and
guarantee the security
of all deposit accounts. The viability of money in non-investment bank accounts was demonstrated to be as much a public responsibility
as cash.
This raises fundamental questions about money as a social institution. Is it right that money can be generated by a private choice
to take on debt, which then becomes a liability of the state to guarantee in a crisis?
But far from seeing money as a public resource, under neoliberal handbag economics, money creation and circulation has increasingly
been seen as a function of the market. Money is "made" solely in the private sector. Public spending is seen as a drain on that money,
justifying austerity to make the public sector as small as possible.
This stance, however, is based on a complete misunderstanding of the nature of money, sustained by a series of deeply embedded
myths.
Myths about money
Neoliberal handbag economics is derived from two key myths about the origin and nature of money. The first is that money emerged
from a previous market economy based on barter. The second is that money was originally made from precious metal.
It is claimed that bartering proved to be very inefficient as each buyer-seller needed to find another person who exactly matched
their requirements. A hat maker might barter a hat for some shoes she needs – but what if the shoe maker is in no need of a hat?
The solution to this problem, so the story goes, was to choose one commodity that everyone desired, to act as a medium of exchange.
Precious metal (gold and silver) was the obvious
choice because it had its own value and could be easily divided and carried. This view of the origin of money goes back to at
least the 18th century: the time of economist
Adam Smith .
The 'father of capitalism' Adam Smith, 1723-1790. Matt Ledwinka/Shutterstock.com
These myths led to two assumptions about money that are still current today. First, that money is essentially connected to, and
generated by, the marketplace. Second that modern money, like its original and ideal form, is always in short supply. Hence the
neoliberal
claim that public spending is a drain on the wealth-creating capacity of the market and that public spending must always be as
limited as possible. Money is seen as a commercial instrument, serving a basic, market, technical, transactional function with no
social or political force.
But the real story of money is very different. Evidence from anthropology and history shows that there was no widespread barter
before markets based on money developed, and precious metal coinage emerged long before market economies. There are also many forms
of money other than precious metal coins.
Money as custom
Something that acts as money has existed in most, if not all, human societies. Stones, shells, beads, cloths, brass rods and many
other forms have been the means of comparing and acknowledging comparative value. But this was rarely used in a market context. Most
early human communities lived directly off the land – hunting, fishing, gathering and gardening. The customary money in such communities
was used mainly to celebrate auspicious social events or serve as a way of resolving social conflict.
For example, the Lele people, who lived in what is now the Democratic Republic of Congo in the 1950s, calculated value in
woven raffia
cloths . The number of cloths required for different occasions was fixed by custom. Twenty cloths should be given to a father
by a son on achieving adulthood and a similar amount given to a wife on the birth of a child. The anthropologist Mary Douglas, who
studied the Lele, found
they were resistant to using the cloths in transactions with outsiders, indicating that the cloths had a specific cultural relevance.
Even stranger is the large stone money of the Yap people of Micronesia. Huge circular discs of stone could weigh up to
four metric tons . Not something to put in your
pocket for a trip to the shops.
Try lugging that to the market. Evenfh/Shutterstock.com
There is plenty of other anthropological evidence such as this all over the world, all pointing to the fact that money, in its
earliest form, served a social rather than market-based purpose.
Money as power
For most traditional societies, the origin of the particular money form has been lost in the mist of time. But the origin and
adoption of money as an institution became much more obvious with the emergence of states. Money did not originate as precious metal
coinage with the development of markets. In fact, the new invention of precious metal coinage in around
600BC was adopted
and controlled by imperial rulers to build their empires by waging war.
Most notable was Alexander the Great, who ruled from 336–323BC. He is said to have used
half a ton of silver a day
to fund his largely mercenary army rather than a share of the spoils (the traditional payment). He had more than 20 mints producing
coins, which had images of gods and heroes and the word Alexandrou (of Alexander). From that time, new ruling regimes have
tended to herald their arrival by a new coinage.
Alexandrou. Alex Coan/Shutterstock.com
More than a thousand years after the invention of coinage, the Holy Roman Emperor Charlemagne (742-814), who ruled most of western
and central Europe, developed what became the basis of the British pre-decimal money system: pounds, shillings and pence. Charlemagne
set up a currency system based on 240 pennies minted from a pound of silver. The pennies became established as the denier in France,
the pfennig in Germany, the dinero in Spain, the denari in Italy and the penny in Britain.
So the real story of money as coinage was not one of barterers and traders: it emerged instead from a long history of politics,
war and conflict. Money was an active agent in state and empire building, not a passive representation of price in the market. Control
of the money supply was a major power of rulers: a sovereign power. Money was created and spent into circulation by rulers either
directly, like Alexander, or through taxation or seizure of private holdings of precious metal.
Nor was early money necessarily based on precious metal. In fact, precious metal was relatively useless for building empires,
because it was in short supply. Even in the Roman era, base metal was used, and Charlemagne's new money eventually became debased.
In China, gold and silver did not feature and paper money was being used as early as the 9th century.
A coin from the time of Charlemagne, 768-814 AD. Classical Numismatic Group, CC BY-SA
What the market economy did introduce was a new form of money: money as debt.
Money as debt
If you look at a £20 banknote you will see it says: "I promise to pay the bearer on demand the sum of twenty pounds." This is
a promise originally made by the Bank of England to exchange notes for the sovereign currency. The banknote was a new form of money.
Unlike sovereign money it was not a statement of value, but a promise of value. A coin, even if made of base metal, was exchangeable
in its own right: it did not represent another, superior, form of money. But when banknotes were first invented, they did.
The new invention of promissory notes emerged through the needs of trade in the 16th and 17th centuries. Promissory notes were
used to acknowledge receipt of loans or investments and the obligation to repay them through the fruits of future transactions. A
major task of the emerging profession of banking was to periodically set all these promises against each other and see who owed what
to whom. This process of "clearing" meant that a great amount of paper commitments was reduced to relatively less actual transfer
of money. Final settlement was either by payment with sovereign money (coins) or another promissory note (banknote).
Eventually, the banknotes became so trusted that they were treated as money in their own right. In Britain they became equivalent
to the coinage, particularly when they were united under the banner of the Bank of England. Today, if you took a banknote to the
Bank of England, it would merely exchange your note for one that is exactly the same. Banknotes are no longer promises, they are
the currency. There is no other "real" money behind them.
What promissory notes became. Wara1982/Shutterstock.com
What modern money does retain is its association with debt. Unlike sovereign money, which was created and spent directly into
circulation, modern money is largely borrowed into circulation through the banking system. This process shelters behind another myth,
that banks merely act as a link between savers and borrowers. In fact, banks create money. And it is only in the last decade that
this powerful myth has been finally put to rest by banking and monetary authorities.
It is now
acknowledged
by monetary authorities such as the IMF, the US Federal Reserve and the Bank of England, that banks are creating new money when
they make loans. They don't lend the money of other account holders to those who want to borrow.
Bank loans consist of money conjured out of thin air, whereby new money is credited to the borrowers account with the agreement
that the amount will eventually be repaid with interest.
The policy implications of the public currency being created out of nowhere and lent to borrowers on a purely commercial basis
have still not been taken on board. Nor has basing a public currency on debt as opposed to the sovereign power to create and directly
circulate money free of debt.
The result is that rather than using their own sovereign power over money creation, as Alexander the Great did, states have become
borrowers from the private sector. Where there are public spending deficits or the need for large scale future expenditure, there
is an expectation that the state will borrow the money or increase taxation, rather than create the money itself.
Creators of cash. Creative Lab/Shutterstock.com
Dilemmas of debt
But basing a money supply on debt is ecologically, socially and economically problematic.
Ecologically, there is a problem because the need to pay off debt could drive potentially
damaging
growth : money creation based on repaying debt with interest must imply constant growth in the money supply. If this is achieved
through increasing productive capacity, there will inevitably be pressure on natural resources.
Basing the money supply on debt is also socially discriminatory because not all citizens are in a position to take on debt. The
pattern of the money supply will tend to favour the already rich or the most speculative risk-taker. Recent decades, for example,
have seen a
huge amount of borrowing by the financial sector to enhance their investments.
The economic problem is that the money supply depends on the capacity of the various elements of the economy (public and private)
to take on more debt. And so as countries have become more dependent upon bank-created money, debt bubbles and credit crunches have
become more frequent.
This is because handbag economics creates an impossible task for the private sector. It has to create all new money through bank-issued
debt and repay it all with interest. It has to completely fund the public sector and generate a profit for investors.
But when the privatised bank-led money supply flounders, the money creating powers of the state come back into clear focus. This
was particularly plain in the 2007-8 crisis, when central banks created new money in the process known as quantitative easing. Central
banks used the sovereign power to create money free of debt to spend directly into the economy (by buying up existing government
debt and other financial assets, for example).
The question then becomes: if the state as represented by the central bank can create money out of thin air to save the banks
– why can't it create money to save the people?
It's a mistake to think of the state as a piggybank or handbag. ColorMaker/Shutterstock.com
Money for the people
The myths about money have led us to look at public spending and taxation the wrong way around. Taxation and spending, like bank
lending and repayment, is in a constant flow. Handbag economics assumes that it is taxation (of the private sector) that is raising
the money to fund the public sector. That taxation takes money out of the taxpayer's pocket.
But the long political history of sovereign power over money would indicate that the flow of money can be in the opposite direction.
In the same way that banks can conjure money out of thin air to make loans, states can conjure money out of thin air to fund public
spending. Banks create money by setting up bank accounts, states create money by allocating budgets.
When governments set budgets they do not see how much money they have in a pre-existing taxation piggybank. The budget allocates
spending commitments that may, or may not, match the amount of money coming in through taxation. Through its accounts in the treasury
and the central bank, the state is constantly spending out and taking in money. If it spends more money than it takes in, it leaves
more money in people's pockets. This creates a budget deficit and what is effectively an overdraft at the central bank.
Is this a problem? Yes, if the state is treated as if it was any other bank account holder – the dependent household of handbag
economics. No, if it is seen as an independent source of money. States do not need to wait for handouts from the commercial sector.
States are the authority behind the money system. The power exercised by the banks to create the public currency out of thin air
is a sovereign power.
It is no longer necessary to mint coins like Alexander, money can be created by keystrokes. There is no reason why this should
be monopolised by the banking sector to create new public money as debt. Deeming public spending as being equivalent to bank borrowing
denies the public, the sovereign people in a democracy, the right to access its own money free of debt.
Money should be designed for the many, not the few. Varavin88/Shutterstock.com
Redefining money
This foray into the historical and anthropological stories about money shows that long-held conceptions – that money emerged from
a previous market economy based on barter, and that it was originally made from precious metal – are fairytales. We need to recognise
this. And we need to capitalise on the public ability to create money.
But it is also important to recognise that the sovereign power to create money is not a solution in itself. Both the state and
bank capacity to create money have advantages and disadvantages. Both can be abused. The reckless lending of the banking sector,
for example, led to the near meltdown of the American and European monetary and financial system. On the other hand, where countries
do not have a developed banking sector, the money supply remains in the hands of the state, with massive room for corruption and
mismanagement.
The answer must be to subject both forms of money creation – bank and state – to democratic accountability. Far from being a technical,
commercial instrument, money can be seen as a social and political construct that has immense radical potential. Our ability to harness
this is hampered if we do not understand what money is
and how it works . Money must become our servant, rather than our master.
theconversation.com The views of individual contributors do not necessarily represent those of the Strategic Culture Foundation.
Tags: Capitalism Neoliberalism
Print this article June
24, 2019 | Editor's Сhoice Neoliberalism Has Tricked Us Into Believing a Fairytale About Where Money Comes From Mary MELLOR
There is nothing natural about money. There is no link to some scarce essential form of money that sets a limit to its creation.
It can be composed of base metal, paper or electronic data – none of which is in short supply. Similarly – despite what you may have
heard about the need for austerity and a lack of certain cash-generating trees – there is no "natural" level of public expenditure.
The size and reach of the public sector is a matter of political choice.
Which puts austerity, the culling of expenditure in the public economy, under some question. For some countries, such as
Greece , the impact of austerity has been devastating. Austerity policies still persist despite numerous
studies arguing that they were entirely misconceived,
based on political choice rather than economic logic. But the economic case for austerity is equally mistaken: it is based on what
can best be described as fairytale economics.
So what were the justifications? Britain, for example, has lived under an austerity regime since 2010, when the incoming Tory-Liberal
Democrat government reversed the Labour policy of raising the level of public expenditure in response to the 2007-8 financial crisis.
The crisis had created a perfect storm: bank rescue required high levels of public spending while economic contraction reduced tax
income. The case for austerity was that the higher level of public expenditure could not be afforded by the taxpayer. This was supported
by "
handbag economics ", which adopts the analogy of states as being like households, dependent on a (private sector) breadwinner.
Under handbag economics, states are required to restrict their expenditure to what the taxpayer is deemed to be able to afford.
States must not try to increase their spending by borrowing from the (private) financial sector or by "printing money" (although
the banks were rescued by doing so by another name – quantitative
easing , the creation of electronic money).
The ideology of handbag economics claims that money is to be generated only through market activity and that it is always in short
supply. Request for increased public expenditure is almost invariably met with the response "where's the money to come from?" When
confronted by low pay in the NHS, the British prime minister, Theresa May, famously declared, "there is no magic money tree".
So where does money come from? And what is money
anyway? What is money?
Until the last 50 years or so the answer seemed to be obvious: money was represented by cash (notes and coin). When money was
tangible, there seemed no question about its origin, or its value. Coins were minted, banknotes were printed. Both were authorised
by governments or central banks. But what is money today? In richer economies the use of cash is
declining rapidly . Most monetary transactions are based on transfers between accounts: no physical money is involved.
In the run up to the financial crisis, the state's role in relation to money held in bank accounts was ambiguous. Banking was
a monitored and licensed activity with some level of state guarantee of bank deposits, but the actual act of creating bank accounts
was, and is, seen as a private matter. There may be regulations and limitations, but there is
no detailed scrutiny of bank accounts and bank lending.
Yet, as the 2007-8 financial crisis showed, when bank accounts came under threat as banks teetered on the edge of bankruptcy,
states and central banks had to step in and
guarantee the security
of all deposit accounts. The viability of money in non-investment bank accounts was demonstrated to be as much a public responsibility
as cash.
This raises fundamental questions about money as a social institution. Is it right that money can be generated by a private choice
to take on debt, which then becomes a liability of the state to guarantee in a crisis?
But far from seeing money as a public resource, under neoliberal handbag economics, money creation and circulation has increasingly
been seen as a function of the market. Money is "made" solely in the private sector. Public spending is seen as a drain on that money,
justifying austerity to make the public sector as small as possible.
This stance, however, is based on a complete misunderstanding of the nature of money, sustained by a series of deeply embedded
myths.
Myths about money
Neoliberal handbag economics is derived from two key myths about the origin and nature of money. The first is that money emerged
from a previous market economy based on barter. The second is that money was originally made from precious metal.
It is claimed that bartering proved to be very inefficient as each buyer-seller needed to find another person who exactly matched
their requirements. A hat maker might barter a hat for some shoes she needs – but what if the shoe maker is in no need of a hat?
The solution to this problem, so the story goes, was to choose one commodity that everyone desired, to act as a medium of exchange.
Precious metal (gold and silver) was the obvious
choice because it had its own value and could be easily divided and carried. This view of the origin of money goes back to at
least the 18th century: the time of economist
Adam Smith .
The 'father of capitalism' Adam Smith, 1723-1790. Matt Ledwinka/Shutterstock.com
These myths led to two assumptions about money that are still current today. First, that money is essentially connected to, and
generated by, the marketplace. Second that modern money, like its original and ideal form, is always in short supply. Hence the
neoliberal
claim that public spending is a drain on the wealth-creating capacity of the market and that public spending must always be as
limited as possible. Money is seen as a commercial instrument, serving a basic, market, technical, transactional function with no
social or political force.
But the real story of money is very different. Evidence from anthropology and history shows that there was no widespread barter
before markets based on money developed, and precious metal coinage emerged long before market economies. There are also many forms
of money other than precious metal coins.
Money as custom
Something that acts as money has existed in most, if not all, human societies. Stones, shells, beads, cloths, brass rods and many
other forms have been the means of comparing and acknowledging comparative value. But this was rarely used in a market context. Most
early human communities lived directly off the land – hunting, fishing, gathering and gardening. The customary money in such communities
was used mainly to celebrate auspicious social events or serve as a way of resolving social conflict.
For example, the Lele people, who lived in what is now the Democratic Republic of Congo in the 1950s, calculated value in
woven raffia
cloths . The number of cloths required for different occasions was fixed by custom. Twenty cloths should be given to a father
by a son on achieving adulthood and a similar amount given to a wife on the birth of a child. The anthropologist Mary Douglas, who
studied the Lele, found
they were resistant to using the cloths in transactions with outsiders, indicating that the cloths had a specific cultural relevance.
Even stranger is the large stone money of the Yap people of Micronesia. Huge circular discs of stone could weigh up to
four metric tons . Not something to put in your
pocket for a trip to the shops.
Try lugging that to the market. Evenfh/Shutterstock.com
There is plenty of other anthropological evidence such as this all over the world, all pointing to the fact that money, in its
earliest form, served a social rather than market-based purpose.
Money as power
For most traditional societies, the origin of the particular money form has been lost in the mist of time. But the origin and
adoption of money as an institution became much more obvious with the emergence of states. Money did not originate as precious metal
coinage with the development of markets. In fact, the new invention of precious metal coinage in around
600BC was adopted
and controlled by imperial rulers to build their empires by waging war.
Most notable was Alexander the Great, who ruled from 336–323BC. He is said to have used
half a ton of silver a day
to fund his largely mercenary army rather than a share of the spoils (the traditional payment). He had more than 20 mints producing
coins, which had images of gods and heroes and the word Alexandrou (of Alexander). From that time, new ruling regimes have
tended to herald their arrival by a new coinage.
Alexandrou. Alex Coan/Shutterstock.com
More than a thousand years after the invention of coinage, the Holy Roman Emperor Charlemagne (742-814), who ruled most of western
and central Europe, developed what became the basis of the British pre-decimal money system: pounds, shillings and pence. Charlemagne
set up a currency system based on 240 pennies minted from a pound of silver. The pennies became established as the denier in France,
the pfennig in Germany, the dinero in Spain, the denari in Italy and the penny in Britain.
So the real story of money as coinage was not one of barterers and traders: it emerged instead from a long history of politics,
war and conflict. Money was an active agent in state and empire building, not a passive representation of price in the market. Control
of the money supply was a major power of rulers: a sovereign power. Money was created and spent into circulation by rulers either
directly, like Alexander, or through taxation or seizure of private holdings of precious metal.
Nor was early money necessarily based on precious metal. In fact, precious metal was relatively useless for building empires,
because it was in short supply. Even in the Roman era, base metal was used, and Charlemagne's new money eventually became debased.
In China, gold and silver did not feature and paper money was being used as early as the 9th century.
A coin from the time of Charlemagne, 768-814 AD. Classical Numismatic Group, CC BY-SA
What the market economy did introduce was a new form of money: money as debt.
Money as debt
If you look at a £20 banknote you will see it says: "I promise to pay the bearer on demand the sum of twenty pounds." This is
a promise originally made by the Bank of England to exchange notes for the sovereign currency. The banknote was a new form of money.
Unlike sovereign money it was not a statement of value, but a promise of value. A coin, even if made of base metal, was exchangeable
in its own right: it did not represent another, superior, form of money. But when banknotes were first invented, they did.
The new invention of promissory notes emerged through the needs of trade in the 16th and 17th centuries. Promissory notes were
used to acknowledge receipt of loans or investments and the obligation to repay them through the fruits of future transactions. A
major task of the emerging profession of banking was to periodically set all these promises against each other and see who owed what
to whom. This process of "clearing" meant that a great amount of paper commitments was reduced to relatively less actual transfer
of money. Final settlement was either by payment with sovereign money (coins) or another promissory note (banknote).
Eventually, the banknotes became so trusted that they were treated as money in their own right. In Britain they became equivalent
to the coinage, particularly when they were united under the banner of the Bank of England. Today, if you took a banknote to the
Bank of England, it would merely exchange your note for one that is exactly the same. Banknotes are no longer promises, they are
the currency. There is no other "real" money behind them.
What promissory notes became. Wara1982/Shutterstock.com
What modern money does retain is its association with debt. Unlike sovereign money, which was created and spent directly into
circulation, modern money is largely borrowed into circulation through the banking system. This process shelters behind another myth,
that banks merely act as a link between savers and borrowers. In fact, banks create money. And it is only in the last decade that
this powerful myth has been finally put to rest by banking and monetary authorities.
It is now
acknowledged
by monetary authorities such as the IMF, the US Federal Reserve and the Bank of England, that banks are creating new money when
they make loans. They don't lend the money of other account holders to those who want to borrow.
Bank loans consist of money conjured out of thin air, whereby new money is credited to the borrowers account with the agreement
that the amount will eventually be repaid with interest.
The policy implications of the public currency being created out of nowhere and lent to borrowers on a purely commercial basis
have still not been taken on board. Nor has basing a public currency on debt as opposed to the sovereign power to create and directly
circulate money free of debt.
The result is that rather than using their own sovereign power over money creation, as Alexander the Great did, states have become
borrowers from the private sector. Where there are public spending deficits or the need for large scale future expenditure, there
is an expectation that the state will borrow the money or increase taxation, rather than create the money itself.
Creators of cash. Creative Lab/Shutterstock.com
Dilemmas of debt
But basing a money supply on debt is ecologically, socially and economically problematic.
Ecologically, there is a problem because the need to pay off debt could drive potentially
damaging
growth : money creation based on repaying debt with interest must imply constant growth in the money supply. If this is achieved
through increasing productive capacity, there will inevitably be pressure on natural resources.
Basing the money supply on debt is also socially discriminatory because not all citizens are in a position to take on debt. The
pattern of the money supply will tend to favour the already rich or the most speculative risk-taker. Recent decades, for example,
have seen a
huge amount of borrowing by the financial sector to enhance their investments.
The economic problem is that the money supply depends on the capacity of the various elements of the economy (public and private)
to take on more debt. And so as countries have become more dependent upon bank-created money, debt bubbles and credit crunches have
become more frequent.
This is because handbag economics creates an impossible task for the private sector. It has to create all new money through bank-issued
debt and repay it all with interest. It has to completely fund the public sector and generate a profit for investors.
But when the privatised bank-led money supply flounders, the money creating powers of the state come back into clear focus. This
was particularly plain in the 2007-8 crisis, when central banks created new money in the process known as quantitative easing. Central
banks used the sovereign power to create money free of debt to spend directly into the economy (by buying up existing government
debt and other financial assets, for example).
The question then becomes: if the state as represented by the central bank can create money out of thin air to save the banks
– why can't it create money to save the people?
It's a mistake to think of the state as a piggybank or handbag. ColorMaker/Shutterstock.com
Money for the people
The myths about money have led us to look at public spending and taxation the wrong way around. Taxation and spending, like bank
lending and repayment, is in a constant flow. Handbag economics assumes that it is taxation (of the private sector) that is raising
the money to fund the public sector. That taxation takes money out of the taxpayer's pocket.
But the long political history of sovereign power over money would indicate that the flow of money can be in the opposite direction.
In the same way that banks can conjure money out of thin air to make loans, states can conjure money out of thin air to fund public
spending. Banks create money by setting up bank accounts, states create money by allocating budgets.
When governments set budgets they do not see how much money they have in a pre-existing taxation piggybank. The budget allocates
spending commitments that may, or may not, match the amount of money coming in through taxation. Through its accounts in the treasury
and the central bank, the state is constantly spending out and taking in money. If it spends more money than it takes in, it leaves
more money in people's pockets. This creates a budget deficit and what is effectively an overdraft at the central bank.
Is this a problem? Yes, if the state is treated as if it was any other bank account holder – the dependent household of handbag
economics. No, if it is seen as an independent source of money. States do not need to wait for handouts from the commercial sector.
States are the authority behind the money system. The power exercised by the banks to create the public currency out of thin air
is a sovereign power.
It is no longer necessary to mint coins like Alexander, money can be created by keystrokes. There is no reason why this should
be monopolised by the banking sector to create new public money as debt. Deeming public spending as being equivalent to bank borrowing
denies the public, the sovereign people in a democracy, the right to access its own money free of debt.
Money should be designed for the many, not the few. Varavin88/Shutterstock.com
Redefining money
This foray into the historical and anthropological stories about money shows that long-held conceptions – that money emerged from
a previous market economy based on barter, and that it was originally made from precious metal – are fairytales. We need to recognise
this. And we need to capitalise on the public ability to create money.
But it is also important to recognise that the sovereign power to create money is not a solution in itself. Both the state and
bank capacity to create money have advantages and disadvantages. Both can be abused. The reckless lending of the banking sector,
for example, led to the near meltdown of the American and European monetary and financial system. On the other hand, where countries
do not have a developed banking sector, the money supply remains in the hands of the state, with massive room for corruption and
mismanagement.
The answer must be to subject both forms of money creation – bank and state – to democratic accountability. Far from being a technical,
commercial instrument, money can be seen as a social and political construct that has immense radical potential. Our ability to harness
this is hampered if we do not understand what money is
and how it works . Money must become our servant, rather than our master.
We can already hear the whining from the uber-left's ivory tower as Fed Chair Jerome Powell
unleashed some common-sense on the latest fraud being thrust upon Americans - that of Modern
Monetary Theory (MMT).
As Bloomberg reminds, MMT argues that because America borrows in its own currency, it can
always print more dollars to cover its obligations. As a result, the thinking goes, the U.S.
can always run sustained budget deficits and rack up an ever-increasing debt burden. Helping
grease the wheels for some MMTers is the expectation that the Fed would keep rates low to
contain the cost of servicing America's obligations . With that in mind, Sen. David Perdue,
R-Ga., asked Powell about the theory, saying its advocates back a "spend-now spend-later
spend-often policy that would use massive annual deficits to fund these tremendously expensive
policy proposals." MMT advocates figure the Fed would be a partner in funding these programs
through easy monetary policy.
Powell's response was brief and to the point:
"The idea that deficits don't matter for countries that can borrow in their own currency I
think is just wrong..."
"And to the extent that people are talking about using the Fed -- our role is not to
provide support for particular policies," Powell said.
"Decisions about spending, and controlling spending and paying for it, are really for
you."
Simply put, Powell explained that the increasingly popular theory espoused by progressives
that the government can continue to borrow to fund social programs such as Medicare for
everyone, free college tuition and a conversion to renewable energy in the next decade is
unworkable and makes some "pretty extreme claims."
Earlier in the hearing Powell also noted that "U.S. debt is fairly high to the level of GDP
-- and much more importantly -- it's growing faster than GDP, really significantly faster. We
are going to have to spend less or raise more revenue."
In his book "A Time For Action" written in 1980 William Simon, a former Secretary of the
Treasury tells how he was "frightened and angry". In short, he sounded the trumpet about how
he saw the country was heading down the wrong path. William Simon (1927 – 2000) was a
businessman and a philanthropist.
Simon became the Secretary of the Treasury on May 8, 1974, during the Nixon administration
and was reappointed by President Ford and served until 1977. I recently picked up a copy of
the book that I had read decades ago and while re-reading it I reflected on and tried to
evaluate the events that brought us to today.
Out of this came an article reflecting on how the economy of today had been greatly shaped
by the actions that took place starting around 1979. Interest rates, inflation, and debt do
matter and are more significant than most people realize. Rewarding savers and placing a
value on the allocation of financial assets is important.
The path has again become unsustainable and many people will be shocked when the reality
hits, this is not the way it has always been. The day of reckoning may soon be upon us, how
it arrives is the question. Many of us see it coming, but the one thing we can bank on is
that after it arrives many people will be caught totally off guard. The piece below explores
how we reached this point.
1) It isn't a theory, just an explanation of the US monetary system and how it works. It
isn't advocating the system, it is just stating how it works and how one would need to
operate within it.
2) MMT states that money shouldn't be created (spent into the economy by the gov) unless
the necessary capacity, productivity, workers, resources and assets existed in the economy.
And, if they didn't, they'd have to be created first. This would prevent inflation, not
create it.
Most everyone is misinformed and hasn't done their homework as to what MMT is. The
Libtards have taken an MMT point out of context and run with it. PRINT MONEY! But they omit
the key MMT policy point of... "Print/spend ONLY ONLY ONLY if the productive capacity and
resources are already in the economy to balance any gov spending out." A slightly important
point that they conveniently overlooked due to their 2nd grade understanding of finance,
economics and accounting.
MMT simply doesn't work if a nation 'borrows' its own currency. However, if it does not,
then MMT would at least theoretically be correct because the issue of 'printing money'
(or creating credit) would not be tied to debt but would entail a balancing of the
beneficial and adverse effects of monetary inflation.
There is some evidence that you can print money and spend it and have a vibrant, powerful
economy. It depends on how you spend it. If it's spent on supportive infrastructure such as
energy, transportation, utilities, communications, etc. it's all upwards. If it's spent on
welfare, war machinery, and supporting the bureaucracy the system fails in one
generation.
Underlying the whole premise of MMT is the question; Does the market determine interest
rates or does the fed?
I know the fed determines the federal funds rate but are they the sole dictator of
interest rates? A large portion of our debt is purchased by both domestic and foreign
investors. These are independent people....as well as governments. Will they continue to buy
bonds at 2% interest from a country that has a debt-to-GDP ration of 300% and 10 trillion
dollar yearly deficits??
If US debt gets downgraded, can the fed over-ride the tide of reality and dictate low
interest rates? Can they print enough to buy them all or do they have to maintain a
functioning balance sheet as well?
cut spending - why does usa need fbi branches in every foreign country?
why do we need so many outdated military machines (ahem aircraft carriers)
why does health care and education cost so much (ahem we forget to talk about cost, only
how to pay the fee imposed by the business)
Much of our debt is result of party over country, pointless wars (that Iraq oil is now
controlled by Russia and china..so much for the return on investment there), Afghanistan is a
failed and foolish intervention - just ask russia, syria is a soverign nation leave them
alone, same as venezuala.
Retrench and let the world figure itself out - after pakistan and india nuke each other
back to stone age, lets hope for humanities sake we can get real global cooperative
leadership that doesnt include the capitalist big read white and blue **** smacking foreign
nations on the forehead to further the elites agenda.
"... But otherwise, quite correct. Raise payments on deposits and get more deposits. Raise charges on loans and get fewer loans. I might note that the Fed has supposedly paused rate hikes, but deposits are still exiting the system faster than loans. This result can be had via Fred. Thus the curve is getting more3 inverted. ..."
Large Excess Reserves and the Relationship between Money and Prices - FRB Richmond
At the same time that it has been normalizing its balance sheet, the Fed also has been
raising its target for interest rates. The ability to pay interest on reserves has been
crucial to allowing the Fed to raise its target rate while there are still significant excess
reserves in the banking system. Despite these rate increases, due to various secular reasons,
interest rates are expected to remain historically low for a long time.
--------------
I sample the current expectation, and it is a bit more detailed. The expectation is that
the curve will remain inverted, generally with a zero near the five yer mark, if I judge from
the Treasury curve where the curve has been inverted with a zero near the five yer mark.
The ten year rate will remain historically higher than the five year rate for some time,
evidently. If we measure interest rate as the per annum percent of Real GDP devoted to
nominal federal interest charges, then the interest rate was higher than it has ever been
going back to 1972, briefly (four months ago) , and now occupies the second highest level
since just before the 92 recession, at about 3.5% of GDP. These result can be had in Fred by
dividing nominal interest payments by real GDP.
But otherwise, quite correct. Raise payments on deposits and get more deposits. Raise
charges on loans and get fewer loans. I might note that the Fed has supposedly paused rate
hikes, but deposits are still exiting the system faster than loans. This result can be had
via Fred. Thus the curve is getting more3 inverted.
Why do we know the curve will invert? It is the law, when the Fed loses deposits, loan
charges drop, not rise as would be normal. That is why we all expect the curve to remain
inverted, the law. The law is specifically designed so the Fed holds the current low rate as
long as possible, then does the sudden regime change. The law, written into the law, a rule
requires that we spend time with an inverted yield curve before price adjustment. I emphasis
the law because it is actually typed out, signed and enforced publicly.
The law requires the Fed hold the curve as long as possible, mainly so the pres and
Congress have time to react to changes in term of trade. So, like under Obama, we hold the
line on rates until Obama and the Repubs agree on a tax and spending plan going forward, then
the treasury curve gains traction again. Te law, it is not under debate unless you want to be
arreswted.
The original bronze disks of Rome circulated as currency. The metal money of U.S.
Confederacy circulated that is until the Confederacy became no more.
The point? Money's true nature is law. When a country collapses, then its money
collapses.
Paper money that was good? Lincoln's greenbacks circulated at par. Massachusetts Bills
circulated as money and prevented Oligarchs from England and their attempted takeover. The
colony used the money to make iron goods (like Cannons) and do commerce.
The real statement is this: Money when it becomes unlawful, always collapses.
Massive money printing can happen when too many loans are made, as in the case today as
all private bank credit notes come into being with loan activity -- a little more that
98%.
Driving a currency down with shorts causes new money to be loaned into existence, which in
turn is the underlying cause of hyperinflations. The new credit creation covers the short.
This mechanism always goes along with exchange rate pressures, where your country has to pay
a debt in a foreign currency.
If you had an internal gold currency, which is recognized internationally, then your debts
would be paid in gold, which would collapse your country into depression instead of
inflation.
Bottom line is that money's true nature is law, and making claims about "paper" or "metal"
obscures this fact.
Since both the Fed and your local bank create money from nothing
They also impose some obligations: repayment of principle and interest. Since we
can't create money from nothing, this payback has to come from money somehow created by the
banks as well.
I'm less worried about "disappearing" tax money than I am about misallocated spending
and its consequences -- eg the 'black budget' of the NSA and 'deep state' generally.
Can't we worry about everything ?
Good point about the 'black budget'. But the last time some sort of DOD audit was
attempted the Pentagon accountants' offices got hit by a missile, I mean airliner, on
911.
Internally, a national currency has a value corresponding to demand placed by the
government, such as money for the taxes the state requires of its people. The ups and downs
of Lincoln's Greenback fiat currency, especially its interaction with the value of gold,
demonstrates how currency is tied to confidence in the government, as you suggest.
Externally, a nation's currency usually has value to the extent that a nation has
something to offer others, which makes the currency useful for making a desired purchase.
Today, the "desired purchase" is oil. The dollar is valued because you need dollars to buy
oil, as formerly enforced by diplomatic pressure. Because of US sanctions, trade in oil is
now beginning using rubles, yuan, and most unforgivably, Venezuelan currency! (Like Iraq,
Libya and Syria). If this keeps up, countries will no longer need dollars for their oil, and
$ will have to compete internationally based on other considerations. That won't be pretty.
IMHO, US leaders have dangerously eroding the dollar's pre-eminence by profligate use of
sanctions.
I need to remedy my own deficiencies in this area, but advocates of Modern Monetary
Theory, like Michael Hudson, Steve Keene, and like-minded economists who often post at
nakedcapitalism, make a strong case for a fiat money system, issued and controlled by
state banks, in contrast to the private banks as now.
But objecting to the fact that private bankers charge us interest, and act above the law
and democratic accountability, is such a quaint complaint.
Money quote: " neoliberalism is the fight of finance to subdue society at large, and to
make the bankers and creditors today in the position that the landlords were under
feudalism."
Notable quotes:
"... ... if you take the Bible literally, it's the fight in almost all of the early books of the Old Testament, the Jewish Bible, all about the fight over indebtedness and debt cancellation. ..."
"... neoliberalism is the fight of finance to subdue society at large,and to make the bankers and creditors today in the position that the landlords were under feudalism. ..."
"... They call themselves free marketers, but they realize that you cannot have neoliberalism unless you're willing to murder and assassinate everyone who promotes an alternative ..."
"... Just so long as you remember that most of the strongest and most moving condemnations of greed and money in the ancient and (today) western world are also Jewish--i.e. Isaiah, Jeremiah, Micah, the Gospels, Letter of James, etc. ..."
"... The history of Jewish banking after the fall or Rome is inextricable from cultural anti-judaism of Christian west and east and de facto marginalization/ghettoization of Jews from most aspects of social life. The Jewish lending of money on interest to gentiles was both necessary for early mercantilist trade and yet usury was prohibited by the church. So Jewish money lenders were essential to and yet ostracized within European economies for centuries. ..."
"... Now Christianity has itself long given up on the tradition teaching against usury of course. ..."
"... In John, for instance most of the references to what in English is translated as "the Jews" are in Greek clearly references to "the Judaeans"--and especially to the ruling elite among the southern tribe in bed with the Romans. ..."
Just finished reading the fascinating
Michael Hudson interview I linked to on previous thread; but since we're discussing Jews
and their religion in a tangential manner, I think it appropriate to post here since the
history Hudson explains is 100% key to the ongoing pain us humans feel and inflict. My
apologies in advance, but it will take this long excerpt to explain what I mean:
"Tribes: When does the concept of a general debt cancellation disappear historically?
"Michael: I guess in about the second or third century AD it was downplayed in the Bible.
After Jesus died, you had, first of all, St Paul taking over, and basically Christianity was
created by one of the most evil men in history, the anti-Semite Cyril of Alexandria. He
gained power by murdering his rivals, the Nestorians, by convening a congress of bishops and
killing his enemies. Cyril was really the Stalin figure of Christianity, killing everybody
who was an enemy, organizing pogroms against the Jews in Alexandria where he ruled.
"It was Cyril that really introduced into Christianity the idea of the Trinity. That's
what the whole fight was about in the third and fourth centuries AD. Was Jesus a human, was
he a god? And essentially you had the Isis-Osiris figure from Egypt, put into Christianity.
The Christians were still trying to drive the Jews out of Christianity. And Cyril knew the
one thing the Jewish population was not going to accept would be the Isis figure and the
Mariolatry that the church became. And as soon as the Christian church became the
establishment rulership church, the last thing it wanted in the West was debt
cancellation.
"You had a continuation of the original Christianity in the Greek Orthodox Church, or the
Orthodox Church, all the way through Byzantium. And in my book And Forgive Them Their Debts,
the last two chapters are on the Byzantine echo of the original debt cancellations, where one
ruler after another would cancel the debts. And they gave very explicit reason for it: if we
don't cancel the debts, we're not going to be able to field an army, we're not going to be
able to collect taxes, because the oligarchy is going to take over. They were very explicit,
with references to the Bible, references to the jubilee year. So you had Christianity survive
in the Byzantine Empire. But in the West it ended in Margaret Thatcher. And Father
Coughlin.
"Tribes: He was the '30s figure here in the States.
"Michael: Yes: anti-Semite, right-wing, pro-war, anti-labor. So the irony is that you have
the people who call themselves fundamentalist Christians being against everything that Jesus
was fighting for, and everything that original Christianity was all about."
Hudson says debt forgiveness was one of the central tenets of Judaism: " ... if
you take the Bible literally, it's the fight in almost all of the early books of the Old
Testament, the Jewish Bible, all about the fight over indebtedness and debt
cancellation. "
Looks like I'll be purchasing Hudson's book as he's essentially unveiling a whole new,
potentially revolutionary, historical interpretation.
@ karlof1 with the Michale Hudson link....thanks!!
Here is the quote that I really like from that interview
"
Michael: No. You asked what is the fight about? The fight is whether the state will be taken
over, essentially to be an extension of Wall Street if you do not have government planning.
Every economy is planned. Ever since the Neolithic (era), you've had to have (a form of)
planning. If you don't have a public authority doing the planning, then the financial
authority becomes the planners. So globalism is in the financial interest –Wall Street
and the City of London, doing the planning, not governments. They will do the planning in
their own interest. So neoliberalism is the fight of finance to subdue society at
large,and to make the bankers and creditors today in the position that the landlords were
under feudalism.
"
karlof1, please email me as I would like to read the book as well and maybe we can share a
copy.
And yes, it is relevant to Netanyahoo and his ongoing passel of lies because humanity has
been told and been living these lives for centuries...it is time to stop this shit and grow
up/evolve
@13 / 78 karlof1... thanks very much for the links to michael hudson, alastair crooke and the
bruno maraces articles...
they were all good for different reasons, but although hudson is being criticized for
glossing over some of his talking points, i think the main thrust of his article is very
worthwhile for others to read! the quote to end his article is quite good "The question is,
who do you want to run the economy? The 1% and the financial sector, or the 99% through
politics? The fight has to be in the political sphere, because there's no other sphere that
the financial interests cannot crush you on."
it seems to me that the usa has worked hard to bad mouth or get rid of government and the
concept of government being involved in anything.. of course everything has to be run by a
'private corp' - ie corporations must run everything.. they call them oligarchs when talking
about russia, lol - but they are corporations when they are in the usa.. slight rant..
another quote i especially liked from hudson.. " They call themselves free marketers,
but they realize that you cannot have neoliberalism unless you're willing to murder and
assassinate everyone who promotes an alternative ." that sounds about right...
@ 84 juliania.. aside from your comments on hudsons characterization of st paul "the
anti-Semite Cyril of Alexandria" further down hudson basically does the same with father
coughlin - https://en.wikipedia.org/wiki/Charles_Coughlin..
he gets the anti-semite tag as well.. i don't know much about either characters, so it's
mostly greek to me, but i do find some of hudsons views especially appealing - debt
forgiveness being central to the whole article as i read it...
it is interesting my own view on how money is so central to the world and how often times
I am incapable of avoiding the observation of the disproportionate number of Jewish people in
banking.. I guess that makes me anti-semite too, but i don't think of myself that way.. I
think the obsession with money is killing the planet.. I don't care who is responsible for
keeping it going, it is killing us...
Just so long as you remember that most of the strongest and most moving condemnations
of greed and money in the ancient and (today) western world are also Jewish--i.e. Isaiah,
Jeremiah, Micah, the Gospels, Letter of James, etc.
The history of Jewish banking after the fall or Rome is inextricable from cultural
anti-judaism of Christian west and east and de facto marginalization/ghettoization of Jews from
most aspects of social life. The Jewish lending of money on interest to gentiles was both
necessary for early mercantilist trade and yet usury was prohibited by the church. So Jewish
money lenders were essential to and yet ostracized within European economies for
centuries.
Now Christianity has itself long given up on the tradition teaching against usury of
course.
I too greatly admire the work of Hudson but he consistently errs and oversimplifies
whenever discussing the beliefs of and the development of beliefs among preNicene followers
of the way (as Acts puts is) or Christians (as they came to be known in Antioch within
roughly eight or nine decades after Jesus' death.) Palestinian Judaism in the time of Jesus
was much more variegated than scholars even twenty years ago had recognized. The gradual
reception and interpretation of the Dead Sea Scrolls in tandem with renewed research into
Phili of Alexandria, the Essenes, the so-called Sons of Zadok, contemporary Galilean zealot
movements styles after the earlier Maccabean resistance, the apocalyptism of post exilic
texts like Daniel and (presumably) parts of Enoch--all paint a picture of a highly diverse
group of alternatives to the state-Church once known as Second Temple Judaism that has been
mistaken as undisputed Jewish "orthodoxy" since the advent of historical criticism.
The
Gospel of John, for example, which dates from betweeen 80-120 and is the record of a much
earlier oral tradition, is already explicitly binitarian, and possibly already trinitarian
depending on how one understands the relationship between the Spirit or Advocate and the Son.
(Most ante-Nicene Christians understood the Spirit to be *Christ's* own spirit in distributed
form, and they did so by appeal to a well-developed but still largely under recognized strand
in Jewish angelology.)
The "theological" development of Christianity occurred much sooner
that it has been thought because it emerged from an already highly theologized strand or
strands of Jewish teaching that, like Christianity itself, privileged the Abrahamic covenant
over the Mosaic Law, the testament of grace over that of works, and the universal scope of
revelation and salvation as opposed to any political or ethnic reading of the "Kingdom."
None
of these groups were part of the ruling class of Judaean priests and levites and their
hangers on the Pharisees.
In John, for instance most of the references to what in English is
translated as "the Jews" are in Greek clearly references to "the Judaeans"--and especially to
the ruling elite among the southern tribe in bed with the Romans.
So the anti-Judaism/Semiti
of John's Gispel largely rests on a mistranslation. In any event, everything is much more
complex than Hudson makes it out to be. Christian economic radicalism is alive and well in
the thought of Gregory of Nysa and Basil the Great, who also happened to be Cappadocian
fathers highly influential in the development of "orthodox" Trinitarianism in the fourth
century.
I still think that Hudson's big picture critique of the direction later Christianity
took is helpful and necessary, but this doesn't change the fact that he simplifies the
origins, development, and arguably devolution of this movement whenever he tries to get
specific. It is a worthwhile danger given the quality of his work in historical economics,
but still one has to be aware of.
Newly elected Representative Alexandria Ocasio-Cortez recently
said that Modern Monetary Theory (MMT) absolutely needed to be "a larger part of our
conversation." Her comment shines a spotlight on MMT. So what is it? According to Wikipedia , it is:
"a macroeconomic theory that describes the currency as a public monopoly and unemployment as
the evidence that a currency monopolist is restricting the supply of the financial assets
needed to pay taxes and satisfy savings desires."
It is uncontroversial to say that the Federal Reserve has a monopoly on the dollar. So let's
look at the second proposition. Unemployment, MMT holds, is evidence that the supply of dollars
is restricted.
In other words, more money causes more employment!
This does not sound very different from what the New Keynesians say. Keith analyzed former
Fed Chair Janet Yellen's seminal paper on the economics of labor for
Forbes :
"Here is their [Yellen and co-author Ackerloff] tenuous chain of logic:
Disgruntled employees don't work hard, and may even sabotage machinery.
So companies must overpay to keep them from slacking.
Higher pay per worker means fewer workers, because companies have a finite budget.
Yellen concludes -- you guessed it:
inflation provides corporations with more money to hire more people."
As a footnote, MMT is referred to as neo-Chartalism, and there is some evidence that Keynes
was influenced by Chartalism (which goes back to at least
1905).
On Thursday, Marketplace published a piece on
MMT . Things are heating up for this hot new (old) idea. Marketplace presented a "bathroom
sink" model of the economy (yes, really!)
To wrap your brain around this concept, picture a bathroom sink. Think of the government and
its ability to create more money whenever it needs to as the faucet and that bucket area of the
sink where the water goes as the economy.
The government controls how much money, or water, is flowing into the economy. It spends
money into the economy by building interstates or paying farm subsidies or funding
programs.
"And so as those dollars reach the economy, they begin to fill up that bucket, and what you
want to do is be very mindful about how full that bucket is getting or you're going to get an
inflation problem," [Bernie Sanders economic advisor Stephanie] Kelton said.
Inflation is where the sink overflows. If that happens, Kelton said there are two ways to
fix it: "You can slow the flow of dollars coming into that bucket. That means the government
then has to start slowing it's [sic] rate of spending, or you can open up the drain and let
some of those dollars out of the economy. And that's what we do when we collect taxes."
This sounds a lot like the Quantity Theory of Money (QTM). This view often paints a picture
of pouring water into a container. The higher the water level, the higher the general price
level.
QTM by itself does not promote the idea that more money causes more employment. Only that
more money causes more rising prices. But Keynes did. And the New Keynesians like Yellen
do.
So what makes MMT unique?
According to Stephanie Kelton, in the Marketplace article:
"If you control your own currency and you have bills that are coming due, it means you can
always afford to pay the bills on time," Kelton said. "You can never go broke, you can never be
forced into bankruptcy. You're nothing like a household."
Keynes taught us about government deficits to bolster employment and government deficits to
respond to a crisis. MMT teaches us how to get to the next level. The voters want free goodies.
Traditional economics says "there ain't no such thing as a free lunch."
MMT says "oh yes there is!"
At least until you get to too much inflation . The Monetarists would agree, don't print too
much money or you get too much inflation . Much of the gold community also agrees. If you print
too much money, then you get skyrocketing inflation .
Never mind that this prediction was proven wrong in the post-2008 policy response. We want
to highlight that the Keyesians, the Monetarists, the MMTers, and even many Austrians largely
agree. The problem with too much money printing is too much inflation . They quibble about what
is too much, but they agree on the "bathroom sink" model of the economy.
In the words of early 20 th century physicist Wolfgang Pauli, QTM "is not even
wrong ."
We define inflation as the counterfeiting of credit. That is, fraudulently taking money from
a saver. It is called borrowing , but the borrower hasn't got the means or intent to repay.
Additionally, when everyone thinks that the government's debt paper is money , the saver
doesn't even know or consent to the borrowing.
There are lies, damnlies, and statistics. Then there are a few pugnacious, in your face,
gaslighting make-you-believe-in-unreality cargo cults. We will explore this in full, below.
During World War II, the US military set up operations on certain Pacific islands. They
built landing strips, where they landed planes bringing in supplies and men. They hired the
local tribesmen as labor, and paid them stuff that was ordinary to Americans, but wondrous to
the islanders. Like canned food. The islanders really looked forward to when a plane would
land, and they would get some cargo.
After the war, the US military pulled up stakes and left. But the islanders still wanted the
cargos. So they set up these elaborate charades, with tiki torches instead of flashlights, and
coconut shell mockup headphones. They went through the motions that they thought the Americans
did. To try to bring back the cargos.
Huh. What does that remind you of? An elaborate charade, with bogus props, going through the
motions of a civilization they don't understand to try to produce desired results -- free
goodies?
Modern Monetary Theory is a cargo cult.
It's ironic that the name includes the word modern . If we said that a pile of greasy rags
sealed in a dark closet would spontaneously generate rats, would you call that a modern theory?
If we said that sickness is caused by bad humors, and the cure is bloodletting by leaches,
would you say this is modern ? How about the idea that the Sun and the planets orbit the Earth.
Is this modern , too?
Not only are these not modern -- they are, in fact, old ideas that were tossed into the
garbage heap -- they are not theories either. A theory is an explanation of reality, which
integrates many observed facts and contradicts none. Modern Monetary Theory is neither modern
nor a theory .
MMT is not an attempt to explain reality, but to deny it.
Even a child understands something. Even people in the ancient world understood it, too. If
you lend a bushel of wheat to your neighbor, and he does not repay it, you suffer a loss. You
are worse off, compared to before. And so is the borrower (who at the least ruins his
credit).
MMT is based on denying this universal truth. Common sense says that if Peter lends to Paul,
and Paul does not repay, then Peter is impoverished. Common sense says that Peter would not
lend to Paul if he knew that Paul would renege on his obligation.
MMT says that a modern economy has a modern currency, which is just the state's paper. And
in a modern economy, the modern state can print more with no concerns other than "overflowing
the bathroom sink". Get that, the only concern is prices could rise too fast. And so long as
this does not occur, then the state can get away with it. Only, there is nothing to get away
with. It's perfectly fine.
In a cargo cult, the people did not recognize the difference between fake coconut shell
headphones, and real headphones. Or flashlights and tiki torches. So they made crude copies as
best they could. They went through the motions to summon the sky gods to come down to earth,
with cargo.
Let's look at the mental gymnastics. They imbued magical -- that is outside the principle of
cause and effect -- characteristics to their props. Failing to understand that airplanes are
created by men, and that it takes a great deal of planning (not to mention wealth) to fly a
plane full of cargo from America to the middle of the Pacific, they imagined that, somehow, the
act of using the headphones and the flashlights caused the plane and its cargo to come. The
headset is tokenized, viewed as a magical talisman.
What a cargo cult does to headphones, MMT does to money. First, the cargo cult substitutes
coconut shells held together with twisted vine for headphones. What they wear when attempting
to summon the sky gods is not a headset, but a surrogate. MMT (as does Keynesianism and
Monetarism) substitutes government debt paper for money.
As an aside, even a gold-redeemable certificate is not money. Think about it. You can bring
this piece of paper to the teller window. You push it across the counter. The teller pushes
back the gold coin. If the word for the paper is money, then what is the word for the gold for
which it redeems?
Anyways, modern monetary systems use irredeemable paper. It's not gold-redeemable, but even
worse. And they treat this paper as if it were money .
And it goes even farther. Previous theories felt the need to at least pay lip service to
repaying debt. They couldn't quite get to the point of openly admitting that the debt is never
to be repaid. Keynes famously quipped that, "in the long run, we are all dead," creating
ambiguity about the intention to repay. Monetarists generally promote the idea that if the
economy grows fast enough, the debt will shrink as a proportion of GDP.
The Keynesians don't have the intention to repay. And the Monetarists don't look at
Marginal
Productivity of Debt , which would show them that their idea isn't working. But they don't
go as far as the MMT'ers.
MMT says that the government is unlike deadbeat-debtor Paul. There is no need for the
government to repay. It's the same as the cargo cult. The cargo cult has no concept for
capital. The islanders do not produce in excess of what they consume, accumulating tools and
technology to increase their productivity. They subsist, and assume that this is how the world
works.
MMT has no concept for capital either. It puts blinders on, declaring that consumer prices
are the only thing to measure. The only risk is if they rise too fast. And the MMT'ers refuse
to see anything else.
In our discussion of Yield Purchasing Power , we
introduced a farmer who sells off the back 40 (acres), chops down the apple orchard to sell the
fruitwood, tears down the old barn to sell the planks, and even dismantles the tractor. And why
does he do this? He gets cash in exchange. And the cash is far in excess of his crop yield. Why
struggle and sweat to produce $20,000 a year by growing food, when you can sell off the piece
of the farm for $20,000,000.
The monetary system incentivizes the farmer to trade productive capital for paper credit
slips. The incentive is that this paper has a greater purchasing power than what he can earn by
operating the farm. He can trade his farm for far more groceries, than the food he could grow
on it.
This is the same old game. But MMT gives it a new name -- and asserts a bolder defense.
MMT'ers don't want to see, and they want you not to see, that the lender gives up good capital
but the borrower is just consuming it.
MMT justifies the naked consumption of capital.
Supply and Demand Fundamentals
The prices of the metals rose this week, especially on Friday. The exchange rate of gold
went up twenty two US dollars, and that of silver 41 US cents.
As we will discuss below, we think that there is a rethinking of gold occurring in the
market. And we don't just mean celebrities like Sam Zell buying gold for the first time.
There is a sense of déjà vu. Starting in mid-2004, the Fed went on one of its
rate-hiking sprees. It did not manage to get as high as the previous peak of 6.5%, set prior to
the previous crisis. In 2006, this rate topped out at 5.25%. In both the crisis of 2001, and
the crisis of 2008, the Fed had begun cutting rates before the official indication of recession
, and the cuts occurred more rapidly than the preceding hikes.
The cuts were too little and/or too late to avert disaster.
The problem is that during the period of low rates, firms are incentivized to borrow. They
finance projects which generate a low rate of return. These projects would not be financed, but
for the even-lower cost of borrowing. When rates rise, it does not increase the rate of return
produced by marginal projects (likely the opposite). So borrowers are squeezed.
The Fed eventually comes along with its fix -- even lower rates. While this is too late to
save firms that are teetering into default, it does enable the next wave of borrowing for
even-poorer-projects.
And now, here we are. Since its first tepid hike in December 2005, the Fed has been hiking
for just over three years so far. It has hit a rate well under half of the peak of 2006-2007.
The president has publicly urged the Fed to reverse policy course. And the Fed said it is
listening to the market, and may have paused hiking for now.
Meanwhile, the Fed Funds rate may be lower than the previous peak but it is much higher than
it was from the end of 2008 through the end of 2015. For seven years, it was basically zero.
Nobody knows how many dollars' worth of projects were financed that were only justified, only
possible, due to this zero interest-rate policy. But it was surely a lot (we would guess at
least trillions).
And now the rate is up to 2.25%. Many of those projects are no longer justified, and can no
longer service the debt that finances them.
And none of this is a secret. It is well known to the borrowers, of course. And their
creditors. And the Fed. And hedge funds and other sophisticated speculators. And not just in
general theory, but lists of specific companies and the rollover dates of their bond
issues.
Rollover is key to this. After decades of falling interest, everyone has learned the game of
using short-term financing. But the risk is that it must be rolled over. And when it is rolled,
the previous low-rate is replaced with the higher, current rate. And that's when we find out
which businesses can still pay.
So what will the Fed do? The next programs will have a new name, but the Fed must lower the
cost of capital if it wants to keep the game going.
Is this time going to be the total collapse of the dollar? We don't believe so, as there is
still a lot of capital remaining and more is flooding in as people abandon the
dollar-derivative currencies. So we think of it as déjà vu, the Fed is likely to
do something similar to last time.
And that is an environment where even the non-goldbugs see clear and compelling arguments
for owning gold.
It could be that the timing is not now. It could be that it will take months or years to
arrive at this point. We make no predictions of timing. However, we note that the Monetary
Metals Gold Fundamental Price has been in a rising trend since mid-October. Its low was on
October 9 ($1,266).
Silver is similar, but a bit different. The low in its fundamental occurred in late November
($14.37). But it's up like a rocket since then, now about two bucks higher.
We are at an interesting point.
Let's take a look at the only true picture of the supply and demand fundamentals of gold and
silver. But, first, here is the chart of the prices of gold and silver.
@tac The Torah,
biblical and Quran stories were written in agrarian societies where capitalistic enterprise
hardly existed.
Loans were for not dying of hunger in the period between when the food of the last harvest
had been used completely, and the new harvest was still in the future.
Thus interest was seen as blackmailing people, they needed money to prevent dying of
starvation.
There was enterprise long ago, and trade over long distances, in the early centuries for
example swords from Damascus were famous in Europe, and exported to Europe.
Investment for business was the exception, even the first iron smelting installations were
simple, those who wanted them could build them by themselves.
The idea that invested money could yield money came later, when installations became more
complex, ships bigger, etc.
With investment came risk, there was not much risk in consumptive loans, they normally could
paid out of the coming harvest.
And so the problem began, a church not understanding capitalism, an agrarian society based on
barter changing into a money using capitalistic society.
Commercial people had no problem with interest, even now Muslims do not have problems with
interest.
What they do is simply giving interest other names, such as a fine for repaying late.
It has been agreed that the repayment will be late, so anybody is happy.
@renfro And
there you have it in a nutshell: usary -- the usurper of civilization, the enslaver of
humanity, the seed of ultimate degeneracy. It seems humanity is adverse to learn from
history. It is an interesting side-note that both Christianity and Islam both prohibit the
use of usury (a consideration worthy of mention when one contemplates the ongoing wars in the
ME) and some who here take shots at Farakhann, 'neo-nazis', blue-hair and other deplorables.
Our dilemma today is the same that occurred in Rome. Our country and people will
suffer the same fate if usury continues as it has. From the onset of history, it has
been the moneychangers, who have exploited mankind for pure profit. Usury is an abomination
against God's statutes, which manipulates and destroys people, families, and nations. It is
by the profits made from usury used to attack Christianity. One needs only to ask- who is
in control of usury worldwide? Didn't Rome suffer from these same people? Usury brings
forth an insidious side to all people. The temptation to borrow is powerful, and it always
polarizes lender against borrower where the former becomes the master and the later, the
slave. As a vice, neighbor is pitted against his neighbor, and nation against nation.
[...]
The Roman government was far too corrupt already with its politicians bought by
moneychangers for any fledgling Christian sect to have an affect on its decline. The
moneychanger's demand was perpetually self-serving, which was disparate to the common good
of the populace. Originally, Rome was founded as a republic. The unchecked influence of the
moneychangers caused it to change into a democracy. A republic is derived through the
election of public officials whose attitude toward property is respected in terms of law
for individual rights. A democracy is derived through the election of public officials
whose attitude toward property is communistic and respects the "collective good" of the
population instead of the individual. This is the resultant system that moneychangers bring
to civilization. The subversion of power is a sleight of hand that changes the right of the
individual into what is often called the "collective good" of the people (communistic),
which is always controlled by an alliance of powerful interests.
There is no reference in the article to the moneychangers and their lawyers sowing the
seeds for Roman society to suffocate under its own lethargic weight. Lawyers were indeed a
problem to Rome. The Romans were so concerned by lawyers' opprobrious effect on public
morale that they attempted to curb their influence. In 204 BC, the Roman Senate passed a
law prohibiting lawyers from plying their trade for money. As the Roman republic declined
and became more democratic, it became increasingly difficult to keep lawyers in check and
prevent them from accepting fees under the table. Indeed, they were very useful to the
moneychangers. The lawyers fed upon corruption and accelerated the downward plunge of Roman
civilization. Some wealthy Romans began sending their sons to Greece to finish their
schooling, to learn rhetoric (Julius Caesar was one example) -- a lawyer's cleverness in
oration. This compounded Rome's growing woes.
[...] The moneychangers destroyed Rome from within by first monopolizing usury, monopolizing
the precious mineral trade and then disproportionately magnifying the temporal businesses
of prostitution (including pedophilia and homosexuality), and slavery. Constantine
(306-337 AD) was the first Roman emperor to issue laws, which radically limited the rights
of Jews as citizens of the Roman Empire, a privilege conferred upon them by Caracalla in
212 AD. The laws of Constantius (337-361 AD) recognized the Jewish domination of the slave
trade and acted to greatly curtail it. A law of Theodosius II (408-410 AD), prohibited Jews
from holding any advantageous office of honor in the Roman state. Always the impetus was
buying influence concerning their trade.
[...] Usury has been the opiate that has ruined the ingenuity of many of its civilizations. As
this Jewish craft spread, the people increasingly suffered from the burdens of
indebtedness. So troubling was the effects of usury that Lex Genucia outlawed usury in
342 BC. Nevertheless, ways of evading such legislation were found and by the last period of
the Republic, usury was once again rife. Emperors like Julius Caesar and Justinian tried to
limit the interest rate and control its devastating effects (Birnie, 1958).
Entertainment was a way to temporarily set aside the burdens of indebtedness. It was a
way to festively indulge in all the glory that Rome had to offer. Rome soon became drunk on
hedonism. Collectively, entertainment helped disguise the collapsing of a great power.
Spectator blood sports, brothels, carnivals, festivals, and parties substituted for
everything that was wrong with Rome.
[...] Rome became a multi-cultural state much like our own in the United States. Indeed, it
was truly an international city. Foreigners of every nation resided and worked there. The
Romans soon intermarried and had children with the many foreigners. This included
concubines from the numerous slaves won through war. Rome had an extraordinary large
slave population and was estimated to make up about two-thirds of its population at one
time.
[...] Eventually, the Romans lost their tribal cohesion and identity. The population of Rome
had changed and so did its character. Increasing demands were made of the ruling
patricians. The aristocrats tried to appease the masses, but eventually those demands could
not be sustained. Rome had become bankrupt. The effects of usury polarized the patrician
class against an increasingly dispossessed and burdened class of citizens.
[...]
Rome was bankrupt and was collapsing. The parasitic nature of usury and its effect on
government was too complex for the uneducated plebeians to understand (see Addendum for
an illustration of usury's power). Indeed, it was the moneychangers with the use of
their lawyers that destroyed pagan Rome. The Jewish interests did not control all
usury. However, they were a people well recognized as being extremely loyal to each
other and adept in the black craft of usury. To all others (gentiles) they showed hate and
enmity. Throughout history the weapon of usury is used again and again to destroy
nations.
[...]
Fortunately, the writings of Cicero survived the burning of libraries. In the case against
Faccus, we can see the crafts of the Jews are the same today. The Jews clearly held
great influence in politics as a result of their professions and profited immensely at the
expense of Rome. We can further deduce by the case of Faccus that the Jews were not
concerned with the interests of Rome, but rather for their own interests. The Jewish
gold was being shipped from Rome and its provinces throughout the empire to Jerusalem. Why?
We also know that the Jews had utter contempt and hatred of the Romans. This contempt is
demonstrated by their breaking of Roman law, which Faccus tried to uphold. If we look
closer, we see that gold has a very special meaning to all Jewry unlike any other
people.
[...] There are enough records for us to piece together what actually occurred in Rome that
led to its downfall. Rome fell as a result of corruption and the lack of cohesion of its
own people. But, it was the instrument of usury that brought about this corruption and
allowed its gold and silver to be controlled by Jewish interests.
[...] It was Christianity that put an end to the destructive nature of usury on its people
(see addendum for usury example). Rome's treasury became barren as a result of the
moneychangers. It weakened the Roman Empire immeasurably, and thrust untold millions in
poverty, debt, and in prison. It was Christianity that halted the influence of the Jews and
their destructive trades and practices. And, the Christian faith spread throughout the
former Roman Empire. All of the European people eventually became Christianity's vanguard
and champion. Without the strict adherence to the moral ethos, any civilization will
devolve into the religion of Nimrod.
I apologize in advance to Lambert for adding this link to his terrific daily water cooler
topics, but since Yves and NC were specifically mentioned I thought it would be interesting
to share. The video is titled, "Should we trust MMT?" with Joe Bongiovanni. It is 48 minutes
long and I only made it about 20 minutes after becoming too annoyed. Yves/NC are mentioned at
18 minutes and 40 seconds in. Joe says he was part of the NC commentariat for years, but was
banned due to his thoughts that MMT proponents are misleading and don't "tell the real
truth".
Not being an economist or comfortable enough with my understanding of MMT to know if what
he was saying had merit. Plus the style and lack of preparation from the interviewer other
than wanting her expert to debunk MMT for her right wing followers.
I'm 30 min in .skip ahead to that point to get to the meat of his discussion.
He keeps repeating that he wants monetary "reform", so that the money system 'works for
the people'. But he doesn't say what that change is or why MMT gets it wrong in its
understanding of how the system works.
He says "govt doesn't create money by spending". Except, yes, it does. It then chooses to
offset that spending later with bond auctions.
He doesn't make a distinction between public and private debt, doesn't distinguish between
currency users and issuers. No distinction between stocks and flows. No discussion of
capacity constraints, inflation.
He actually fear-mongers about the debt around the 38-39 min mark. Says there's going to
be tough times when we get austerity (in addition to environment collapsing).
He talks a lot about how 'the monetary system works', but it's clear to me he doesn't get
how the banking system works. I don't think you can understand one without the other very
well.
MMT can offer a clear explanation of why:
1) 30 yr treasury bond yields fell rapidly in the 1980s while deficits were exploding.
2) 30 yr treasury bond yields rose in 2000, hitting 7% on the 30 yr at one point, when the
government was running surpluses.
3) Japan has a functional currency and economy with massive debts and deficits for many
years.
Conventional economics has NO explanation for the above phenomenon.
Cheers Johnny – he's been here before and took umbrage to the NC crew saying that
taxation for revenue is obsolete. Don't make me go there.
Said NC doesn't like criticism and Yves had banned him I'd be banned too if I thought
that!!
Got some trolls on Youtube worked up. I'll go and finish them off after I do a little more
digging on Joe and his Kettle Pond Institute for Debt Free Money.
He had a go at Bill Mitchell on this post recently:
IMO, Tvc, if you want some relevant stuff, look at how Jimmy Dore (a comedian turned
activist) gets his head around MMT – Stephanie Kelton was good and has been linked here
and also Chris Hedges
People like JD are very influential and I can see a heightened awareness out there that we
are not going to get anywhere now by being polite and civil.
I don't remember the details, but he was banned for behavior. The problem that so often
happens is that the people on losing sides of arguments here (as in not just the moderators
but the commentariat does a good job of debunking their claims) is they don't give up and
start going into various forms of bad faith argumentation: broken record, straw manning, or
just plain getting abusive. Then they try to claim they were banned due to their position, as
opposed to how they started carrying on when they couldn't make their case.
The AMI people are a real problem, and the worst is that they use enough lingo that sounds
MMT-like that they confuse people about MMT. They are also presumptuous as hell. I was part
of an Occupy Wall Street group, Alternative Banking. Every week, a group came and kept trying
to hijack the discussion to be about Positive Money. They got air time because that's Occupy
but everyone else regarded them as an annoyance.
One Sunday, the president of AMI showed up in a suit, uninvited, and expected to be able
to take over the group and lecture. The rules were everyone on stack got only 2 or 3 minutes
each (I forget how long) and then had to cede the floor. Since everyone else was too polite,
I was the one who had to shut him up by blowing up at him and telling him he was totally out
of line and had no business abusing the group's rules. That is the only time in my WASPy life
I have carried on like that in a public setting. Broke up the meeting, which reconvened only
after he left.
Why does the dollar continue to possess a hegemonic status a decade after the crisis that
seemed to signal an end to U.S.-U.K. dominated finance? Gillian Tett of the
Financial Times offers several reasons. The first is the global reach of U.S.
based banks. U.S. banks are seen as stable, particularly when compared to European banks. Any
listing
of the largest international banks will be dominated by Chinese banks, and
these institutions have expanded their international business . But the Chinese banks will
conduct business in dollars when necessary. Tett's second reason is the relative strength of
the U.S. economy, which grew at a 4.1% pace in the second quarter. The third reason is the
liquidity and credibility of U.S. financial markets, which are superior to those of any
rivals.
The U.S. benefits from its financial dominance in several ways.
Jeff Sachs of Columbia University points out that the cost of financing government deficits
is lower due to the acceptance of U.S. Treasury securities as "riskless assets." U.S. banks and
other institutions earn profits on their foreign operations. In addition, the use of our
banking network for international transactions provides the U.S. government with a powerful
foreign policy tool in the form of sanctions
that exclude foreign individuals, firms or governments from this network .
There are risks to the system with this dependence. As U.S. interest rates continue to rise,
loans that seemed reasonable before now become harder to finance. The burden of
dollar-denominated debt also increases as the dollar appreciates. These developments exacerbate
the repercussions of policy mistakes in Argentina and Turkey, but also affect other countries
as well.
The IMF in its latest Global Financial Stability (see also here )
identifies another potential destabilizing feature of the current system. The IMF reports that
the U.S. dollar balance sheets of non-U.S. banks show a reliance on short-term or wholesale
funding. This reliance leaves the banks vulnerable to a liquidity freeze. The IMF is
particularly concerned about the use of foreign exchange swaps, as swap markets can be quite
volatile. While
central banks have stablished their own network of swap lines , these have been
criticized .
The status of the dollar as the primary international currency is not welcomed by foreign
governments. The Russian government, for
example, is seeking to use other currencies for its international commerce. China and
Turkey have offered some support, but China is invested in promoting the use of its own
currency. In addition, Russia's dependence on its oil exports will keep it tied to the
dollar.
But interest in formulating a new international payments system has now spread outside of
Russia and China.
Germany's Foreign Minister Heiko Maas has called for the establishment of "U.S. independent
payment channels" that would allow European firms to continue to deal with Iran despite the
U.S. sanctions on that country.
Chinese electronic payments systems are being used in Europe and the U.S. The dollar may
not be replaced, but it may have to share its role as an international currency with other
forms of payment if foreign nations calculate that the benefits of a new system outweigh its
cost. Until now that calculation has always favored the dollar, but the reassessment of
globalization initiated by the Trump administration may have lead to unexpected
consequences.
Our commenter psychohistorian and others interested in public banking, and the
concept of money as a public utility rather than a private (and profit-gouging) instrument,
may want to watch the latest Keiser Report, which has an interview with Ellen Brown.
Brown relates that the city of Los Angeles has on its ballot for the November elections a
measure to create a city-owned bank. This was put on the ballot by the city council itself,
prompted by a groundswell of support coming from constituents.
The rapid-fire interview doesn't go deeply into the politics behind this citizen
initiative, but it seems like a happy story of young millennials looking for an alternative
to Wall Street banks, and learning from Brown and others about the strong value of the public
bank.
An interesting turn of events. The interview starts in the second half of the show at
14:40:
"... By L. Randall Wray, Professor of Economics at Bard College. Originally published at New Economic Perspectives ..."
"... Treatise on Money ..."
"... State Theory of Money ..."
"... Money and Credit in Capitalist Economies ..."
"... Understanding Modern Money ..."
"... Modern Money Theory ..."
"... Payback: Debt and the shadow side of wealth ..."
"... Reclaiming the State ..."
"... Austerity: The History of a Dangerous Idea ..."
"... permanent Zirp (zero interest rate policy) is probably a better policy since it reduces the compounding of debt and the tendency for the rentier class to take over more of the economy. ..."
"... that one of the consequences of the protracted super-low interest rate regime of the post crisis era was to create a world of hurt for savers, particularly long-term savers like pension funds, life insurers and retirees. ..."
"... income inequality ..."
"... even after paying interest ..."
"... It seems to me that the US macroeconomic policy has been operating under MMT at least since FDR (see for example Beardsley Ruml from 1945). ..."
"... After learning MMT I've occasionally thought I should get a refund for the two economics degree's I originally received. ..."
"... "Taxes or other obligations (fees, fines, tribute, tithes) drive the currency." ..."
"... "JG is a critical component of MMT. It anchors the currency and ensures that achieving full employment will enhance both price and financial stability." ..."
I was asked to give a short presentation at the MMT conference. What follows is the text
version of my remarks, some of which I had to skip over in the interests of time. Many readers
might want to skip to the bullet points near the end, which summarize what I include in
MMT.
I'd also like to quickly respond to some comments that were made at the very last session of
the conference -- having to do with "approachability" of the "original" creators of MMT. Like
Bill Mitchell, I am uncomfortable with any discussion of "rockstars" or "heroes". I find this
quite embarrassing. As Bill said, we're just doing our job. We are happy (or, more accurately
pleasantly surprised) that so many people have found our work interesting and useful. I'm happy
(even if uncomfortable) to sign books and to answer questions at such events. I don't mind
emailed questions, however please understand that I receive hundreds of emails every day, and
the vast majority of the questions I get have been answered hundreds, thousands, even tens of
thousands of times by the developers of MMT. A quick reading of my Primer or search of NEP (and
Bill's blog and Warren's blogs) will reveal answers to most questions. So please do some
homework first. I receive a lot of "questions" that are really just a thinly disguised pretense
to argue with MMT -- I don't have much patience with those. Almost every day I also receive a
2000+ word email laying out the writer's original thesis on how the economy works and asking me
to defend MMT against that alternative vision. I am not going to engage in a debate via email.
If you have an alternative, gather together a small group and work for 25 years to produce
scholarly articles, popular blogs, and media attention -- as we have done for MMT -- and then
I'll pay attention. That said, here you go: [email protected] .
As an undergraduate I studied psychology and social sciences -- but no economics, which
probably gave me an advantage when I finally did come to economics. I began my economics career
in my late 20's studying mostly Institutionalist and Marxist approaches while working for the
local government in Sacramento. However, I did carefully read Keynes's General Theory
at Sacramento State and one of my professors -- John Henry -- pushed me to go to St. Louis to
study with Hyman Minsky, the greatest Post Keynesian economist.
I wrote my dissertation in Bologna under Minsky's direction, focusing on private banking and
the rise of what we called "nonbank banks" and "off-balance sheet operations" (now called
shadow banking). While in Bologna, I met Otto Steiger -- who had an alternative to the barter
story of money that was based on his theory of property. I found it intriguing because it was
consistent with some of Keynes's Treatise on Money that I was reading at the time.
Also, I had found Knapp's State Theory of Money -- cited in both Steiger and
Keynes–so I speculated on money's origins (in spite of Minsky's warning that he didn't
want me to write Genesis ) and the role of the state in my dissertation that became a
book in 1990 -- Money and Credit in Capitalist Economies -- that helped to develop the
Post Keynesian endogenous money approach.
What was lacking in that literature was an adequate treatment of the role of the
state–which played a passive role -- supplying reserves as demanded by private bankers --
that is the Post Keynesian accommodationist or Horzontalist approach. There was no discussion
of the relation of money to fiscal policy at that time. As I continued to read about the
history of money, I became more convinced that we need to put the state at the center.
Fortunately I ran into two people that helped me to see how to do it.
First there was Warren Mosler, who I met online in the PKT discussion group; he insisted on
viewing money as a tax-driven government monopoly. Second, I met Michael Hudson at a seminar at
the Levy Institute, who provided the key to help unlock what Keynes had called his "Babylonian
Madness" period -- when he was driven crazy trying to understand early money. Hudson argued
that money was an invention of the authorities used for accounting purposes. So over the next
decade I worked with a handful of people to put the state into monetary theory.
As we all know, the mainstream wants a small government, with a central bank that follows a
rule (initially, a money growth rate but now some version of inflation targeting). The fiscal
branch of government is treated like a household that faces a budget constraint. But this
conflicts with Institutionalist theory as well as Keynes's own theory. As the great
Institutionalist Fagg Foster -- who preceded me at the University of Denver–put it:
whatever is technically feasible is financially feasible. How can we square that with the
belief that sovereign government is financially constrained? And if private banks can create
money endogenously -- without limit -- why is government constrained?
My second book, in 1998, provided a different view of sovereign spending. I also revisited
the origins of money. By this time I had discovered the two best articles ever written on the
nature of money -- by Mitchell Innes. Like Warren, Innes insisted that the dollar's value is
derived from the tax that drives it. And he argued this has always been the case. This was also
consistent with what Keynes claimed in the Treatise, where he said that money has been a state
money for the past four thousand years, at least. I called this "modern money" with intentional
irony -- and titled my 1998 book Understanding Modern Money as an inside joke. It only
applies to the past 4000 years.
Surprisingly, this work was more controversial than the earlier endogenous money research.
In my view it was a natural extension -- or more correctly, it was the prerequisite to a study
of privately created money. You need the state's money before you can have private money.
Eventually our work found acceptance outside economics -- especially in law schools, among
historians, and with anthropologists.
For the most part, our fellow economists, including the heterodox ones, attacked us as
crazy.
I benefited greatly by participating in law school seminars (in Tel Aviv, Cambridge, and
Harvard) on the legal history of money -- that is where I met Chris Desan and later Farley
Grubb, and eventually Rohan Grey. Those who knew the legal history of money had no problem in
adopting MMT view -- unlike economists.
I remember one of the Harvard seminars when a prominent Post Keynesian monetary theorist
tried to argue against the taxes drive money view. He said he never thinks about taxes when he
accepts money -- he accepts currency because he believes he can fob it off on Buffy Sue. The
audience full of legal historians broke out in an explosion of laughter -- yelling "it's the
taxes, stupid". All he could do in response was to mumble that he might have to think more
about it.
Another prominent Post Keynesian claimed we had two things wrong. First, government debt
isn't special -- debt is debt. Second, he argued we don't need double entry book-keeping -- his
model has only single entry book-keeping. Years later he agreed that private debt is more
dangerous than sovereign debt, and he's finally learned double-entry accounting. But of course
whenever you are accounting for money you have to use quadruple entry book-keeping. Maybe in
another dozen years he'll figure that out.
As a student I had read a lot of anthropology -- as most Institutionalists do. So I knew
that money could not have come out of tribal economies based on barter exchange. As you all
know, David Graeber's book insisted that anthropologists have never found any evidence of
barter-based markets. Money preceded market exchange.
Studying history also confirmed our story, but you have to carefully read between the lines.
Most historians adopt monetarism because the only economics they know is Friedman–who
claims that money causes inflation. Almost all of them also adopt a commodity money view --
gold was good money and fiat paper money causes inflation. If you ignore those biases, you can
learn a lot about the nature of money from historians.
Farley Grubb -- the foremost authority on Colonial currency -- proved that the American
colonists understood perfectly well that taxes drive money. Every Act that authorized the issue
of paper money imposed a Redemption Tax. The colonies burned all their tax revenue. Again,
history shows that this has always been true. All money must be redeemed -- that is, accepted
by its issuer in payment. As Innes said, that is the fundamental nature of credit. It is
written right there in the early acts by the American colonies. Even a gold coin is the
issuer's IOU, redeemed in payment of taxes. Once you understand that, you understand the nature
of money.
So we were winning the academic debates, across a variety of disciplines. But we had a hard
time making progress in economics or in policy circles. Bill, Warren, Mat Forstater and I used
to meet up every year or so to count the number of economists who understood what we were
talking about. It took over decade before we got up to a dozen. I can remember telling Pavlina
Tcherneva back around 2005 that I was about ready to give it up.
But in 2007, Warren, Bill and I met to discuss writing an MMT textbook. Bill and I knew the
odds were against us -- it would be for a small market, consisting mostly of our former
students. Still, we decided to go for it. Here we are -- another dozen years later -- and the
textbook is going to be published. MMT is everywhere. It was even featured in a New
Yorker crossword puzzle in August. You cannot get more mainstream than that.
We originally titled our textbook Modern Money Theory , but recently decided to
just call it Macroeconomics . There's no need to modify that with a subtitle. What we
do is Macroeconomics. There is no coherent alternative to MMT.
A couple of years ago Charles Goodhart told me: "You won. Declare victory but be magnanimous
about it." After so many years of fighting, both of those are hard to do. We won. Be nice.
Let me finish with 10 bullet points of what I include in MMT:
1. What is money: An IOU denominated in a socially sanctioned money of account. In almost
all known cases, it is the authority -- the state -- that chooses the money of account. This
comes from Knapp, Innes, Keynes, Geoff Ingham, and Minsky.
2. Taxes or other obligations (fees, fines, tribute, tithes) drive the currency. The ability
to impose such obligations is an important aspect of sovereignty; today states alone monopolize
this power. This comes from Knapp, Innes, Minsky, and Mosler.
3. Anyone can issue money; the problem is to get it accepted. Anyone can write an IOU
denominated in the recognized money of account; but acceptance can be hard to get unless you
have the state backing you up. This is Minsky.
4. The word "redemption" is used in two ways -- accepting your own IOUs in payment and
promising to convert your IOUs to something else (such as gold, foreign currency, or the
state's IOUs).
The first is fundamental and true of all IOUs. All our gold bugs mistakenly focus on the
second meaning -- which does not apply to the currencies issued by most modern nations, and
indeed does not apply to most of the currencies issued throughout history. This comes from
Innes and Knapp, and is reinforced by Hudson's and Grubb's work, as well as by Margaret
Atwood's great book: Payback: Debt and the shadow side of wealth .
5. Sovereign debt is different. There is no chance of involuntary default so long as the
state only promises to accept its currency in payment. It could voluntarily repudiate its debt,
but this is rare and has not been done by any modern sovereign nation.
6. Functional Finance: finance should be "functional" (to achieve the public purpose), not
"sound" (to achieve some arbitrary "balance" between spending and revenues). Most importantly,
monetary and fiscal policy should be formulated to achieve full employment with price
stability. This is credited to Abba Lerner, who was introduced into MMT by Mat Forstater.
In its original formulation it is too simplistic, summarized as two principles: increase
government spending (or reduce taxes) and increase the money supply if there is unemployment
(do the reverse if there is inflation). The first of these is fiscal policy and the second is
monetary policy. A steering wheel metaphor is often invoked, using policy to keep the economy
on course. A modern economy is far too complex to steer as if you were driving a car. If
unemployment exists it is not enough to say that you can just reduce the interest rate, raise
government spending, or reduce taxes. The first might even increase unemployment. The second
two could cause unacceptable inflation, increase inequality, or induce financial instability
long before they solved the unemployment problem. I agree that government can always afford to
spend more. But the spending has to be carefully targeted to achieve the desired result. I'd
credit all my Institutionalist influences for that, including Minsky.
7. For that reason, the JG is a critical component of MMT. It anchors the currency and
ensures that achieving full employment will enhance both price and financial stability. This
comes from Minsky's earliest work on the ELR, from Bill Mitchell's work on bufferstocks and
Warren Mosler's work on monopoly price setting.
8. And also for that reason, we need Minsky's analysis of financial instability. Here I
don't really mean the financial instability hypothesis. I mean his whole body of work and
especially the research line that began with his dissertation written under Schumpeter up
through his work on Money Manager Capitalism at the Levy Institute before he died.
9. The government's debt is our financial asset. This follows from the sectoral balances
approach of Wynne Godley. We have to get our macro accounting correct. Minsky always used to
tell students: go home and do the balances sheets because what you are saying is nonsense.
Fortunately, I had learned T-accounts from John Ranlett in Sacramento (who also taught
Stephanie Kelton from his own, great, money and banking textbook -- it is all there, including
the impact of budget deficits on bank reserves). Godley taught us about stock-flow consistency
and he insisted that all mainstream macroeconomics is incoherent.
10. Rejection of the typical view of the central bank as independent and potent. Monetary
policy is weak and its impact is at best uncertain -- it might even be mistaking the brake
pedal for the gas pedal. The central bank is the government's bank so can never be independent.
Its main independence is limited to setting the overnight rate target, and it is probably a
mistake to let it do even that. Permanent Zirp (zero interest rate policy) is probably a better
policy since it reduces the compounding of debt and the tendency for the rentier class to take
over more of the economy. I credit Keynes, Minsky, Hudson, Mosler, Eric Tymoigne, and Scott
Fullwiler for much of the work on this.
That is my short list of what MMT ought to include. Some of these traditions have a very
long history in economics. Some were long lost until we brought them back into discussion.
We've integrated them into a coherent approach to Macro. In my view, none of these can be
dropped if you want a macroeconomics that is applicable to the modern economy. There are many
other issues that can be (often are) included, most importantly environmental concerns and
inequality, gender and race/ethnicity. I have no problem with that.
A JG is to discontinue NAIRU or structural under-unemployment with attendant
monetarist/quasi inflation views. Something MMT has be at pains to point out wrt fighting a
nonexistent occurrence due to extended deflationary period.
Its double entry accounting counting both sides of the equation. Fed deposits money into
bank requires 4 entries, a double entry for the Fed and for the bank. Typical double entry
accounting only looks at the books of 1 entity at a time. Quadruple Entry accounting makes
the connection between the government monetary policy and private business accounting. I'm
not an accountant, I may have butchered that.
think about banks and reserves, your money is on the bank's liability side (and your
asset), while the reserves are on the bank's asset side (and gov't or fed's liability.)
i think its the reserves that quadruple it, reserves are confusing because when you move
$5 from a bank account to buy ice cream its not just one copy of the $5 that moves between
checking accounts, there is another $5 that moves "under the hood" so to speak in reserve
world
Very briefly, double entry bookkeeping keeps track of how money comes in/out, and where it
came from/went. Cash is the determining item (although there may be a few removes). Hence,
say I buy a $20 dollar manicure from you. I record my purchase as "Debit (increase) expense:
manicure $20, credit (decrease) cash, $20". Bonus! If my bookkeeping is correct, my debits
and credits are equal and if I add them up (credits are minus and debits are plus) the total
is zero – my books "balance". So, double-entry bookkeeping is also a hash-total check
on my accounting accuracy. But I digress.
On your books, the entry would be "Debit (increase) cash $20, credit (decrease)
sales, $20".
So, your double-entry book plus my double-entry books would be quadruple-entry
accounting.
#7 was my immediate stopper, too. It drives me nuts when people introduce 2-3-4 letter
acronyms with no explanation (I work for the DoD and I'm surrounded by these "code words". I
rarely know what people are talking about and when I ask, the people talking rarely know what
these TLAs – T hree L etter A cronyms – stand for either!).
Next question regarding #7: What is ELR?
Other than #7, I really appreciate this article. NC teaches and/or clarifies on a daily
basis.
This quick, entertaining read is IMHO nothing less than a "Rosetta Stone" that can bring
non-specialists to understand MMT: not just how , but why it differs from
now-conventional neoliberal economics. I hope it finds a wide readership and that its many
references to MMT's antecedents inspire serious study by the unconvinced (and I hope they
don't take Wray's invitation to skip the 10 bullet points).
This piece is a fine demonstration of why I've missed Wray as he seemed to withdraw from
public discourse for the last few years.
Thank you! The (broad) analogies with my own experience are there. I had a decidedly
"mainstream" macro education at Cambridge (UK); though many of the "old school"
professors/college Fellows who, although not MMT people as we'd currently understand (or
weren't at *that* stage – Godley lectured a module I took but this was in the early
1990s) were still around, in hindsight the "university syllabus" (i.e. what you needed to
regurgitate to pass exams) had already steered towards neoliberalism. I never really
understood why I never "got" macro and it was consistently my weakest subject.
It was later, having worked in the City of London, learned accountancy in my actuarial
training, and then most crucially starting reading blogs from people who went on to become
MMT leading lights, that I realised the problem wasn't ME, it was the subject matter. So I
had to painfully unlearn much of what I was taught and begin the difficult process of getting
my head around a profoundly different paradigm. I still hesitate to argue the MMT case to
friends, since I don't usually have to hand the "quick snappy one liners" that would torpedo
their old discredited understanding.
I'm still profoundly grateful for the "old school" Cambridge College Fellows who were
obviously being sidelined by the University and who taught me stuff like the Marxist/Lerner
critiques, British economic history, political economy of the system etc. Indeed whilst I had
"official" tutorials with a finance guy who practically came whenever Black-Scholes etc was
being discussed, an old schooler was simultaneously predicting that it would blow the world
economy up at some point (and of course he was in the main , correct). I still had to fill in
some gaps in my knowledge (anthropology was not a module, though Marxist economics was), with
hindsight I appreciate so much more of what the "old schoolers" said on the sly during quiet
points in tutorials – Godley being one, although he wasn't ready at that time to
release the work he subsequently published and was so revolutionary. Having peers educated
elsewhere during my Masters and PhD who knew nothing of the subjects that – whilst
certainly not the "key guide" to "proper macro" described in the article – began to
horrify me later in my career.
This is really great. Thanks a ton, as Yves would say.
I know I have used to "rock star" metaphor on occasion, so let me explain that to
me what is important in excellent (i.e., live) rock and roll is improvisational
interplay among the group members -- the dozen or so who understood MMT in the beginning, in
this case -- who know the tune, know each other, and yet manage to make the song a little
different each time. It's really spectacular to see in action. Nothing to do with spotlights,
or celebrity worship, or fandom!
I'm no MMT expert, but I think
this article does a good job of juxtaposing MMT with classic (non-advanced)
macroeconomics. I quote:
In the language of Tinbergen (1952), the debate between MMT and mainstream macro can be
thought of as a debate over which instrument should be assigned to which target. The
consensus assignment is that the interest rate, under the control of an independent central
bank, should be assigned to the output gap target, while the fiscal position, under control
of the elected budget authorities, should be assigned to the debt sustainability target. [
] The functional finance assignment is the reverse -- the fiscal balance under the budget
authorities is assigned to the output target, while any concerns about debt sustainability
are the responsibility of the monetary authority.
What about interest rate fixing? The central bank would remain in charge of that, but in
an MMT context this instrument would lose most of its relevance:
[W]hile a simple swapping of instruments and targets is one way to think about
functional finance, this does not describe the usual MMT view of how the policy interest
rate should be set. What is generally called for, rather, is that the interest rate be
permanently kept at a very low level, perhaps zero. In an orthodox policy framework, of
course, this would create the risk of runaway inflation; but keep in mind that in the
functional framework, the fiscal balance is set to whatever level is consistent with price
stability.
It may be a partial reconstruction of MMT, but to me this seems to be a neat way to
present MMT to most people. Saying that taxes are there just to remove money from the economy
or to provide incentives is a rather extreme statement that is bound to elicit some fierce
opposition.
Having said that, I've never seen anyone address what I think are two issues to MMT: how
to make sure that the power to create money is not exploited by a political body in order to
achieve consensus, and how to assure that the idea of unlimited monetary resources do not
lead to misallocation and inefficiencies (the bloated, awash-with-money US military industry
would probably be a good example).
The best comparison of MMT with neoliberal neoclassical economics, in my view, is Bill
Mitchell's blog post, "How to Discuss Modern Monetary Theory" ( http://bilbo.economicoutlook.net/blog/?p=25961
). I especially recommend the table near the end as a terrific summary of the differences
between the mainstream narrative and MMT.
Thanks! I have enormous respect for Mitchell, given the quantity and quality of his
blogging. However, my only nitpick is that a lot of his blog entries are quite long and "not
easily digestible". I have long thought that one of those clever people who can do those 3
minute rapid animation vids we see on youtube is needed to "do a Lakoff" and change the
metaphors/language. But this post of Mitchell (which I missed, since I don't read all his
stuff) is, IMHO, his best at "re-orienting us".
Saying that taxes are there just to remove money from the economy or to provide
incentives is a rather extreme statement that is bound to elicit some fierce
opposition.
Yes this is a frightening statement. The power to tax is the power to destroy. If this is
a foundation point of the proposal then
Having said that, I've never seen anyone address what I think are two issues to MMT: how
to make sure that the power to create money is not exploited by a political body in order
to achieve consensus, and how to assure that the idea of unlimited monetary resources do
not lead to misallocation and inefficiencies (the bloated, awash-with-money US military
industry would probably be a good example).
Bingo. My thoughts exactly. Too much power in the hands of the few. Easy to slide into
Orwell's Animal Farm – where some people are more equal than others.
MMT is based upon very good intentions but, in my view, there is a moral rot at the root
of the US of A's problems, not sure this can be solved by monetary policy and more
centralized control.
And the JG? Once the government starts to permanently guarantee jobs
I suggest you delve into what is proposed by the MMT – PK camp wrt a JG because its
not centralized in the manner you suggest. It would be more regional and hopefully
administrated via social democratic means e.g. the totalitarian aspect is moot.
I think its incumbent on commenters to do at least a cursory examination before heading
off on some deductive rationalizations, which might have undertones of some book they read
e.g. environmental bias.
Skippy, I read the article, plus the links, including those links of the comments. I will
admit that I am a little more right of center in my views than many on the website.
The idea is interesting, but the administration of such a system would require rewriting
the US Constitution, or an Amendment to it if one thinks the process through, would it not? I
think of the Amendment required to create the Federal Reserve System when I say this.
One thing I really don't like at all -- and I've crossed swords with many over this -- is
that we do tend to take (not just in the US, this is prevalent in far too many
places) things like the constitution, or cultural norms, or traditions or other variants of
"that's the way we've always done this" and elevate them to a level of sacrosanctity.
Not for one moment am I suggesting that we should ever rush into tweaking such devices
lightly nor without a great deal of analysis and introspective consultations.
Constitutions get amended all the time. The Republic of Ireland changed its to renounce a
territorial claim on Northern Ireland. The U.K. created a right for Scotland to secede from
the Union. There's even a country in Europe voting whether to formally change its name right
now. Britain "gave up" its empire territories (not, I would add speedily, without a lot of
prodding, but still, we got there in the end). All of which were, at one time or another,
"unthinkable". Even the US, perhaps the most inherently resistant to change country when it
thinks it's being "forced" to do so, begrudgingly acknowledged Cuba.
Why would a jobs guarantee require a constitutional amendment? The federal government
creates jobs all the time, with certain defined benefits. This would merely expand upon that,
to potentially include anyone who wants a job.
There are a couple different aspects of this that people are getting mixed together, I
think. The core of MMT is not a proposal for government to implement. Rather, it is simply a
description of how sovereign currencies actually operate, as opposed by mainstream economics,
which has failed in this regard. In other words, we don't need any new laws to implement MMT
– we need a paradigm shift.
The Jobs Guarantee is a policy proposal that flows from this different paradigm.
It has been stated many times that it is to inform policy wrt to potential and not some
booming voice from above dictating from some ridged ideology.
Persoanly as a capitalist I can't phantom why anyone would want structural under –
unemployment. Seems like driving around with the hand brake on and then wondering why
performance is restricted or parts wear out early.
Thinking of the Federal Reserve Act being enabled by the Federal Income Tax of the 16th
Amendment.
Using Federal taxes to fund the JG; I do not think that this aspect of it (and others)
would survive a Constitutional challenge. Therefore ultimately an Amendment might be
needed.
Then again I may be wrong. Technically Obamacare should have been implemented by an
Amendment were strict Constitutional law applied.
Rights to health care and jobs are not enumerated in either the Constitution or Bill of
Rights, as far as I am aware.
Not opposed to some of the principles of MMT, just don't understand, in this modern age
where effectively all currency is electronic digits in a banking computer system, the issue
of a currency must be tied to taxes. In years past, where currency was printed and in one's
pocket, or stuffed under a mattress, or couriered by stagecoach, then yes – taxes would
be needed. But today can we not just print (electronically) the cash needed for government
operations each year based upon a fixed percentage of private sector GDP? Why therefore do we
need government debt? Why do we need an income tax?
Skippy, I have lived and worked in countries without income tax (but instead indirect tax)
and where government operating revenue was based upon a percentage of projected national
revenue. I have been involved in the administration of such budgets.
I am in favor of government spending, or perhaps more accurately termed investing, public
money on long-term, economically beneficial projects. But this is not happening. The reality
is that government priorities can easily be hijacked by political interests, as we currently
witness.
While I agree that political highjacking is possible and must be dealt with, this is not
strictly speaking part of an economic theory, which is what MMT is. While MMT authors may
take political positions, the theory itself is politically neutral.
Income taxes, tithes, or any other kind of driver is what drives the monetary circuit.
Consider it from first principles. You have just set up a new government with a new currency
where this government is the monopoly issuer. No one else has any money yet. So, the
government must be the first spender. However, how is this nascent government going to
motivate anyone to use this new currency? Via taxation, or like means, that can only be met
by using the national currency, whatever form that currency may take, marks on a stick,
paper, an entry in a ledger, or the like.
Thank you for this explanation. I understand that, for example, this is why the Federal
Reserve Act of 1913, I believe, created the Federal Reserve and Federal Income Tax at the
same time.
But the US economy functioned adequately, survived a civil war, numerous banking crises,
experienced industrialization, national railways, etc without a central bank or federal
income tax from the 1790's to 1913.
To me, the US's state of perpetual war is enabled by Federal Income Tax. Without it the
MIC would collapse, I am certain.
Functioned adequately
During the 150 yr hard money period we had recessions/depressions that we're both far more
frequent (every three years) and on avg far deeper than what we have had since fdr copied the
brits and took us off the gold standard. Great deprecession was neither the longest or
deepest.
Two reasons
Banks used to fail frequently, a run on one bank typically leading to runs on other banks,
spreading across regions like prairie fires if your bank failed you lost all your money.
Consequences were serious.
During GR so many banks failed in the Midwest, leading to farm foreclosures, the region was
near armed insurrection in 1932. Fiat meant that the fed can supply unlimited liquidity.
Since then banks have failed but immediately taken over by another. Critically, no depositor
has lost a penny, even those with far more exposed than the deposit insurance limit. No runs
on us banks since 1933.
Second, we now have auto stabilizers, spending continues during downturns because gov has no
spending limit. Note previously in an emergency gov borrowed. 10 mil from J.P. Morgan.
But at what cost? no depositor loses money, yet huge amounts are required to be printed,
thus devaluing the "currency". So is the answer inflation that must by necessity become
hyperinflation?
I don't understand why it is important to protect a bank vs. making it perform its function
without risking collapse. This is magical thinking as we have found very few banks in this
world not ready and willing to pillage their clients, be it nations or just the little
folk.
Why would anyone trust a government to do the right thing by its population? When has that
ever worked out in favor of the people?
I can not understand the trust being demanded by this concept. It wants trust for the users,
but in no way can it expect trust or virtue from the issuer of the "currency"
also, I can't help but think MMT is for growth at all costs. Hasn't the growth shown that
it is pernicious in itself? Destroy the planet for the purpose of stabilizing "currency".
Our federal reserve gave banks trillions of dollars, and then demanded they keep much of
it with the Fed and are paid interest not to use it. It inflated the "currency" in
circulation yet again and now it is becoming clear a great percentage of people in our
country can no longer eat, no longer purchase medications, a home, a business
If being on a hard money system as we were causes recessions and depressions, would we
find that it was a natural function to cut off the speculators at their knees?
How does MMT promote and retain value for the actual working and producing people that
have no recourse with their government? I would like to read about what is left out of this
monumental equation.
US had a federal income tax during the civil war and for a decade or so after.
I have always assumed that mass conscription and the Dreadnought arms race led to the
implementation of the modern taxing/monetary system. (gov't needed both warfare and
welfare)
Taxes, just as debt, create an artificial demand for currency as one must pay back their
taxes in {currency}, and one must pay back debt in {currency}. It doesn't have to be an
income tax, and I think a sales tax would be a better driver of demand than an income
tax.
The US had land sales that helped fund government expenditures in the 1800s.
Not all taxes are income taxes. Back in the day (20's/30's/40's),my grandfather could pay
off the (county) property taxes on his farm by plowing snow for the county in the winter --
and he was damned careful to make sure that the county commissioners' driveways were plowed
out as early as possible after a storm.
In the 30's/40's the property tax laws were changed to be payable only in dollars.
So Grandpa had to make cash crops. Things changed and money became necessary.
But today can we not just print (electronically) the cash needed for government
operations each year based upon a fixed percentage of private sector GDP?
The élites could, but it would be totally undemocratic and the economics profession's
track record of forecasting growth is no better than letting a cat choose a number written on
an index card.
Why therefore do we need government debt?
There is no government debt. It's just a record of interest payments Congress has agreed
to make because the wealthy wanted another welfare program.
Why do we need an income tax?
The only logically consistent purpose is because people have too much income.
I think the point they're driving at, is that by requiring the payment of taxes in a
particular currency, a government creates demand for that currency. There are other uses for
federal taxes, not the least of which is to keep inflation in check.
Government debt is not needed, at least not at the federal level. My understanding of it
is that it's a relic from the days of the gold standard. It's also very useful to some rather
large financial institutions, so eliminating it would be politically difficult.
Wray has said in interviews that the debt (and associated treasury bonds), while not
strictly necessary in a fiat currency, is of use in that it provides a safe base for
investment, for pensioners and retirees, etc.
Sure, it could be eliminated by (a) trillion dollar platinum coins deposited at the
Federal Reserve followed by (b) slowly paying off the existing debt when the bonds mature or
(c) simply decreeing that the Fed must go to a terminal and type in 21500000000000 as the US
Gov account balance (hope I got the number of zeroes correct!).
It could be argued that the US doesn't strictly need taxes to drive currency demand as
long as our status as the world reserve currency is maintained (see oft-discussed
petrodollar, Libya, etc). If that status is imperiled, say by an push by a coalition of
nations to establish a different currency as the "world reserve currency") taxes would be
needed to drive currency demand.
I think most of this is covered in one way or another here:
Government debt is not actually a 'real thing'. It is a residue of double-entry
bookkeeping, as is net income (income minus expenses, that's a credit in the double-entry
system). It could as well be called 'retained earnings (also a 'book' credit in the
double-entry system). If everybody had to take bookkeeping in high school there would be far
few knickers in knots!
There are two kinds of government 'debt': the accumulated deficit which is the money in
circulation not a real debt, and outstanding bonds which is real in the sense that it must be
repaid with interest.
However, the government can choose the interest rate and pay it (or buy back the bonds at
any time) with newly minted money at no cost to itself, cf. QE.
seems to me that the guaranteed jobs would be stigmatized, and make it harder for people
to get private sector jobs. "once youre in the JG industry, its hard to get out" etc.
how much of a guarantee is the job guarantee supposed to be? ie. at what point can you get
fired from a guaranteed job?
Yes, my mind wandered into the same territory. While I agree that something needs to be
done, it also has the potential to strike at the heart of a lean, merit-based system by
introducing another layer of bureaucracy. In principle, I am not against the idea, but as
they say, "God (or the Devil – take your pick) is in the details ".
If you haven't already read it, "Reclaiming the State" by Mitchell and Fazi (Pluto Press
2017) provides a detailed and cogent analysis of how neoliberalism came into ascendency, and
how the principles of MMT can be used to pave the way to a more humane and sustainable
economic system. A new political agenda for the left, drawing in a different way upon the
nationalism that has energized the right, is laid out for those progressives who understand
the necessity of broadening their appeal. And the jobs guarantee that MMT proposes has
NOTHING to do with MacJobs and Amazon workers. It has to do with meeting essential human and
environmental needs which are not profitable to meet in today's private sector.
Job guarantee, or govt as employer of last resort -- now there is a social
challenge/opportunity if there ever was one.
Well managed, it would guarantee a living wage to anyone who wants to work, thereby
setting a floor on minimum wages and benefits that private employers would have to meet or
exceed. These minima would also redound to the benefit of self-employed persons by setting
standards re income and care (health, vacations, days off, etc) *and* putting money in the
pockets of potential customers.
Poorly managed it could create the 'digging holes, filling them in' programs of the
Irish Potato Famine
ore worse (hard to imagine, but still ). It has often been remarked that the potato blight
was endemic across Europe, it was only a famine in Ireland -- through policy choices.
So, MMT aside (as being descriptive, rather than prescriptive), we are down to who
controls policy. And that is *really* scary.
In terms of power, the government has the power to shoot your house to splinters, or blow
it up, with or without you in it. We say they're not supposed to, but they have the ability,
and it has been done.
The question of how to hold your government to the things it's supposed to do applies to
issues beyond money. We'd best deal with government power as an issue in itself. I should
buckle down and get Mitchell's next-to-newest book Reclaiming the State .
I don't claim to fully understand MMT yet, but I find Wray's use of the derogatory term
"gold bugs" to be both disappointing and revealing. To lump those, some of whom are quite
sophisticated, who believe that currencies should be backed by something of tangible value
(and no, "the military" misses the point), or those who hold physical gold as an insurance
policy against political incompetence, and the inexorable degradation of fiat currencies, in
with those who promote or hold gold in the hopes of hitting some type of lottery, is
disingenuous at best.
OMT seemingly has no reason to exist being old school, but for what it's worth, the
almighty dollar has lost over 95% of it's value when measured against something that matters,
since the divorce in 1971.
I found this passage funny, as in flipping the dates around to 1791, is when George
Washington set an exchange rate of 1000-1 for old debauched Continental Currency, in exchange
for newly issued specie. (there was no Federal currency issued until 1861)
So yeah, they burned all of their tax revenue, because the money wasn't worth jack.
Farley Grubb -- the foremost authority on Colonial currency -- proved that the American
colonists understood perfectly well that taxes drive money. Every Act that authorized the
issue of paper money imposed a Redemption Tax. The colonies burned all their tax
revenue.
Gold bug is akin to money crank e.g. money = morals. That's not to mention all the
evidence to date does not support the monetarist view nor how one gets the value into the
inanimate object or how one can make it moral.
Gold doesn't historically perform as a hedge but as a speculative trade. Those who think
it can protect them from political events typically don't realize that a gold standard means
public control of the gold industry, thereby cutting any separation from the political
process off at the knees.
When a government declares that $20 is equal in value to one ounce of gold, it also
declares an ounce of gold is equal to $20 dollars. It is therefore fixing, through a
political decision subject to political changes, the price of the commodity.
Nonsense. When fiat currencies invariably degrade, and especially at a fast rate, gold has
proven to be a relative store of value for millennia . All one need do is to look at
Venezuela, Argentina, Turkey, etc., to see that ancient dynamic in action today.
You, and others who have replied to my comment, are using the classical gold standard as a
straw man, as well. Neither I, nor many other gold "bugs" propose such a simple solution to
the obviously failed current economy, which is increasingly based on mountains of debt that
can never be repaid.
gold has proven to be a relative store of value for millennia.
As long as one is mindful that gold is just another commodity, subject to the same
speculative distortions as any other commodity (see Hunt brothers and silver).
But that is obviously false, given that no other commodity has remotely performed with
such stability over such a long period of time.
It is true that over short periods distortions can appear, and the *true* value of gold
has been suppressed in recent years through the use of fraudulent paper derivatives. But
again, I'm not arguing for the return of a classical gold standard.
Don't worry, I'm likely to be at least equally dense!
I didn't mean to suggest that there is some formula from which a *true* value of precious
metals might be derived. I simply meant that gold has clearly been the object of price
suppression in recent years through the use of paper derivatives (i.e. future contracts). The
reason for such suppression, aside from short-term profits to be made, is that gold has
historically acted as a barometer relating to political and economic stability, and those in
power have a particular interest in suppressing such warning signals when the system becomes
unstable.
So, while the Central Banks created previously unimaginable mountains of debt, it was
important not to alarm the commoners.
The suppression schemes have become less effective of late, and will ultimately fail when
the impending crisis unfolds in earnest.
As long as one is mindful that gold is just another commodity, subject to the same
speculative distortions as any other commodity
It sounds good in theory, but history says otherwise.
The value remained more or less the same for well over 500 years as far as an English
Pound was concerned, the weight and value of a Sovereign hardly varied, and the exact weight
and fineness of one struck today or any time since 1817, is the same, no variance
whatsoever.
Thus there was no speculative distortions in terms of value, the only variance being the
value of the Pound (= 1 Sovereign) itself.
" who believe that currencies should be backed by something of tangible value"
As I understand it, MMT also requires that currency be backed by something of tangible
value: a well managed and productive economy. It doesn't matter in the least if your debt is
denominated in your own currency if you have the economy of Zimbabwe.
Sounds reasonable in theory, but that was supposed to be the case with the current
economic system, as well, and we can all see where that has led.
I'm not arguing that there isn't a theoretically better way to create and use
"modern" money, but rather doubt that those empowered to create it out of thin air will ever
do so without abusing such power.
Oh, I agree with you. In no universe that I am aware of would the temptation to create
money beyond the productive capacity of the economy to back it up be resisted. I think
Zimbabwe is a pretty good example of where the theory goes in practice.
That's exactly wrong. Zimbabwe had a production collapse. Same amount of money to buy a
much smaller amount of goods. The gov responded not by increasing goods, but increasing money
supply.
Mark Blyth has a good discussion of the gold standard in his book Austerity: The
History of a Dangerous Idea . He makes the point that, in imposing the adjustments
necessary to keep the balance of payments flowing, the measures imposed by a government would
be so politically toxic, that no elected official in his or her right mind would implement
them, and expect to remain in office. In short, you can have either democracy, or a gold
standard, but you can't have both.
Also, MMT does recognize that there are real world constraints on a currency, and that is
represented by employment, not some artificially-imposed commodity such as gold (or bitcoin,
or seashells, etc). The Jobs Guarantee flows out of this.
As mentioned above, you, among others who have replied to my original comment, are using
the classical gold standard as a straw manl. Neither I, nor many other gold "bugs", propose
such a simple solution for the failed current economic system, which is increasingly based on
mountains of debt that can never be repaid.
increasingly based on mountains of debt that can never be repaid.
Huh? I listed two ways they could be repaid above. In the US, the national debt is
denominated in dollars, of which we have an infinite supply (fiat). In addition, the Federal
Reserve could buy all the existing debt by [defer to quad-entry accounting stuff from Wray's
primer] and then figuratively burn it. Sure, the rest of the world would be pissed and
inflation *may* run amok, but "can never" is just flat out wrong.
Of course it can be extinguished through hyperinflation. I didn't think that it would be
necessary to point that out. No "may" about it, though, as if the U.S. prints tens of
trillions of dollars to extinguish the debt, hyperinflation will be assured.
I didn't think that it would be necessary to point that out.
Sorry, but I'm an old programmer; logic rules the roost. When one's software is expected
to execute billions of times a day without fail for years (and this post is very likely
routed through a device running an instance of something I've written). Always means every
time, no exceptions; never means not ever, no matter what.
I'm sure that there is no one solution proposed, though an alternative to the current
system which seems plausible would be a currency backed by a basket of commodities, including
gold.
Hi Tinky, much late but still. Gold will have value as long as people believe it has
value. But what will they trade it for? The bottom line is your life.
I don't have any gold, too expensive, and it really has no use. But I remember Dimitri Orlov's
advice : I am long in needles, pins, thread, nails and screws, drill bits, saws, files,
knives, seeds, manual tools of many sorts, mechanical skills and beer recipes. Plus I can
sing.
The vast majority of people who hold physical gold are well aware of the value of having
skills and supplies, etc., in case of a serious meltdown. But it's not a zero-sum game, as
you suggest. Gold will inexorably rise sharply in value when today's fraudulent markets
crash, and there will be plenty of opportunities for those who own it to trade it for other
assets.
Furthermore, as previously mentioned, gold's utility is already on full display,
to those who are paying attention, and not looking myopically through a USD lens.
"Mountains of debt that can never be repaid" is a propaganda statement with no reference
to any economic fact. Why do you feel that this "debt" needs to be "repaid"? It is simply an
accounting artifact. The "debt" is all of the dollars that have been spent *into* the economy
without having been taxed back *out*. The word "debt" activates your feels, but has no
intrinsic meaning in this context. Please step back from your indoctrinated emotional
reaction and understand that the so-called national "debt" is nothing more than money that
has been created via public spending, and "repaying" it would be an act of destruction.
I keep telling (boring, annoying, infuriating) people that, in the simplest terms, the
national debt is the money supply and they won't grasp that simple declaration. When I said
it to my Freedom Caucus congress critter (we were seated next to each other on an exit aisle)
his head started spinning, reminding me of Linda Blair in The Exorcist.
As I said to my congress critter, if the debt bother's y'all so much, why not just pay it
off, dust off your hands, and be done with it?
Personally, if I were President for a day, I'd have the mint stamp out 40 or so trillion
dollar platinum coins just to fill the top right drawer of the Resolute desk. Would give me
warm fuzzy feelings all day long.
p.s. I also told him that the man with nothing cares not about inflation. He didn't like
that either.
"those, some of whom are quite sophisticated, who believe that currencies should be backed
by something of tangible value (and no, "the military" misses the point), or those who hold
physical gold as an insurance policy against political incompetence, and the inexorable
degradation of fiat currencies"
I suspect that Wray exactly means that these people are the goldbugs, not the ones who
speculate on gold.
The whole point that currencies should be backed by something of tangible value IMO is
wrong, and I think the MMTers agree with me on this.
If so, then he should clarify his position, as again, lumping the billions –
literally – of people who consider gold to be economically important, together as one,
is disingenuous.
I think people that consider gold to be a risk hedge understand its anthro, per se an
early example of its use was a fleck of golds equal weight to a few grains of wheat e.g. the
gold did not store value, but was a marker – token of the wheat's value – labour
inputs and utility. Not to mention its early use wrt religious iconography or vis-à-vis
the former as a status symbol. Hence many of the proponents of a gold standard are really
arguing for immutable labour tokens, problem here is scalability wrt high worth individuals
and resulting distribution distortions, unless one forwards trickle down sorts of
theory's.
Not to mention in times of nascent socioeconomic storms many that forward the idea of gold
safety are the ones selling it. I think as such the entire thing is more a social psychology
question than one of factual natural history e.g. the need to feel safe i.e. like commercials
about "peace of mind". I think a reasonably stable society would provide more "peace of mind"
than some notion that an inanimate object could lend too – in an atomistic
individualistic paradigm.
I once had an co-worker that was a devout Christian. When he realized I wasn't religious,
he asked me, incredulously, how I was able to get out of bed in the morning. Meaning, he
couldn't face a world without meaning.
I think a lot of people feel that same way about money. They fight over it, lie for it,
steal it, kill for it, go to war over it, and most importantly, slave for it. Therefore, it
must have intrinsic value. I think gold bugs are in this camp.
Talking about Warren's blog ( http://moslereconomics.com/ ), everytime I try to go there,
Cloudflare asks me to prove that I am human. Anyone know what's up with that? It's the only
website I've ever seen do that.
That's a good suggestion. Unfortunately, as I sometimes find, you can pass ALL the major
test-sites but something (a minor, less-used site using out-of-date info?) can give you
grief. NC site managers once (kindly) took the time to explain to me why I might have
problems that they had no ability to address at their end. I had to muck around with a link
given earlier to Bill Mitchell's blog before my browser would load it.
I think there can be quirks that are beyond our control (unfortunately) – for instance
I think a whole block of IP addresses (including mine) used by my ISP have been flagged
*somewhere* – no doubt due to another customer doing stuff that the checker(s) don't
like. (The issue I mentioned above was more likely due to a strict security protocol in my
browser, however.)
Monetary policy in terms of interest rates is not just weak, it also tends to treat all
targets the same. Fiscal policy can be targetted to where it is felt it can do the most
good.
Christine Desan's book, "Making Money," exhaustively documents the history of money as a
creature of the state. Recall as well that creating money and regulating its value are among
the enumerated POWERS granted to our government by we, the people. Money, indeed, is
power.
Hmmm Randy Wray states that " permanent Zirp (zero interest rate policy) is probably a
better policy since it reduces the compounding of debt and the tendency for the rentier class
to take over more of the economy. "
But just last week, Yves stated that " that one of the consequences of the protracted
super-low interest rate regime of the post crisis era was to create a world of hurt for
savers, particularly long-term savers like pension funds, life insurers and retirees. "
[ https://www.nakedcapitalism.com/2018/09/crisis-caused-pension-train-wreck.html
]
So are interest rates today too high, or too low? We're getting mixed messages here.
IMO, interest rates are too low . Beyond the harmful effect to savers, it also
drives income inequality . How? When interest rates are less than inflation, it is
trivial to borrow money, buy some assets, wait for the assets to appreciate, sell the assets,
repay the debt, and still have profit left over even after paying interest . Well,
it's trivial if you're already rich and have a line of credit that is both large and
low-interest. If you're poor with a bad FICO score, you don't get to play the asset
appreciation game at all.
The rates between riskier and less risky borrowers will still be reflected in the
different rates given to each.
The low rates encourage greater risk taking to increase the reward(a higher rate of
return). This is what leads to the gross malinvestment.
Case in point: the low rates led to more investments into the stock market, where the
returns are unlimited. This is what led to the income inequality of Obama's term, as
mentioned above.
I cannot speak for Yves, nor or Randy, but IMO, interest rates are too low for people who
depend on interest for their living -- as an old person, I have seen my expected income drop
to about zilch when I had expected 7 to 10% on my savings. Haha! So yeah, too low for us who
saved for 'retirement'.
Too high for people financing on credit, since a decent mortgage on a modestly-priced
house will cost you almost the same as
the house . And that doesn't even begin to look at unsecured consumer credit (ie, credit
card debt), which is used in the US and other barbaric countries for medical expenses, not to
mention student debt. The banks can create the principal with their keystrokes, but they
don't create the interest. Where do you suppose that comes from? Hint: nowhere, as in
foreclosures and bankruptcies.
Wray's statement reflects his preferences from an operational policy perspective.
Sovereign government debt cares no risk and therefore should not pay interest. The income
earned from that interest is basically a subsidy and all income when spent caries a risk of
inflation induced excess demand. Therefore who unnecessarily add the risk to the economy and
potential risk needing to reduce other policy objectives to accommodate unnecessary interest
income subsidies to mostly rich people?
Yves comment reflects the reality of prior decades of economic history. Even if Wray's
policy perspective is optimal, there are decades of people with pensions and retirement
savings designed around the assumption of income from risk-free government debt. It's this
legacy that Yves is commenting on and is a real problem that current policy makers are just
ignoring.
As for your comments on how low cost credit can be abused, I believe you'll find most MMT
practitioners would recommend far more regulation on the extension of credit for
non-productive purposes.
I just wrote a note to Randy:
The origin of money is not merely for accounting, but specifically for accounting for DEBT --
debt owed to the palatial economy and temples.
I make that clear in my Springer dictionary of money that will come out later this year:
Origins of Money and Interest: Palatial Credit, not Barter
Can somebody help me out here? It seems to me that the US macroeconomic policy has been
operating under MMT at least since FDR (see for example Beardsley Ruml from 1945).
Since then, insofar as I understand MMT, fiat has been printed and distributed to flow
primarily through the MIC and certain other periodically favored sectors (e.g. the Interstate
Highway System). Then, rather than destroying this fiat through taxation, the sectoral
balances have been kept deliberately out of balance: Taxes on unearned income have been
almost eliminated with an eye to not destroying fiat, but to sequestering as much as possible
in the private hands of the 1%. This accumulating fiat cannot be productively invested
because that would cause overproduction, inflation, and reduce the debt burden by which the
1% retains power over the 99%. So the new royalists, as FDR would have styled them, keep
their hoard as a war chest against "socialists".
I get all this, more or less, and I appreciate that it is well and good and important that
MMTers insistently point out that the emperor has no clothes. This is a necessary first step
in educating the 99%.
But I don't see MMT types discussing the fact that US (and NATO) macroeconomic policy
already has a Job Guarantee: if you don't want to work alongside undocumented immigrants on a
roof or in a slaughterhouse or suffer the humiliation of US welfare, such as it is, you can
always get a job with the army, or the TSA, or the police, or as a prison guard, or if you
have some education, with a health unsurance company or pushing drone buttons. You only have
to be willing to follow orders to kill–or at least help to kill–strangers.
(Okay, perhaps I overstate. If you're a medical doctor or an "educator" with university
debt you don't have to actively kill. You can decline scant Medicaid payments and open a
concierge practice, or you can teach to the test in order that nobody learns anything
moral.)
It is difficult to get a man to understand something, when his salary depends on his not
understanding it. Wouldn't it be clarified matters if MMTers acknowledged that we already
have a JG?
We have been operating on MMT since the end of WW2, with 2 exceptions in 1968 when Silver
Certificate banknotes no longer were redeemable for silver, and in 1971 when foreign central
banks (not individuals!) weren't allowed to exchange FRN's for gold @ $35 an ounce
anymore.
It's been full on fiat accompli since then and to an outsider looks absurd in that money
is entirely a faith-based agenda, but it's worked for the majority of all of lives, so nobody
squawks.
It's an economic "the emperor has no clothes" gig.
It seems to me that the US macroeconomic policy has been operating under MMT at
least since FDR (see for example Beardsley Ruml from 1945).
Yup, you are correct, IMO. And about the jobs guarantee, too. The point of MMT is not that
we have to adopt, believe in, or implement it, but that *this is how things work* and we need
to get a %&*^* handle on it *STAT* or they will ride it and us to the graveyard. The
conservatives and neo-cons are already on to this, long-time.
I believe the chant is:
We can have anything we want that is available in our (sovereign) currency and for which
there are resources
What we get depends on what we want and how well we convince/coerce our 'leaders' to make
it so.
JG is geared toward community involvement to create an open-ended collection of potential
work assignments, not top-down provision of a limited number of job slots determined by
bureaucrats on a 1% leash.
About every 80 years, there has been a great turning in terms of money in these United
States
Might as well start with 1793 and the first Federal coins, followed in 1861 by the first
Federal paper money, and then the abandonment of the gold standard (a misnomer, as it was one
of many money standards @ era, most of them fiat) in 1933.
We're a little past our use-by date for the next incarnation of manna, or is it already
here in the guise of the great giveaway orchestrated since 2008 to a selected few?
After learning MMT I've occasionally thought I should get a refund for the two economics
degree's I originally received. One of the primary mainstream teachings that I now readily
see as false is the concept of money being a vale over a barter economy. It's lazy,
self-serving analysis. It doesn't even pass a basic logical analysis let alone archeological
history. Even in a very primitive economy it would be virtually impossible for barter to be
the main form of transaction. The strawberry farmer can't barter with the apple farmer. His
strawberries will be rotten before the apples are ripe. He could give the apple farmer
strawberries in June on the promise of receiving apples in October, but that's not barter
that's credit. The apple farmer could default of his own free will or by happenstance (he
dies, his apple harvest is destroyed by an act of god, etc ). How does the iron miner get his
horse shoed if the blacksmith needs iron before he can make the horse show? Credit has to
have always been a key component of any economy and therefore barter could never have been
the original core.
After learning MMT I've occasionally thought I should get a refund for the two
economics degree's I originally received.
Agreed. Richard Wolff notes that in most Impressive Universities there are two schools,
one for Economics (theory) and another for Business (practice). Heh. I say, go for the
refund, you was robbed.
All the Rupee* has done over time is go down in value against other currencies, and up in
the spot price measured in Rupees even as gold is trending down now, and that whole stupid
demonetization of bank notes gig, anybody on the outside of the fiat curtain looking in, had
to be laughing, and ownership there is no laughing matter, as it's almost a state financial
religion, never seen anything like it.
* A silver coin larger than a U.S. half dollar pre-post WW2, now worth a princely 1.4
cents U.S.
Not an economist, but I appreciate both the applicability of MMT and the fierce, but often
subtle resistance its proponents have encountered academically, institutionally and
politically. However, I have questioned to what extent MMT is uniquely applicable to a nation
with either a current account surplus or that controls access to a global reserve
currency.
How does a nation that is sovereign in its own currency, say Argentina for example (there
are many such examples), lose 60 percent of its value in global foreign exchange markets in a
very short time period?
Is this due primarily to private sector debts denominated in a foreign currency (and if
so, what sectors of the Argentine economy undertook those debts, for what purposes, and to
whom are they owed?), foreign exchange market manipulation by external third parties, the
effective imposition of sanctions by those who control the global reserve currency and
international payments system, or some combination of those or other factors?
MMT makes more sense than orthodox neoliberal accounts of currency and sovereign spending
to me, as it does a better job of acknowledging reality. MMT recognizes that currency is an
artifice and that imagined limitations on it are just that, and real resources are the things
which are limited. Neoliberal economics acts as if all sorts of byzantine factors mean
currency must be limited, but we can think of resources, and the growth machine they feed, as
being infinite.
"Taxes or other obligations (fees, fines, tribute, tithes) drive the
currency."
Specifically, what does "drive" mean? Does it mean:
1. When taxes are reduced, the value of money falls?
2. If taxes were zero, the value of money would be zero?
3. Cryptocurrencies, which are not supported by taxes, have no value?
"JG is a critical component of MMT. It anchors the currency and ensures that achieving
full employment will enhance both price and financial stability."
Specifically, what do "anchors" and "critical component" mean? Do they mean:
1. Since JG does not exist, the U.S. dollar is unanchored and MMT does not exist?
2. Providing college graduates with ditch-digging jobs enhances price and financial
stability?
3. Forcing people to work is both morally and economically superior to giving them money and
benefits?
"Drive" means "creates initial demand for":
1. No, not for an established currency.
2. See 1.
3. Crypto is worth what you can buy with it.
"Anchors" means it acts against inflation and deflation. "Critical component" means the
economy works better if it has it.
1. Yes and no.
2. Yes, if no-one else will hire them.
3. No element of force is implied.
Karlof1 I could be wrong of course but one example of why none of that would matter is
when the US dollar for all practical purposes winks out of existence and that could happen
right now as we speak. Why would that happen you may ask? It would happen whenever someone
"beyond personal wealth" like the usual finance suspects decides it is the way for them to
make enormous amounts of profit out of the resulting worldwide instability before any of
their competitors beat them to it. The longer they wait the more likely someone else will
jump the gun and surprise them.
I don't think the US has two years worth of "blood" left in it before that happens.
In a sense nothing will be left when each and every dollar becomes at least 20 trillion
times less valuable. If the response to that happening is the same as the early 20ieth
century response (Germany) then nothing will be left at all considering the difference in
technology and differences in circumstance (everybody already have the weapons ready). If the
response is the late 20ieth century response (USSR) then maybe something will be left but the
USSR was both lucky and relatively solvent in comparison to the current US. The starting
point for the US is several magnitudes worse in both examples. The world can't afford to
carry the US at cost any more than the US can't right now and like the US haven't been able
to for decades, the required wealth doesn't exist.
The nascent USA had its national capital sacked and presidential residence burnt during
what's known as the War of 1812, yet it continued to exist politically. Same during Civil
War. During the Revolutionary War, the USA had a national government and 13 separate state
governments, all of which continued to function as the war raged. There've been at least two
Coups--1963 and 2000--but the USA continued its political existence. Even the Germany
destroyed by WW2 still existed politically. Destroying political entities is
very--extremely--difficult, which is why it seldom occurs. Rome's central authority ceased in
the mid 6th century but its provinces continued as did the Eastern portion of the Roman
Empire. Russia's governmental system was drastically altered during and after Russia's Civil
War, but Russia continued to exists as a political entity. The USSR was an imperial governing
edifice built atop numerous national political entities. It did vanish, but the nations
comprising it didn't; indeed, new nations were born as a result.
As for the dollar and its international position, even those nations desirous of undoing
dollar hegemony have said it cannot be done overnight as the overall system is both too
complex and too fragile for hasty adjustments to be made stably . Moreover, for better
or worse, the Outlaw US Empire's an integral component of the global economy, which motivates
those changing the system to arrive at a Soft Landing, not a Hard Crash.
Catastrophism belongs in the realm of Geology, not Geopolitics, although the former will
certainly affect the latter. Geopolitics can certainly enable an ecological crisis such as
the Overshoot we're now entering, but that's several magnitudes less than what rates as a
geological catastrophe--and not all such catastrophes are global.
- This is a repost of the recent Palisade
Weekly Letter –
Earlier this week –
news went by relatively unnoticed by the ' mainstream ' financial media (CNCB and such)
that Beijing's started selling their U.S. debt holdings.
Putting it another way – they're dumping U.S. bonds. . .
"China's ownership of U.S. bonds, bills and notes slipped to $1.17 trillion, the lowest
level since January and down from $1.18 trillion in June."
And although they're starting to sell U.S. bonds – expect it to be at a slow and
steady pace. They don't want to risk hurting themselves over this.
I believe China may be selling just enough to get the attention of Trump and the Treasury. A
soft warning for them not to take things too far with tariffs and trade.
Yet already just as news hit the wire that China was selling bonds a few days ago –
U.S. yields spiked above 3%. . .
Don't forget that China's the U.S.'s largest foreign creditor. And this is an asset for
them.
And although them selling is worrisome – the real problems started months ago. . .
Over the last few months, my macro research and articles are all finally coming together.
This thesis we had is finally taking shape in the real world.
I wrote in a detailed piece a few months back that foreigners just aren't lending to the
U.S. as much anymore ( you can read that here ).
I called this the 'silent problem'. . .
Long story short: the U.S. is running huge deficits. They haven't been this big since the
Great Financial Recession of 08.
And it shouldn't come as a surprise to many.
Because of Trump's tax cuts, there's less government revenue coming in. And that means the
increased military spending and other Federal spending has to be paid for on someone else's
tab.
The U.S. does 'bond auctions' all the time where banks and foreigners buy U.S. debt –
giving the Treasury cash to spend now.
But like I highlighted in the 'silent problem' article (seriously, read it if you haven't)
– foreigners are buying less U.S. debt recently. . .
This is a serious problem because if the Treasury wants to spend more while collecting less
taxes, they need to borrow heavily.
This trend's continued since 2016 and it's getting worse. And with the mounting liabilities
(like pensions and social security and medicare), they'll need to borrow trillions more in the
coming years.
So, in summary – the U.S. has less interested foreign creditors at a time when they need
them more than ever.
But wait, it gets worse. . .
The Federal Reserve's currently tightening – they're raising rates and selling bonds
via Quantitative Tightening (QT – fancy word for sucking money out of system).
This is the second big problem – and I wrote about in 'Anatomy of a Crisis' (
read here ). And
even earlier than that
here .
So, while the Fed does this tightening, they're creating a global dollar shortage. . .
As I wrote. . . "This is going to cause an evaporation of dollar liquidity – making
the markets extremely fragile. Putting it simply – the soaring U.S. deficit requires an
even greater amount dollars from foreigners to fund the U.S. Treasury . But if the Fed is
shrinking their balance sheet , that means the bonds they're selling to banks are sucking
dollars out of the economy (the reverse of Quantitative Easing which was injecting dollars into
the economy). This is creating a shortage of U.S. dollars – the world's reserve currency
– therefore affecting
every global economy."
The Fed's tightening is sucking money – the U.S. dollar – out of the global
economy and banks. And they're doing this at a time when Foreigners need even more liquidity so
that they can buy U.S. debt.
How is the Treasury supposed to get funding if there's less dollars out there available? And
how can they entice investors if Foreigners don't have enough liquidity to fund U.S. debt?
These Emerging Markets must use their dollar reserves to prop up their own currencies and
economies today. They can't be worrying about funding U.S. pensions and other bloated spending
when their economies are crumbling.
These two themes I've written about extensively – the decline of foreign investors and
the Fed's tightening – have gotten us to this point today.
And the U.S. is extremely fragile because of both problems. . .
Here's the worst part – China probably knows this . That's why they're selling just
enough U.S. bonds to spook markets.
But if the trade war and soon-to-be a currency war continues, no doubt China will sell more
of their debt – sending yields soaring.
I just got done last week detailing how U.S. debt servicing costs (interest payments) are
already becoming very unsustainable ( click here if you missed it
).
At this point they're literally borrowing money just to pay back old debts – that's
known as a 'ponzi scheme'.
This is why I believe the Fed will eventually cut rates back to 0% – and then into
negative territory. And instead of sucking money out of the economy via QT, they're going to
start printing trillions more.
How else will the Treasury be able to get the funding they need?
I'll continue to keep you up to date with what's going on and how it all fits together.
But I think the two big problems I wrote about above are now converging into a new massive
problem. And I don't see any way out of it unless the Fed monetizes the U.S. Treasury and
outstanding debts. And that will cause massive moves in the markets.
I'm sure Trump will eventually
tweet , "Oh Yeah? Foreigners don't want to buy the U.S. debt? Blasphemy! Who needs you all
when we have a printing press!"
Or something like that. . .
TimeTraveller , 1 hour ago
I'm really starting to get sick of these crap reports from Palisade Research. Again they
are totally wrong on so many levels.
1. China is selling Treasuries, because they are pre-empting a debt crisis in their own
country and need Dollar financing for their overleveraged companies and their banking sector.
Also, China is lending money to every 3rd world country that needs infrustructure for it's
Belt and Road Initiative. Building ports, bridges and railways across Asia and Africa, costs
money.
2. Selling Treasuries will weaken the Dollar, so making the RMB stronger. China does NOT
want the RMB stronger because it erodes their exporters margins and competetiveness. Why
would they want to hurt themselves just to punish their biggest customer?
To even suggest China is "using the Nuclear option" of dumping Treasuries just shows your
total ignorance of the real world.
Palisade are clueless
ConanTheContrarian1 , 1 hour ago
OTOH, the crisis in Emerging Markets and the effect of capital flight on China are just
two of the MANY things not mentioned in this article. There has been tension building into
financial warfare between China and the US ever since they pegged the yuan low to the dollar
in 1987. The US is doing things under the table to China, China to the US, and they're both
quite capable of paying Adam Tumerkan (and others) to write hit pieces against the other
side. Think deeply before choosing a side.
@ Lochearn who is correcting my genealogical representation of empire
Yes, you are more correct than I. That said, does it go back even further to the founding
of monotheistic religions? We are referring to social control by an elite in my mind more
than the Jewish bankers part of your genealogy. I admit to the bankers part but see that
bankers group as the encourage/control entity for the other monotheistic religions.
Has that system dynamic changed/evolved seriously since the Roman era? We have usury. We
have inheritance. We have banking. The concept of private property evolved along with the
mythical moral fig leaf of rule-of-law. We call it the Western form of "civilization".
Psycho Historian: I have been reading a Great Courses book on the history of the Achaemenid
rmpire that ruled Persia and one interesting tidbit from my reading is that temples and their
priests made loans to property (though turned did not accept deposits). So religious
institutions got into the banking business early.
In his talks about his upcoming book, Hudson has said that besides the Palace the Temples
were the first sources of credit. But their relation to society then vastly differs from what
evolved as both Palace and Temple become corrupted by greed.
So religious institutions got into the banking business early.
Achaemenids? I think this was rather late. IIRC temples in Ur, Sumer and Babylon were in
the business long before the Achaemenid period.
However Ur, Sumer and Babylon also seem to have had a general debt amnesty about every 7
years. There was a sound political or economic rationale for this. Something about the idea
that one was not supposed to grind the faces of the poor into the gravel, nor destroy the
fabric of society.
The temples were the only organizations that had the administrative ability to do this.
Temple, at least in Mesopotamia is a bit of a misnomer. As I understand it, the "temple" was
the home of the god, the royal palace and the seat of the civil service all rolled into
one.
You might find David Graeber's book Debt : The First 5,000 Years interesting. He
discusses why the temples were in the money lending business. It's a rather fun read and
comes in hard cover and completely free pdf. https://libcom.org/files/__Debt__The_First_5_000_Years.pdf
did not accept deposits
I never thought of it, but yes of course. Given their functions they would not take
deposits. They were loaning from state resources and did not need deposits. They would not
have even understood the concept.
I am not sure if this applies during the Achaemenid period but it seems likely.
Sunday, August 12, 2018Back That A$$et Up ... From the first sentence of
Michael Sproul's There's No Such Thing as Fiat Money (2007) :
I make the claim that fiat money does not exist, and that the money that is commonly called
fiat money is actually backed by the assets of its issuer.
Who would argue against the premise that modern currencies are backed by the
issuer's assets? The questions that remain are: How broad a definition of "assets" is being
considered? And does "asset backing" justifiably negate the meaning of "fiat", or is this mere
semantics?
In any event, I would counter argue that the meaning of "fiat" is possibly in need of
clarification. And such clarification would then allow for the sensible conclusion that fiat
money does indeed exist. Sproul's premise is a good launch pad for clarifying just what it is
that backs the US Dollar.
Many have said that the US military "backs" the dollar. And indeed, the US Deep State and
its Military Industrial Corporatist alliance represents a huge investment in strategic
worldwide military deployment. That investment is an asset, and it does in part back the
dollar. There are other factors, that are considered in the foreign exchange marketplace, and
there are varying opinions as to which factors bear such weight upon the prime factor :
relative changes in purchasing power. As we have discussed before, usage is a considerable factor in determining a
currency's relative purchasing power, which in turn supports further usage, in a circular
fashion. In times past, there were set fundamentals that established relative fiat currency
exchange value: the country's stability, its industrial base, trade practices and metrics,
population demographics and economic condition, debt to GDP, and so on.
As our real world has progressed into a world of derivative statistic and valuation, through
the rise of financialization, those fundamental factors have evolved to include other factors
that are brought to bear upon a modern digital currency's backing.
Does the depth of a currency in global derivative positions act as a form of backing?
This is a factor which did not exist prior to the existence of derivatives. Does that depth not
guarantee further usage, and that further usage not create greater depth? Does the currency
function successfully as a systemic weapon against other currency issuers? Again, relatively
recent dollar era phenomena.
But there is an incredibly powerful, hugely overlooked factor which begins only around 2008,
which backs the US dollar. I will tell you now that it is the US Government's control
over its people which gives the US dollar the largest share of "asset backing" of any
other factor under consideration - in the FX market and otherwise.
When the US Government publicly bailed out the global banking system and made the
American people the guarantor of that bailout, an incredible precedent was set. It proved to
the families that the issuer of the US Dollar could obligate its tax base to an unrepayable
debt, and that tax base would neither understand, nor care enough about the consequences of
that precedent ... to stand up and fight against the fraud and thievery that keeps the 99% in
perpetual bondage, and the 1% in a risk free position to do as they please.
The issuer has proven to generational wealth that it can divert the attention of the tax
base from the world's most egregious robbery, and do it again every so often, including to
other middle classes who hold wealth, as it moves from country to country. And they will do so
in equally powerful police states, combined with well developed welfare states, as the fiat
wealth concept manages the debt slaves of any culture, keeping them pacified under the doctrine
of "debt as wealth".
You will watch in amazement as China eventually "becomes" the USA in this regard. To the
North, there is one proud people, who thrive on the adversity which shapes their strong
cultural identity - who will be a thorn in the dollar's side - but they will be dealt with, as
opportunity allows.
This modern state of affairs is an incredible asset which the global corporatist banking
cartel (the BIS led global central banking system) has endowed upon the US Dollar - and it's
rival issuers are part and parcel to that system. Until China, India and Russia's central banks
(along with their strategic but smaller allied CBs) achieve a true Coup d'etat (either publicly
- or more likely privately) and begin to act independently from BIS mandate, the world's middle
classes will never have any enduring prosperity - only the fleeting type that comes with
targeted booms, busts and the fraud and bailouts they enable.
Much more importantly ... that Coup will NEVER HAPPEN as long as the American people agree
to the dollar contract they are so deeply sworn to. Americans have been taught to accept the
double standard they now live by. They can default on debt and lose everything they own, but
their lenders can never default - they will be bailed out by whatever wealth remains. There is
no other society on earth who have been so culturally conditioned to accept slavery and
socialism as the generation of Americans whose OBEDIENCE backs the dollar today. That
compliance, coupled with contempt for the wealth of their fellow man, and the social justice
herd mentality, makes the family's smile with exceeding confidence ... that this dollar empire
can milk much more middle class wealth across the globe as it spreads its "debt as wealth"
religion even further into systemic entrenchment.
And this Trump fellow. He and Wilbur are doing well to earn the trust of generational
wealth.
An unexpected wildcard can always be drawn, including an international war. But the
Roacheforque's will profit from war as well - nonetheless, and just the same. Generational
wealth aways profits from the spread of global corporatism, as they are both the authors and
benefactors of it.
This we learn ... from the flower of understanding.
In a press conference this morning, the Russian president said his country doesn't plan to
abandon holding reserves in U.S. dollars though he said that the risk of sanctions is prompting
Russia to diversify its foreign currency assets.
"Russia isn't abandoning the dollar,"
Putin said in answer to a question
about the sharp decline in its holdings of U.S. Treasuries in April and May.
"We need to minimize risks, we see what's happening with sanctions."
"As for our American partners and the restrictions they impose involving the dollar," he
added,
"I think that is a major strategic mistake because they're undermining confidence in
the dollar as a reserve currency."
Putin did however caution that the US is making a big mistake if it hopes to use the dollar as a
political weapon:
"
Regarding our American partners placing limitations, including those on dollar
transactions, I believe is a big strategic mistake
. By doing so, they are undermining
the trust in the dollar as a reserve currency"
In this vein, Putin added that many countries are discussing the creation of new reserve
currencies, noting that China's yuan is a potential reserve currency, but concluded:
"We will continue to use the US dollar unless the United States prevents us from
doing so."
The Russian president also emphasized the need for other currencies in global trade and the
emergence of new reserve currencies like the ruble.
Additionally, President Putin said he's ready to hold a new summit with U.S.
counterpart Donald Trump in either Moscow or Washington,
praising him for sticking to his
election promises to improve ties with Russia.
"One of President Trump's big pluses is that he strives to fulfill the promises he
made to voters, to the American people,"
Putin told a press conference at the BRICS
summit in Johannesburg.
"As a rule, after the elections some leaders tend to forget what they promised the
people but not Trump."
Putin, who said he expects to meet Trump on the sidelines of the G-20
The Anglo Zionist empire not only weaponizes the USD, but
also "democracy" and "human rights".
The golden days of the 1990s
where Uncle Scam could enjoy unrivalled power are gone. Like all
greedy full spectrum empires, abusing unipolar power with wild
abandon and arrogance is now starting to hurt.
Sandbox the Zionist infil
traitors
and take down
the tentacles of the Deep State, and let America join the global
polity of great nations in a new paradigm of peaceful coexistence,
rather than following the directives of that small, paranoid tribe
bent on full spectrum dominance.
One thing that makes me optimistic is that more people are
becoming aware and are questioning the apparatus and narratives of
the old world order. It was alot different 10 years ago, when I felt
like I was a very small minority with a multipolar view, drowned out
in a sea of denial.
Trump and his ZH crybabies
whine on about how "unfairly the rest of the world has been
treating the US" but they 'conveniently' forget that most of
today's problems (wars, financial instability, fiat
currency) originate from the US Reserve Currency Status and
the Breton Woods system which the US has been using UNFAIRLY
to it's advantage for Many DECADES in order to finance wars
and manipulate the price of commodities.
But that's too difficult to grasp for most Trumptards...
They're too busy screaming "sieg heil" for the Orange Jew!
*) They complain about foreign wars and the MIC,
yet vote for someone who promised to INCREASE the
Pentagon's already enormous budget
*) The complain about "the Jews," "Israhell," and
"the ZOG," and yet they vote for someone who is in bed
with Israel and Netanyahu and has a Jewish-American
lawyer who fucks him over
*) They complain about the "banksters," and yet
they vote for someone who makes a Deep State
Goldmanite (Mnuchin) his Treasure Secretary
*) They complain about The Deep State and The
Swamp, and they vote for someone who hires Pompeo,
Haspel and Bolton
*) They complain about the massive amounts of debt
and the fiat currency system, and yet they vote for
someone who calls himself "The King of Debt" and calls
for a massive increase in military spending
I guess now the ZH Trumptards only have one
'weapon' left: downvotes!
I'm not your classic fanboy of Trump, but he has to
work with those cretins somehow, and not turn into
a degenerate pedophile in the process. He was the
lesser of two evils presented in the 2 party
duopoly, sadly, that's what modern 'democracy' has
become; a Hobson's choice.
So far, he's doing
alright, given the circumstances, and everything
stacked against him.
"He was the lesser of two evils presented in
the 2 party duopoly,..."
I completely
agree with that assessment, but what I fail to
understand is how the supposedly "highly
educated readers of ZH," can be so fucking
stupid to blindly believe all the Trump
bullshit.
Being the lesser of two evils is still not
being very good I'm afraid, and being the lesser
of two evils means that he still kinda sucks.
That is what we're witnessing every day: a
stupid narcissistic idiot who can barely play
0,5D chess, let alone 4D chess...
The system that churns out leadership in
America is fundamentally flawed and corrupted
to the bone, yet once in a blue moon, an
"insider outsider" as I like to call them,
like Jackson, Kennedy and Trump, slips
through. And that's when decades happen in a
few years.
Who blindly believes bs? Trump is provably
the most honest politician since the
invention of recording devices. Just having
an uncontested birth certification and school
records is a big head start. Who do you think
would make your paycheck (subsidy?) go higher
than President Trump. Trump is threatening a
lot of people's sinecures and subsidies. Who
wants to guarantee more NPR wannabee hacks a
good paycheck?
What a lot of folks seeem to overlook is that
the lesser of two evils is still, wait for
it, ... evil. This is a highly subjective
measurement of course, the beauty of all that
evil being in the minds eye, of the beholder
..
What do we have ? IMO the jury is still
out on that one. I had hoped that President
Trump would talk straight to the American
people. Particularly in regards to the true
state of the overall economy. But those of us
who have tried to inform friends & family on
these subjects have run up against that solid
wall of denial. Most people don't want to
hear the truth. They fight against it with
everything they've got. Between the Deep
State attacking Trump to maintain their
privileges & power, and a dumbed down
population aggressively in denial - the
president has a Herculean challenge.
Fine, we are Trump fan boyz and Putin fan
boyz, and we'll believe whatever we choose to
believe, for our own reasons, and we don't
owe anyone a stinkin explanation why!
You
can open your eyes, and see why we support,
fight for, defend, and will keep fighting for
Trump! He's the Hope that we can Change the
vampirous system that's defenestrated
everyone playing by the rules!
He's a narcissistic idiot who can barely
play multidimensional chess? You don't say!
Anyhow, even if he were, and he isn't, he's
OUR narcissistic idiot who beat the living
daylights, out of the prissy, elitist,
wicked, and thieving a**holes arrayed against
him!
So how come your folks couldn't win
against a narcissistic idiot? Because your
folks are the narcissistic idiots, who can't
come to terms with the reality that Hope of
True Change is here, and embodied in Trumpus
Maximus Magnus!!
You don't like that he's a Maximux Magnus?
Fine, you can suck my pinkie!...
There is a clear battle going on and at 70+
years of age, I give President Trump a huge
helping of credit just to deal with it all,
without going insane in the process. One thing
though... He had better corral the
dirty-dealers around him, along with the
hag
and those involved from the previous
administration, or it will eventually overwhelm
him. Guaranteed.
Indeed, its a battle for the
soul
of America. The pedophiles, degenerates, Zionists, imperialists must not win. A purge is needed and coming. I hope he survives like Jackson, and doesn't go the way of Kennedy. In any case, he has a big following, but I fear a civil war type scenario is coming no matter what happens. The vitriol and partizanship is at toxic levels.
It's obvious that the NWO crowd weaponizes
populations. Obummer wanted his internal
force 'as well funded & equipped as the
military '. And, theyve been working hard
with their propaganda machine to overturn
the American people's 2nd Amendment.
This is likely one of the most delicate &
dangerous times in American history.
So let's see ... Hillary in conjunction with obama
demonized Iran and Russia (Crimea... have you
forgotten?) for years prior to trump ... overthrew
Libya and stirred the pot in Syria via proxies ...
and Bernie Sanders was against these wars AND
against unfettered globalization ... all part and
parcel of the neoconservative PNAC doctrine ....
but trump trying to implement peace and diplomacy
with Russia and North Korea is 'bad' ... but since
at the same time he increases the budget for the
MIC and he is 'bad' for doing so and he is pissing
off our so-called 'trade partners' as manufacturing
has essentially left the US ... so he is to pick a
fight with the MIC internally to the nation on top
of everything else including pissing of the
globalist cretins in our so called intelligence
(where are those WMDs) ... okie dokie ...
"... Kevin Shipp, former Central Intelligence Agency (CIA) officer, intelligence and counter terrorism expert, held several high-level positions in the CIA. His assignments included protective agent for the Director of the CIA, counterintelligence investigator searching for moles inside the CIA, overseas counter terrorism operations officer, internal security investigator, assistant team leader for the antiterrorism tactical assault team, chief of training for the CIA federal police force and polygraph examiner. Mr. Shipp was the senior program manager for the Department of State, Diplomatic Security, Anti-Terrorism Assistance global police training program. He is the recipient of two CIA Meritorious Unit Citations, three Exceptional Performance Awards and a Medallion for high risk overseas operations. Website/book: fortheloveoffreedom.net ..."
Fake News, Fake Money, How to Tell the Difference Posted on February
21, 2018 | Leave
a comment Why is it so hard these days to tell fact from fiction? Who can be trusted to
tell us what's really going on? Can the New York Times and Washington Post still be believed?
And what about money? Can we still trust the dollar, the euro, the pound sterling? What
supports national currencies, anyway? Is this Bitcoin thing real or fake money, and should I
buy some?
Here's a compelling presentation by Andreas Antonopoulos, that addresses all of these
questions. Antonopoulos is a technologist and entrepreneur and probably the most knowledgeable
and insightful expert on bitcoin, blockchain technology and the profound changes that lie just
ahead.
Now take a deep dive into the political realities of our time by watching this presentation
by CIA officer Kevin Shipp, in which he exposes the Shadow Government and the Deep State. If
you question his credibility here is a brief bio from Information Clearing House:
Kevin Shipp, former Central Intelligence Agency (CIA) officer, intelligence and counter
terrorism expert, held several high-level positions in the CIA. His assignments included
protective agent for the Director of the CIA, counterintelligence investigator searching for
moles inside the CIA, overseas counter terrorism operations officer, internal security
investigator, assistant team leader for the antiterrorism tactical assault team, chief of
training for the CIA federal police force and polygraph examiner. Mr. Shipp was the senior
program manager for the Department of State, Diplomatic Security, Anti-Terrorism Assistance
global police training program. He is the recipient of two CIA Meritorious Unit Citations,
three Exceptional Performance Awards and a Medallion for high risk overseas operations.
Website/book: fortheloveoffreedom.net
(Originally published as [US Dollar Hegemony has to go] in AToL on
April 11. 2002)
There is an economics-textbook myth that foreign-exchange rates are
determined by supply and demand based on market fundamentals. Economics tends
to dismiss socio-political factors that shape market fundamentals that affect
supply and demand.
The current international finance architecture is based on the US dollar
as the dominant reserve currency, which now accounts for 68 percent of global
currency reserves, up from 51 percent a decade ago. Yet in 2000, the US share
of global exports (US$781.1 billon out of a world total of $6.2 trillion) was
only 12.3 percent and its share of global imports ($1.257 trillion out of a
world total of $6.65 trillion) was 18.9 percent. World merchandise exports
per capita amounted to $1,094 in 2000, while 30 percent of the world's
population lived on less than $1 a day, about one-third of per capita export
value.
Ever since 1971, when US president Richard Nixon took the dollar off the
gold standard (at $35 per ounce) that had been agreed to at the Bretton Woods
Conference at the end of World War II, the dollar has been a global monetary
instrument that the United States, and only the United States, can produce by
fiat. The dollar, now a fiat currency, is at a 16-year trade-weighted high
despite record US current-account deficits and the status of the US as the
leading debtor nation. The US national debt as of April 4 was $6.021 trillion
against a gross domestic product (GDP) of $9 trillion.
World trade is now a game in which the US produces dollars and the rest of
the world produces things that dollars can buy. The world's interlinked
economies no longer trade to capture a comparative advantage; they compete in
exports to capture needed dollars to service dollar-denominated foreign debts
and to accumulate dollar reserves to sustain the exchange value of their
domestic currencies. To prevent speculative and manipulative attacks on their
currencies, the world's central banks must acquire and hold dollar reserves
in corresponding amounts to their currencies in circulation. The higher the
market pressure to devalue a particular currency, the more dollar reserves
its central bank must hold. This creates a built-in support for a strong
dollar that in turn forces the world's central banks to acquire and hold more
dollar reserves, making it stronger. This phenomenon is known as dollar
hegemony, which is created by the geopolitically constructed peculiarity that
critical commodities, most notably oil, are denominated in dollars. Everyone
accepts dollars because dollars can buy oil. The recycling of petro-dollars
is the price the US has extracted from oil-producing countries for US
tolerance of the oil-exporting cartel since 1973.
By definition, dollar reserves must be invested in US assets, creating a
capital-accounts surplus for the US economy. Even after a year of sharp
correction, US stock valuation is still at a 25-year high and trading at a 56
percent premium compared with emerging markets.
The Quantity Theory of Money is clearly at work. US assets are not growing
at a pace on par with the growth of the quantity of dollars. US companies
still respresent 56 percent of global market capitalization despite recent
retrenchment in which entire sectors suffered some 80 percent a fall in
value. The cumulative return of the Dow Jones Industrial Average (DJIA) from
1990 through 2001 was 281 percent, while the Morgan Stanley Capital
International (MSCI) developed-country index posted a return of only 12.4
percent even without counting Japan. The MSCI emerging-market index posted a
mere 7.7 percent return. The US capital-account surplus in turn finances the
US trade deficit. Moreover, any asset, regardless of location, that is
denominated in dollars is a US asset in essence. When oil is denominated in
dollars through US state action and the dollar is a fiat currency, the US
essentially owns the world's oil for free. And the more the US prints
greenbacks, the higher the price of US assets will rise. Thus a strong-dollar
policy gives the US a double win.
Historically, the processes of globalization has always been the result of
state action, as opposed to the mere surrender of state sovereignty to market
forces. Currency monopoly of course is the most fundamental trade restraint
by one single government. Adam Smith published Wealth of Nations in
1776, the year of US independence. By the time the constitution was framed 11
years later, the US founding fathers were deeply influenced by Smith's ideas,
which constituted a reasoned abhorrence of trade monopoly and government
policy in restricting trade. What Smith abhorred most was a policy known as
mercantilism, which was practiced by all the major powers of the time. It is
necessary to bear in mind that Smith's notion of the limitation of government
action was exclusively related to mercantilist issues of trade restraint.
Smith never advocated government tolerance of trade restraint, whether by big
business monopolies or by other governments.
A central aim of mercantilism was to ensure that a nation's exports
remained higher in value than its imports, the surplus in that era being paid
only in specie money (gold-backed as opposed to fiat money). This trade
surplus in gold permitted the surplus country, such as England, to invest in
more factories to manufacture more for export, thus bringing home more gold.
The importing regions, such as the American colonies, not only found the gold
reserves backing their currency depleted, causing free-fall devaluation (not
unlike that faced today by many emerging-economy currencies), but also
wanting in surplus capital for building factories to produce for export. So
despite plentiful iron ore in America, only pig iron was exported to England
in return for English finished iron goods.
In 1795, when the Americans began finally to wake up to their
disadvantaged trade relationship and began to raise European (mostly French
and Dutch) capital to start a manufacturing industry, England decreed the
Iron Act, forbidding the manufacture of iron goods in America, which caused
great dissatisfaction among the prospering colonials. Smith favored an
opposite government policy toward promoting domestic economic production and
free foreign trade, a policy that came to be known as "laissez faire"
(because the English, having nothing to do with such heretical ideas, refuse
to give it an English name). Laissez faire, notwithstanding its literal
meaning of "leave alone", meant nothing of the sort. It meant an activist
government policy to counteract mercantilism. Neo-liberal free-market
economists are just bad historians, among their other defective
characteristics, when they propagandize "laissez faire" as no government
interference in trade affairs.
A strong-dollar policy is in the US national interest because it keeps US
inflation low through low-cost imports and it makes US assets expensive for
foreign investors. This arrangement, which Federal Reserve Board chairman
Alan Greenspan proudly calls US financial hegemony in congressional
testimony, has kept the US economy booming in the face of recurrent financial
crises in the rest of the world. It has distorted globalization into a "race
to the bottom" process of exploiting the lowest labor costs and the highest
environmental abuse worldwide to produce items and produce for export to US
markets in a quest for the almighty dollar, which has not been backed by gold
since 1971, nor by economic fundamentals for more than a decade. The adverse
effect of this type of globalization on the developing economies are obvious.
It robs them of the meager fruits of their exports and keeps their domestic
economies starved for capital, as all surplus dollars must be reinvested in
US treasuries to prevent the collapse of their own domestic currencies.
The adverse effect of this type of globalization on the US economy is also
becoming clear. In order to act as consumer of last resort for the whole
world, the US economy has been pushed into a debt bubble that thrives on
conspicuous consumption and fraudulent accounting. The unsustainable and
irrational rise of US equity prices, unsupported by revenue or profit, had
merely been a devaluation of the dollar. Ironically, the current fall in US
equity prices reflects a trend to an even stronger dollar, as it can buy more
deflated shares.
The world economy, through technological progress and non-regulated
markets, has entered a stage of overcapacity in which the management of
aggregate demand is the obvious solution. Yet we have a situation in which
the people producing the goods cannot afford to buy them and the people
receiving the profit from goods production cannot consume more of these
goods. The size of the US market, large as it is, is insufficient to absorb
the continuous growth of the world's new productive power. For the world
economy to grow, the whole population of the world needs to be allowed to
participate with its fair share of consumption. Yet economic and monetary
policy makers continue to view full employment and rising fair wages as the
direct cause of inflation, which is deemed a threat to sound money.
The Keynesian starting point is that full employment is the basis of good
economics. It is through full employment at fair wages that all other
economic inefficiencies can best be handled, through an accommodating
monetary policy. Say's Law (supply creates its own demand) turns this
principle upside down with its bias toward supply/production. Monetarists in
support of Say's Law thus develop a phobia against inflation, claiming
unemployment to be a necessary tool for fighting inflation and that in the
long run, sound money produces the highest possible employment level. They
call that level a "natural" rate of unemployment, the technical term being
NAIRU (non-accelerating inflation rate of unemployment).
It is hard to see how sound money can ever lead to full employment when
unemployment is necessary to maintain sound money. Within limits and within
reason, unemployment hurts people and inflation hurts money. And if money
exists to serve people, then the choice becomes obvious. Without global full
employment, the theory of comparative advantage in world trade is merely
Say's Law internationalized.
No single economy can profit for long at the expense of the rest of an
interdependent world. There is an urgent need to restructure the global
finance architecture to return to exchange rates based on purchasing-power
parity, and to reorient the world trading system toward true comparative
advantage based on global full employment with rising wages and living
standards. The key starting point is to focus on the hegemony of the
dollar.
To save the world from the path of impending disaster, we must:
#
promote an awareness among policy makers globally that excessive dependence
on exports merely to service dollar debt is self-destructive to any economy;
# promote a new global finance architecture away from a dollar hegemony
that forces the world to export not only goods but also dollar earnings from
trade to the US;
# promote the application of the State Theory of Money (which asserts that
the value of money is ultimately backed by a government's authority to levy
taxes) to provide needed domestic credit for sound economic development and
to free developing economies from the tyranny of dependence on foreign
capital;
# restructure international economic relations toward aggregate demand
management away from the current overemphasis on predatory supply expansion
through redundant competition; and restructure world trade toward true
comparative advantage in the context of global full employment and global
wage and environmental standards.
This is easier done than imagained. The starting point is for the major
exporting nations each to unilaterally require that all its exports be
payable only in its currency, so that the global finance architecture will
turn into a multi-currency regime overnight. There would be no need for
reserve currencies and exchange rates would reflect market fundamentals of
world trade.
As for aggregate demand management, Asia leads the world in both
overcapacity and underconsumption. It is high time for Asia to realize the
potential of its market power. If the people of Asia are to be compensated
fairly for their labor, the global economy will see its fastest growth
ever.
"... If Money=Debt, the battle over money can only be won by individuals wisely choosing whom they become indebted too. As the wise Michael Hudson points out, "Debts that can't be paid, won't be paid." ..."
"... Money is the creation of the elite to control the rest of the masses. It screws the rest of the masses by constraining what they can get their hands on while the elite can get their hands on anything they want. ..."
"... IMO the point of the article was to hint that objections (or refusal to engage with) MMT is largely political in nature. ..."
"... Skippy said it above: these are likely bad faith actors who disguise their classism and political desires with talk of "positive money" and the like. Debate clubs won't win this one. ..."
"... As I understand it, MMT is simply a more honest way of explaining the current reality, the problem being that the 1% would like to keep that a secret so that money is only created for the things that they can profit from, like war. ..."
"... MMT necessarily requires the exorbitant privilege of having the US dollar accounting for 60% of world trade & financial transactions with the US economy representing only 20% of world GDP. ..."
"... The Entrepreneurial State ..."
"... money and credit are used almost entirely for speculation, usury, and rent extraction ..."
"... In a normal economy, government spending is financed by taxes and borrowing, meaning that no new spending power has been created, as IS the case with new bank loans. ..."
"... You can fool part of the people all of the time, and all of the people part of the time. ..."
"... handing all credit creation to the central banks is not only technically impossible in a modern economy, it's a dangerous folly ..."
"... Wealth, Virtual Wealth and Debt, 2nd edition. ..."
"... The Order of Time ..."
"... "The debts are owed to government banks. A government can do what the U.S. can't do. The government can forgive debts, at least those that are owed to itself, without creating a political backlash. If a viable corporation has run up too much debt, the government can forgive it. This is better than letting the debt close down a factory or force it be sold to a predatory asset management firm as occurs in the United States. That is the advantage of having public credit and why credit should be public. That's how it was in Babylonia. Rulers were able to cancel debts all the time in the 3rd millennium and 2nd millennium BC, because most debts were owed to the palace or the temples. Rulers were cancelling debts owed to themselves. ..."
"... China can cancel business debt owed to itself. It can proclaim a clean slate. It can minimize debt service to whatever it chooses. But imagine if Chase Manhattan and Goldman Sachs are let in. It would be much harder for the government to raise real estate taxes leading to defaults on the banks. It could save the occupants by making new loans to those who default – based on lower land prices. ..."
"... Well, you can imagine the international furor that would erupt. Trump would threaten to atom bomb Peking and Shanghai to save his constituency. His constituency and that of the Democrats are the same: Wall Street and the One Percent. So China may lose its ability to write down debts if it lets in foreign banks." ..."
"... that this is a Chicago School / Friedmanesque monetary policy is made clear by Positive Money ..."
"... It seems there are greater similarities between China and the US than may be visible at first glance. China builds real estate for a shrinking population, invests for an over-indebted client (the US, which even insists on a drastic reduction of the bilateral trade deficit) and finances all this with money it does not have ..."
The same money that went into TARP would have bought a whole lot of nonperforming
mortgages. You wouldn't have needed a large bailout if the money actually made it's way to
main street.
Slightly off-topic, but if its true that this is a right wing proposal using naïve
left/Green supporters to give a progressive fig leaf, it wouldn't be the first time this has
happened. You can see the same phenomenon with Brexit, where many supposed left wingers have
often bought unthinkingly into many right/libertarian memes about 'freedom' from the EU. The
core reason they could do this is the effective abandonment by the left of arguments about
money and capital to the conservative and libertarian right from the 1980's onward.
One of the many reasons I love NC so much is that it has tried to fill the gap left by so
much of the mainstream left and much of the Greens in analysing economics issues in forensic
technical detail. Articles like this are absolutely invaluable in building up a proper
intellectual program in understanding the central importance of macroeconomics in building a
fairer society.
God, country, apple pie, balanced budget, freedom, democracy, pay-as-you-go, ingredients
in the hash of right/libertarian memes, all supposedly 'common sense' but actually
nonsense, spread thick, intended to distract us while our ruling class steals everything not
tied down.
I think the left saw its audience washed away by a tidal wave of this clever, well-funded
nonsense, so they stopped arguing about money and capital because they found it embarrassing
to be caught talking to themselves.
Of course back in the 1970s, much of the working-class had was doing well enough that they
thought the argument about money had been settled, and in their favor. Little did they know
that their 'betters' were planning on clawing-back every penny of wealth that they'd managed
to accumulate in the post-war years.
So here we are, the working class that was formerly convinced that anyone could live well
if they just worked hard, are finding that you can tug on your boot-straps with all your
might, and get no where.
I think you're right in that the wrong narrative is now dominant.
I don't think this was done intentionally – I think the people pulling the strings
don't know for sure what will happen, either.
The 'common sense' you mention is the best explanation most people have available. They
look at macroeconomics through the lens of their own household budget. Of course a balanced
budget responsible application of money makes sense Most people don't have a money printer in
their basement.
The battle is for the soul of humanity. A leadership that is working toward reducing
inequality and injustice in the world will adopt policies reflecting a more positive outlook
on the human condition. Those implementing austerity revile the masses of humanity, wether
stated or not. The masses are to be controlled, not enlightened or cared for.
The West has gained supremacy in the world by using the strategy of Divide and Conquer.
This thought process is so engrained in the psyche, that it heavily influences every form of
problem solving by using outright war and financial oppression as primary tools to achieve
these ends.
There would need to be a fundamental shift in thinking from Western leadership in order to
bring about a change that would focus on wellbeing over profit, which does not seem
forthcoming.
If Money=Debt, the battle over money can only be won by individuals wisely choosing
whom they become indebted too. As the wise Michael Hudson points out, "Debts that can't be
paid, won't be paid."
The main problem I see is the definition of what "Winning" would be. The definition
determines the policy.
"There would need to be a fundamental shift in thinking from Western leadership in order
to bring about a change that would focus on wellbeing over profit, which does not seem
forthcoming."
Money is the creation of the elite to control the rest of the masses. It screws the
rest of the masses by constraining what they can get their hands on while the elite can get
their hands on anything they want. The tipping point will be when there are sufficient
numbers who understand money isnt necessary to live and have nice things, it actually exists
to deprive them of such.
We've been fighting this same 'war' for a very long time.
Everybody now just has to make up their mind. Is money money or isn't money money.
Everybody who earns it and spends it every day in order to live knows that money is money,
anybody who votes it to be gathered in as taxes knows money is not money. That is what
makes everybody go crazy. -Gertrude Stein – All About Money
As far as I can tell, about 1% of us believe that money is not money, and the rest of us
believe that money is money.
Most of us believe that money is money because as Gertrude Stein said: Everybody who earns
it and spends it every day in order to live knows that money is money
So here's the problem: the 1% of the people, the ones who believe that money is not money,
are in charge of everything.
It's not natural that so few people should be in charge of so much, and that they should
be in charge of 'everything' is truly crazy. (Please excuse the slight digression)
The people who are in charge of everything believe that it's right, proper, indeed
'natural' that they be in charge of everything because they believe that no one could do as
good a job of being in charge of everything because they think they are smarter than
everybody else.
The reason that the 1% of people believe they are smarter than everybody else is rooted
largely in what they believe is their self-evident, superior understanding of money; that is
to say, the understanding that money is not money.
The trouble is, the difference between the 1%'s understanding of money, and the common
man's understanding of money is not evidence of the 1%'s superior intellect, so much as of
their lack of a moral compass and their ability to rationalize the depraved indifference they
show to their fellow man.
Maybe this thought is callous, but perhaps it would be useful to have a real-world
demonstration that this is a bad idea. How systemically important is the Swiss economy? US
abandoned its monetarist "quantity of reserves" experiment after a relatively short time.
Again, it sounds callous, but perhaps a year or two of distress in a small test
environment
(that is starting from a pretty good place and has a good social safety net
would be helpful to the world at large in terms of deprecating a bad idea. Perhaps MMT
will be the last approach standing?
Could it be that Wolf's "we need experiments" rhetoric is actually opposed to "positive
money", but he recognizes that the idea won't go away until it is badly spanked? Even if not,
maybe there is something to the idea that experimentation could be used to distinguish bad
ideas from less bad (the good ideas won't be tested, I reckon, until all the various flavors
of "bad" have been tried and rejected).
IMO the point of the article was to hint that objections (or refusal to engage with)
MMT is largely political in nature. See Marriner Eccles and his observation regarding
the political enemies of full employment.
Skippy said it above: these are likely bad faith actors who disguise their classism
and political desires with talk of "positive money" and the like. Debate clubs won't win this
one.
If the Swiss go through with it and it inevitably fails there will always be an excuse.
They didn't do positive money "hard enough" or whatever.
What I'd like to know is if the Swiss go through with it and it fails, is there anything
other than central bank independence that needs to be changed? Fundamentally it's still fiat,
operating within a democracy. Does it not come down to who decides how much and for what
purpose?
Maybe I'm missing something, but it strikes me as the elites getting their revenge in
first. There go my people and all that. Maybe I am missing it.
the good ideas won't be tested, I reckon, until all the various flavors of "bad" have
been tried and rejected.
So, you don't think current conditions are convincing enough?
As for me, I'm more than convinced, that left to themselves, our elites have an endless
bag of bad ideas, and every one of them results in their further enrichment at our
expense.
I'm convinced; have been persuaded that MMT is the right way to think about "money" since
shortly after I encountered it almost a decade ago.
As I understand it, this is a referendum. If the people don't like the outcome, they
presumably would have power to reverse it. Throw the bastards out and replace with new
bastards who will try something different.
As I understand it, MMT is simply a more honest way of explaining the current reality,
the problem being that the 1% would like to keep that a secret so that money is only created
for the things that they can profit from, like war.
So the issue is that since enough money can be created for the needs of the rest of us,
why is that not happening?
It would appear to me that almost any efforts by the 1% to create a 'new' plan is in
reality, an effort to make sure that the 99% never reap any advantage even if we were to
unanimously come to understand the MMT is really the most realistic perspective.
It's almost as if the 1% has decided to change the rules because the rest of us are
starting to understand that there is no technical reason we can't finance a more equitable
economy.
It's good to explain the current reality more honestly.
Even more honestly would be to explain that reality, which is a man-made system, doesn't
have to be that way, unlike scientific explanations, for example, one for how gravity works.
That particular physics explanation comes with the understanding that we can't change how
gravity works.
The word 'theory' in the sense most people with more than 10 years of education associate
with it is that
1. You will fail to advance to the next grade, or the next class if you don't understand
it.
2. If you don't understand it, you are under pressure to show you agree with the theory, lest
you fail the exam.
3. The reality described by the theory is unalterable, which is often the case with natural
science theories, but not really the case with social/economic/political theories, unless
they deal with human nature, which is hard to change.
If I say there is a theory to explain that on Mars, you drive on the right side of the
road on odd-numbered days, and on the left side on even-numbered days, you would say, I
appreciate the clear explanation of your wonderful theory, but I don't like it, I don't like
how that system is designed. And I want to change it!!!!!!!!!!!!
Yesterday, I watched one of many Mark Blyth videos on YouTube where he was talking about
why people hold on to stupid economic ideas. He offered a variety of interesting hypotheses,
most of which were not necessarily mutually exclusive.
Even a theory that fails basic tests of correspondence with reality -- neoclassical
economics being the prime example -- may prove to be a reliable means of coordinating
behavior on a huge scale. That we indoctrinate people in colleges and business schools in
neoclassical economics has been the foundation for neoliberal politics; even if the theory is
largely rubbish by any scientific standard, the rhetorical engine is easy to operate once you
have a few basic concepts down. And, immunity to evidence or critical reason may actually be
politically advantageous.
Econ 101 is taught as a dogma. The student is under pressure to learn the answers for the
exam, as you say. All the rhetorical tropes -- not just deficit hysteria, but regulatory
burdens, tax incentives, "free markets" (you see many actual markets? no, I didn't think so)
and on and on -- are as easy to recite mindlessly as it is to ride a bicycle.
We have an ideology that prevents thinking or even seeing, collectively.
Well, your wish has been answered – about 160 years ago. Lincoln's issuance of
Greenback's allowed the Union Army to exist. No borrowing, no MMT debt incurred.
MMT experts point out regularly that the Federal government spends out of nothing. Issuing
bonds is a political holdover from the Gold Standard era, but separately, those bonds do have
some use because a lot of investors like holding a risk free asset.
The government spends by the Fed debiting the Treasury's account. That's it.
We don't go around worrying about issuing bonds to pay for the next bombing run in the
Middle East. The US has all sort of official off budget activity as well as unofficial (why
do you think the DoD is not able to account for $21 trillion of spending over time? No one
points out this $21 trillion mystery is proof the USG actually runs on MMT principles).
MMT necessarily requires the exorbitant privilege of having the US dollar accounting for
60% of world trade & financial transactions with the US economy representing only 20% of
world GDP.
Such impunity is changing as we speak so for that reason only (there are others) MMT
should soon find itself non-viable.
That is not correct. Any government that issues its own currency is a sovereign currency
issuer and operates on MMT principles. Canada, Japan, England, Australia, New Zealand .the
constraint on their ability to run deficits is inflation. They will never go bankrupt in
their own currencies. They can create too much inflation.
I have the same reaction to Positive Money ideas as I do to someone who talks about
"parallel currencies". They don't understand money, banking and central banking.
While I agree whole heartedly with Clive that establishing the mini-bot currency is
subject to the law of un-intended consequences and would no doubtedly have a bumpy start and
might not even survive; but it's just another currency. Yes it would likely be subject to a
discount versus the Euro, but so what. From a banking perspective there is nothing magical
about state money or central bank money. These are the dominate means of clearing and
settling payments today, but that's because it's currently cheaper, easier and less risky.
But banking predates central banks by at least one or two hundred years (if not more).
Thinking that if you put an iron fist on the usage of state/central bank money is going to
stop banking only shows you don't understand banking. Most economies already have dual
currencies – state money and bank money – but nobody thinks of them that way
because they trade one for one. But locking the banking system out of using state money to
clear and settle payments created by lending only forces the banking system to find a new
means of acquiring liabilities (I'd suspect they get called something other than "deposits"
of course) and clearing and settling payments. It wouldn't happen overnight but it most
certainly would happen – there's too much "money" to be made.
"Most economies already have dual currencies – state money and bank money" Give me
the ratio please. Other than feeding the parking meter or doing your laundry what else do you
use state money for?
It's not exactly the gold standard, but it would have the same impact, I think. You have
to give them credit, though – they keep finding new ways to dress up this very old
idea.
Hard to get to a new answer if you don't even start with the right question.
Wolf asserts his obvious and unquestionable truth: "Money is debt".
Really?
J. P. Morgan didn't think so. When he was asked:
"But the basis of banking is credit, is it not?" , Morgan replied: "Not always. That is an evidence of banking, but it is not the money itself. Money is
gold, and nothing else" .
Ah yes, the shiny rare metal that served mankind as money for millennia.
I have a gold coin in my hand. I can exchange it for goods and services. But I can't for the
life of me figure out whose debt it is.
And no less than The Maestro (Alan Greenspan) opined the following last month:
"The gold standard was operating at its peak in the late 19th and early 20th centuries,
a period of extraordinary global prosperity, characterised by firming productivity growth and
very little inflation.
But today, there is a widespread view that the 19th century gold standard didn't work.
I think that's like wearing the wrong size shoes and saying the shoes are uncomfortable! It
wasn't the gold standard that failed; it was politics. World War I disabled the fixed
exchange rate parities and no country wanted to be exposed to the humiliation of having a
lesser exchange rate against the US dollar than it enjoyed in 1913.
Britain, for example, chose to return to the gold standard in 1925 at the same exchange
rate it had in 1913 relative to the US dollar (US$4.86 per pound sterling). That was a
monumental error by Winston Churchill, then Chancellor of the Exchequer. It induced a severe
deflation for Britain in the late 1920s, and the Bank of England had to default in 1931. It
wasn't the gold standard that wasn't functioning; it was these pre-war parities that didn't
work.
Today, going back on to the gold standard would be perceived as an act of desperation.
But if the gold standard were in place today we would not have reached the situation in which
we now find ourselves. We would never have reached this position of extreme indebtedness were
we on the gold standard, because the gold standard is a way of ensuring that fiscal policy
never gets out of line."
So let's start with a simpler definition of money: "Money stores labor so it can be
transported across space and time" .
I grew some wheat, and want to store my wheat-labor so I can use it later, or spend it
somewhere that is nowhere near my wheat pile.
But this points out why money that took no labor to produce cannot reliably store labor.
Our system materializes money from thin air. Which is precisely the point of gold: it takes
alot of labor to produce, so it has reliably stored labor for centuries. In A.D. 250 if I
wanted a good-quality men's costume (toga, sash, sandals) the cost was one ounce of gold.
Today one ounce of gold is +/-$1300, probably enough for a pretty good suit and pair of
shoes. That fact is incredible: every other currency, money, government, and country have
come and gone in the interim but gold reliably stored labor across the ages.
Cue the haters: "But gold money allows deadly deflation!!!". Yes, that scourge, when
people benefit from rising productivity (lower costs of goods and services) in what used to
be termed "Progress". Instead we're supposed to love being on a debt treadmill where
everything costs more every year, on purpose .
Just to be clear, I'm not arguing that credit should somehow be abolished. Credit is
critical, and hence so is banking. But separating money and credit would mean that every
banking crisis (extending too much credit) is not automatically also a monetary crisis,
affecting everyone, including people who had nothing to do with extending or accepting too
much debt.
Yes, you are correct. No one in the monetary reform movement wants to abolish credit
– an agreement between two entities – but to have that "credit" backed by the US
government as real money – what a racket!
Of course it should be noted that if you dig up a gold coin from two thousand years ago or
even older, it still has value just for its metal content alone. It still holds value. This
is never true of fiat currencies. In fact, it had never occurred to me before, but when you
think about it – the history of money over the past century has been to get actual
gold, gold coins, gold certificates, silver coins, etc. out of the hands of the average
people and to give them pieces of paper and now plastic as substitutes. Even the coins in
circulation today are only cheap remnants of coins of earlier eras that held value in itself.
I would call that a remarkable achievement.
I think you should avail yourself wrt the history of gold and how humans viewed it over
time, then again you could look at say South America from an anthro observation and the
social changes that occurred between Jade and Gold eras.
As far as value goes that is determined at the moment of price taking which can get blurry
over time and space.
Gold was used as religious iconography for a reason imo.
Just from the stand point that gold was in one anthropological observation – a flec
of gold to equal weight of wheat means the gold got its "value" from the wheat and had
nothing to do with some concept of gold having intrinsic value.
Not particularly in love with gold nor am I a gold bug. My own particular prejudice is
that any money system needs an anchor that will set some sort of boundaries to its growth.
Something that will not blow through the physical laws of natural growth and will acknowledge
that resources can and will be exhausted by limitless credit and growth. Personally I don't
care if it is gold or Electrum or Latinum or even Tribbles so long as it is something.
Yet MMT clearly states that growth is restricted to resources full stop. So I don't
understand your issues with anchor points, its right there in black and white.
Look I think there is a huge difference between informal credit [Greaber] and formal
credit [institutional] and the risk factors that they present. This is also complicated by
not all economies are the same e.g. steady state. In facilitating up lift [social cohesion
with benefits of currant knowlage] vs putting some arbitrary limit on credit because it suits
the perspective of those already with claims on wealth.
In addition I would proffer that MMT is not supply side dependent, just the opposite.
Economics would be much more regional in reference to resources and how that relates to its
populations needs, especially considering the democratic governance of those finite resources
without making money the linchpin to how distribution is afforded.
OpenThePodBayDoorsHAL
How dare you submit such irreverent goldbuggery ?
Your line of thought is not politically correct Sir.
Something for nothing is easier to sell and to live by, don´t you know ? as long as it
lasts.
Problem is ( as HAL would say ? ) the 50 years are almost through, so it just can´t
last much longer no matter how much we pussyfoot around reality.
It has nothing to do with being 'politically incorrect'. It has to do with goldbuggery
being completely ignorant of actual history and facts. It ascribes to gold attributes which
it never truly had even in the West, much less globally.
Some examples from objective reality:
When the Conquistadors arrived in the 'New World', they discovered an entire continent
filled with easily accessible gold and silver, and yet neither was treated by the natives as
money. They were shiny trinkets. Money was cocoa beans and pieces of linen.
When the Vikings reached the Eastern Mediterranean, the Byzantines had a hard time getting
them to accept gold as payment. Before that, the only 'precious' metal they had any interest
in was silver.
Going eastward, in feudal Japan currency was based on rice, not precious metals. Gold and
silver were used as representative tokens of large values of rice. The source of value wasn't
felt to be the metal, it was what the metal represented.
If civilization were to end today, the most well off survivors aren't going to be the ones
who stockpiled gold. It's going to be the ones who stockpiled food and water (and/or the
weapons to protect/seize such stockpiles). Gold has exactly zero inherent value. It's a
luxury item at best, in the same way fine art is. No one in the post-apocalyptic wasteland is
going to be impressed by your lumps of heavy, soft metal.
There's plenty of information available from historians, archaeologists, and
anthropologists (but emphatically not from mainstream economists) on the history of money. If
you want to 'free your mind', you'd best start with one of these fields. Not some libertarian
cesspit, where the 'intellectuals' are even more delusional than mainstream
neoclassicals.
I'll probably get slammed here for this but to tell you the truth, I see no justification
for the shape and character of the present money system in use around the world. In fact, I
absolutely refuse to believe that There Is No Alternative. The present system is one that has
evolved over the centuries and for the greater part was designed by those with wealth to
either solidify or expand their wealth.
Yesterday, in a comment, I made the point that for an economic and financial system to work
it has to be sustainable. Call that General Order Number One. But a survey of the present
system shows a system that by its very nature is seeking to transfer the bulk majority of
wealth to about 1% of the population while pushing about 90% of the population into a
neo-feudal poverty. This is nothing short of self-destructive and is certainly not
sustainable.
We tend to think of money as something permanent but the different currencies in existence
today make up only a fraction of the currencies that have ever existed. All the rest have
gone extinct. I am given to understand that when the US Federal Reserve meets, it is in a
room whose walls are adorned with examples of these extinct currencies. In fact, I even own a
few German Reichsmarks from the hyperinflation era of the early 1920s for an occaisional bit
of perspective.
OK, maybe the Swiss referendum is being used, misused and abused but it is a sign of an
arising discontent. It certainly surprises me that it was the Swiss as when I visited that
country, they were the most conservative people that I have ever met as far as money was
concerned. In any case, perhaps it is time that we all sat down and designed a money system
from the ground up. Throw away the rule book and just take a pragmatic approach. Forget
theories and justifications, just look for stuff that works.
There is no need to "experiment" with other systems of money use: we just need to regulate
the system we have but, unfortunately at present, we are in the midst of de-regulating
everything–finance, environmental protections, healthcare, education, etc., and getting
rid of other groups such as unions. The undermining of many (public) institutions is well on
its way and I do not see it ending well. I think the rich have won this round just as they
planned in the 1970's.
I imagine you would want to start from value (a mental state of persons) and labor, things
persons do to achieve stuff which they value. It would be convenient to have tokens which
represented social agreement about value, valued stuff, and labor. The social agreement could
be brought about by cooperative voluntary institutions ('credit unions') which would oversee
and guarantee the issuance of tokens (debts) by members (persons). We already do this on a
modest scale by writing checks, so it's not unheard-of.
If you want a system which doesn't just feed the elites, you have to create one which
doesn't rely on institutions dominated by or entirely controlled by the elites, such as the
government, the major corporations, large banks, and so on. You want something egalitarian,
democratic, and cooperative. It's not impossible.
Indeed it is possible and has been done in the recent past.
A key insight behind credit unions, mutual insurance and savings and loans back in the day
was that these institutions were loaning people their own money savings and should be run
without assigning hotshot managers the dubious incentive of a profit-motive or talking up
"innovation".
One of the things I object to in Richard Murphy's rhetoric and that of more careless
MMT'ers is that they implicitly concede the premise that Money is usefully thought of as a
quantitative thing, a pile of tokena circulating at some velocity. Financial intermediaries
(and yes, Richard, they are intermediaries) do create "money" in the form of credit by
matching ledger entries. For a savings and loan, which gives a mortgage to a depositor or
just a checking account to a saver, this can be a key idea supporting mutual assistance in
cooperative finance.
But, if you insist that the bank is "creating" a quantity of money that is then set loose
to drive up house prices or some similar narrative scenario, I do not see that your
storytelling is doing anyone any good.
Credit from institutions of cooperative finance -- shorn as they must be of the incentive
toward usury and rent extraction -- is actually a very useful application of money, enabling
people to take reasonable risks over their lifetimes. For example, to enable a young couple
to form a household and buy a house and gradually build up equity in home ownership against
later days. This is sensible and prosaic, a standard use of money to insure by letting a bank
or similar institution help individuals or small businesses to transform the maturities of
their assets and prospects, while certifying their credit. If your understanding of money
does not encompass such prosaic ideas as leverage and portfolios or their application to
improving the general welfare, then the "left" is up a creek without a paddle.
"Financial intermediaries (and yes, Richard, they are intermediaries) do create "money" in
the form of credit by matching ledger entries. "
That is NOT what is meant by the term,"intermediaries" here. The common belief is that banks
merely take in a depositor's money and, as an intermediary, lend that money out. An
intermediary, by definition, does not create anything. That is the accepted meaning of the
term when discussing banking. You are free to use your own definition but it will lead to
confusion.
You are incorrect as to how banking works, and you have also jalbroken moderation, which
is grounds for banning, as is clearly stated in our Site Policies, which you did not bother
to read.
Per your comments on banking, you are also engaging in agnotology, another violation of
site Policies.
Banks do not intermediate. They do not lend out of existing savings. Their loans create
new deposits. Not only has MMT demonstrated, and this has been confirmed empirically, but the
Bank of England has endorsed this explanation as correct.
You are presenting the loanable funds fallacy, a pet idea of monetarists. It was first
debunked by Keynes and later by Kaldor.
Your idea of "accepted meaning" is further confirmation you are way out of your depth here
and are a textbook case of Dunning Kruger syndrome.
The matter of who or what controls money is actually secondary to the matter of what money
is used for. Positive Money correctly identifies the fact that under our present arrangements
in the USA, UK, and most of the West, money and credit are used almost entirely for
speculation, usury, and rent extraction (though they do not, so far as I know, use the
terms). If "the people" somehow were able to gain control of money and credit, and money and
credit continued to be used almost entirely for speculation, usury, and rent extraction,
society and the people would see no net advance economically.
That's the simple overview. Allow me to lay out a couple scenarios to show why just
solving the problem of who controls money and credit does not really address our most urgent
problems.
For the first scenario, assume that it is right wing populists who have triumphed in the
fight to seize control of money and credit. Recall that in the first and second iterations of
the bank bailout proposals in USA, Congress was deluged by overwhelming public opposition to
the bailout. But in the second iteration, the Democrats mostly folded, while on the
Republican side, the closer you got to the Tea Party extreme, the stauncher the opposition to
the bailout you found. So, under right-wing populist control, we would probably see
prosecutions and imprisonment of banksters, which would likely have the intended effect of
lessening rent extraction. But we would probably also see that right-wing populists are not
much concerned about speculation and usury, so those would continue relatively unscathed.
More importantly, we could expect right-wing populist control to result in severe cutbacks
to both government and private funding of scientific research, most especially on climate
change. We would be hurried forward on our course toward climate disaster, not turned away
from it.
For the second scenario, let us assume it is a left-wing populist surge that achieves
control over money and credit. In this scenario, speculation and usury would be suppressed as
well as rent extraction. On science, there would no doubt be a surge in funding for climate
research. But I would greatly fear what left-wing populists might do to funding of space
exploration and hard sciences such as the large Hadron collider at CERN. And what would
happen to funding for military research programs like DARPA?
Can you imagine the implications of cutting those kinds of science programs? Try to think
of doing without all the spinoffs from the NASA Apollo moon landing program and the original
ARPAnet, which includes much of the capability of the miniaturized electronics in the
computer, servers, modems, and routers you are now using.
The point is, that without restoring an understanding of republican (NOT capital R
"R"epublican Party) statecraft, its focus on promoting the general welfare, and the
understanding that promoting the general welfare ALWAYS involves identifying and promoting
the leading edges of science and technology, any success in seizing control of money and
credit away from bankers (whether private or central) does not necessarily result in victory.
For an extended discussion of science and republicanism, see my The
Higgs boson and the purpose of a republic .
There will always be right-wingers, left-wingers, progressives, imperialists, etc.
One or more of them will seize control.
It would seem, then, the first thing to do, is to work on human nature, and not
discovering new devices for them (or us, ourselves), because we can not guarantee no harm to
Nature will come from colliding high energy particles.
I don't really see the left as being anti-science, it seems to me that it's the right that
wants to deny scientific findings such as climate change, etc. There are exceptions of
course, such as new-age/anti-vaxers, chem-trail theorists, etc but they are a small minority,
and I find it hard to envision a scenario where a leftist government would cut science
funding. As it is now, many if not most scientific and technical advances have originated
from what was originally military funding, including the internet we are using at this
moment.
This is a model that needs to change IMHO, there is no reason that cutting-edge science
has to be tied to the military, science could just as easily be funded for its own sake,
without the pentagon getting the money first and then having the tech trickle down to the
rest of us.
I am trying to come up with some examples where technological advances were not induced or
misused by warriors and/or libido, from the dawn of humanity till now.
Stone tools – misused for war.
Bronze/iron tools – the same.
The wheel – war chariots.
Writing – to lord over the illiterate
The steam engine – how the west was won with buffaloes going extinct.
Gun powder – war, and above.
The internet – surveillance and libido.
The smart phone – above.
Aspirin – that's all good .maybe the example I am looking for except I'm allergic to
it.
money and credit are used almost entirely for speculation, usury, and rent
extraction
Certainly on the leading edge, that is what money and credit are used for, but
"entirely"??? In the main, money remains the great lever of coordination in an economy of
vastly distributed decision-making.
The forces of predation and fraud are seriously out-of-control and they use money for
anti-social ends, protected by neoliberal ideology and the cluelessness of what passes for
the political left. Like any normal bank robber, the banksters want the system of money to
continue to work and it does continue to work, in the main, even as they play Jenga with the
towering structures of finance.
Well, I did qualify it with "almost" : ). Still, in the late 1990s I found that there was
around $60 (sixty dollars) of trading in financial markets (including futures and forex) for
every one dollar of GDP. That compares to 1.5 to 1 in 1960. The ratio probably dropped in the
aftermath of the 2007-2008 crashes, but I's be surprised if it has not surpassed 60 to 1 by
now. Have mercy on me: I haven't looked at a BIS report for a few years now.
So your solution is to keep it in the hands of the elite?! Please note that the "central
bank" under the Vollgeld initiative is completely redefined, not a central bank at all but a
government institution controlled by a democratic process.
Many banks around the world started out as state-owned and have been privatised.
I admit it is simplistic, but having a state-run not-for-profit bank being this "government
institution controlled by a democratic process" has a lot of merit to me.
It would have lending guidelines to aid investment in productive endeavours, limit the risk,
and have no part in the insane fringe financial transactions that brought about the GFC, and
who know how many other things that have gone under the radar.
This brings all currency creation into a single place, so it needs transparency and a
(proper) democratic governance.
There would probably be fewer jobs I admit, but many of these would be the top levels
enjoying fat bonuses based on winning zero-sum games.
And as a final comment – should GDP include the transactions within the financial
sector at all? Given the zEro-sum games involved, and the creation of losers as part of that,
does it actually "produce" anything at aLL?
I hate to be a nay-sayer, but the reason there were once many state banks in the US and
there is now only one is that they became cesspools of corruption. And having arm-wrestled
with CalPERS for over four years, which is more transparent than a lot of places, good luck
with getting transparency and good governance.
Mind you, that does not mean they might not be worth trying, but the assumption that they
can just be set up and will work just fine "because democracy" needs to be taken with a
fistful of salt. There needs to be a ton of careful thought re governance and lots of checks
(an inspector general with teeth at a minimum, we can see from CalPERS that boards are very
easily captured).
Bank of North
Dakota has a fascinating history, being founded during the Progressive Era, when ND had a
governor who was a member of the Nonpartisan League, a populist political party, and intended
to save North Dakota's farmers and laborers from the predations of the big banks in
Minneapolis and Chicago.
It remains the only state-owned bank in the country.
The populist
Nonpartisan League remains the most successful third party in history, and had remarkable
impact on politics in North Dakota and Minnesota. It merged with the Democratic Party in the
50s.
Ahem, I acknowledged that. What you miss is that pretty much every other state had a state
bank and they were shuttered because they became embarrassingly corrupt. The fact that past
"state bank" experiments almost universally failed makes me leery of the naive view that
they'll be hunky dory. They could be but the sort of cavalier attitude that they'll be
inherently virtuous is the road to abuse and misconduct.
" Money is debt. It is only created by government spending and bank lending. " --
Richard Murphy
We've jumped through the looking glass. The former money, gold, is NOT debt. Debt-based
money is ersatz, a ghastly fraud on humanity.
In a normal economy, government spending is financed by taxes and borrowing, meaning that
no new spending power has been created, as IS the case with new bank loans.
Daniel Nevins' book Economics for Independent Thinkers discusses how modern
economists got misled into believing the money supply governs everything, whereas earlier
19th century economists understood that bank lending is what drives expansions.
Poor Murphy, starting out with a wonky premise, only succeeds in careering into a briar
patch and wrecking his bike. He should post his pratfall on YouTube.
Fiat money can also be created without debt. That's the whole point of MMT, but it makes
Haygood's head explode so he never acknowledges it (without muttering about hyperinflation,
which never actually happens outside of disasters on the scale of a major war).
When the federal government spends money into existence -- which can be on the basis of a
democratic agenda, in countries that have actual democracies -- there's no need for a
corresponding issuance of government debt. Hence, spending power is indeed created. If the
government does create debt, the bond is an asset on the ledger of whoever buys it, and the
government spends the interest into existence. Which creates additional spending power for
the private sector. The government can choose to, or not, collect a portion of this as taxes,
which extinguishes the money. If the government collected as taxes everything it ever spent
there would be no money in circulation.
> In a normal economy, government spending is financed by taxes and borrowing,
meaning that no new spending power has been created, as IS the case with new bank
loans.
Er, new bank loans also represent borrowing that has to be paid back. The spending power
that gets created is extinguished by paying back the bank loan.
the federal government spends money into existence
a
That's a choice made by the designers of the current system.
But not the only choice.
The people, for example, can be empowered (or perhaps inherit that power, on the basis of
the Constitution amendment clause* that any power not given explicitly to the federal
government is reserved for the people), to spend money into existence.
*The Tenth Amendment declares, "The powers not delegated to the United States by the
Constitution, nor prohibited by it to the states, are reserved to the states respectively, or
to the people."
So do you gold bugs want to dispense with double entry bookkeeping or keep it and adapt it
to gold (would that entail both counterfeit money and counterfeit debt?) – gold as both
credit and debt, or just what exactly? With the gold side weighing down the ledger it's gonna
get wobbly. Maybe have to start a war to fix it? The fog of positive money. Really, JH,
you've been the best voice against war. How do you reconcile all the social imbalance that
would follow with "positive" money?
Fiat money is war finance, made permanent. Even during the gold standard, governments
would suspend gold convertibility during wars. Lincoln's greenbacks and the UK's suspension
during WW I are noteworthy examples.
So the gold standard won't stop governments declaring national security exceptions --
they've always done so. But permanent war finance is what sustains the value-subtraction US
military empire, a gross social imbalance that already plagues us by starving the US
economy of investment.
Double entry bookkeeping doesn't require that every asset have an offsetting liability. A
balance sheet with no liabilities is all equity on the right-hand side. It's what a bank
would look like if it sold off its loan portfolio and paid off its depositors -- cash on the
left side, equity on the right. If the bank then bought some gold, it would be exchanging one
asset (cash) for another (gold), with no effect on the liability/equity side.
Just look up the mintage figures, here's $20 gold coins that contain just under 1 troy oz
of pure gold in content, from 1861 to 1865. You can follow links to other denominations.
There were over 8 million ounces alone in $20 gold coins struck during the Civil War, by
the Union.
We were never on a pure gold standard, nowhere close actually.
The most common money in the land until the Federal Reserve came along, FRN's not being
backed by gold?
Why, that would've been National Banknotes, which was the currency of the land from 1863
to 1935. There were over 10,000 different banks in the country that all issued their own
currency with the same design, but with different names of banking institutions, etc.
Very hard to argue with you, but I'm tripping over this: "If the bank then bought some
gold, it would be exchanging one asset (cash) for another (gold) with no effect o the
liability equity side." Because in my mind cash isn't an asset – it's just money
– a medium of exchange and a unit of account. Where we get all messed up is when the
unit of account starts to slip (due to mismanagement) and people start to demand that money
become a store of value. When the value is society itself. And blablablah.
Sure, the value is society itself, I agree with this. But OTOH, it is for example much
better to be a woman, black person, fill in the blank, even "working class" person with a lot
of money than not in a sexist, racist, etc society.
I can't necessarily compel the forces of sexism, racism, old farts who don't agree with
me, etc through the "political process," thereby bringing my will to bear on society. But I
can move things with my dollars, This is how money gets its magic power. If people played
nice with each other, we wouldn't need money.
What about paper bugs Susan ?
Has paper buggery helped any ever ?
Why do fiat currencies always self-implode (in average) every 50 years ?
" You can fool part of the people all of the time, and all of the people part of the
time. .."
8 white men control > 50% of the world's wealth. Let's just keep going in that
direction, to where it's down to one white guy, and with debt-based money everyone else owes
him all the "money" in the world. Then we can just strangle him in the bathtub and usher in
an era of peace and prosperity.
Richard Murphy says that " handing all credit creation to the central banks is not
only technically impossible in a modern economy, it's a dangerous folly "
What is QE then, Sir ?
Our "modern" economies don´t have business cycles any more, just distorting credit
cycles.
There are no "markets" as such today, nor prices only interventions.
Even interest rates (the price of supposed "money" remember ?) are not priced by markets any
more .
Help me. Gold is not money. And it does not have and never had immutable value. Even in
the days of the gold standard, countries regularly devalued their currencies in gold terms.
It was the money that was used for commerce, not the gold. When the US government devalued
the $ in gold terms by 5%, bread at the store didn't cost more the next day, which is what
your "gold is money" amounts to. It's not correct and you need to drop it.
"The former money, gold, is NOT debt. Debt-based money is ersatz, a ghastly fraud on
humanity."
You've been on NC for years. You have to know by now that this literally, objectively,
isn't true. It just simply isn't. History and anthropology do not at all support your version
of events. People like Hudson and Graeber have extensively documented where money came from.
Debt and credit came first, then money as a token to measure them. We have warehouses full of
the freaking Sumerian transactions tablets that show it! Money is debt, always has been.
Actually, I say you have to know this by now, but given how conspicuously absent you seem
to be in the comments of Michael Hudson articles about the history of debt hosted here, maybe
you just aren't reading them. Or you are and don't like what they say and how it clashes with
your pre-established worldview, so you just ignore them. Though even if the latter, it's
still telling how you don't even attempt to refute them. Perhaps because you can't.
It's not about money; its about creating and distributing wealth. That a trivial thing
like a double-entry bookkeeping operation should stand in the way of creating the wealth the
world and its people need to survive is, of course, insane. But it is also insane to expect
different results from turning over control of the process of money creation to a wholly
owned subsidiary of governments like those of the United States and Great Britain, bent as
they are on global hegemony ("full spectrum dominance") – at ANY cost.
Whether or not China and other developing nations realize it, genuine wealth creation
– not money as debt creation ('finance capitalism') – is THE source of national
power. It is more than a little amusing to watch the neoconservatives fret about the rise of
China after having joined with their neoliberal brothers in off-shoring US and Western wealth
creation potential (in what they must have thought was an oh so clever attack on Western
living standards by forcing 'their' people to compete with the world's most desperate workers
in a global race to the bottom so their 1% patrons would have an excuse to create more money
as debt).
So long as the West remains focused on 'the price of everything and the value of nothing'
(like the human potential of their own people, for example), the developing world is soon
likely to have a monopoly that will put OPEC and its Middle Eastern dictators to shame. In
summary this is about FAR more than just about how a few 'post-industrial' democracies create
their money. The definitive work on this topic remains Soddy's Wealth, Virtual Wealth and
Debt, 2nd edition.
Just as a few days ago Carlos Rovelli, author of " The Order of Time ", has
useful insights of the political significance of LSD, he has advice for this too in the same
book:
The entire evolution of science would suggest that the best grammar for thinking about
the world is that of change, not of permanence. Not of being, but of becoming.
We can think of the world as made up of things. Of substances. Of entities. Of something
that is. Or we can think of it as made up of events. Of happenings. Of processes. Of
something that occurs. Something that does not last, and that undergoes continual
transformation, that is not permanent in time. The destruction of the notion of time in
fundamental physics is the crumbling of the first of these two perspectives, not of the
second. It is the realization of the ubiquity of impermanence, not of stasis in a
motionless time.
In other (his) words:
"The world is made up of networks of kisses, not of stones."
As long as I am feting physicists, this just came over the transom from Sabine
Hossenfelder of backreaction.blogspot.com fame. She's written a book, " Lost in Math
" and was informed that a video trailer is customary in this situation. As the first comment
there says:
"Hey, that is a GREAT statement! (And it applies to SO MUCH in life, not just
physics!)
We've all been focusing on the demand side of the Fed Reserve's liquidity pump: be it for
sound business needs. Or not (pirates).
But what happens when demand for that pump disappears because everyone is over-extended?
Because this is where Bernanke and Japan and the ECB have done "whatever it takes" to keep
that pump from going in reverse. Because in an empire created on naked shorts (currency
creation today is essentially a naked shorting process), the last thing you want is that pump
to go in reverse. That's not just creative destruction. That's house-on-fire destruction.
So Bernanke et. al. have figured out how to keep that pump from going in reverse. Simply
prop up asset prices, e.g. by reducing the asset float in treasuries, MBSs, etc. And it
worked. Yay! Right? If you're an asset holder, you're aces. If you're not an asset holder,
well you're not doing so well. In particular, if you're in that part of the economy which
depends on the velocity of money. Because velocity is at a stand still. As another blogger I
used to follow would say, price sans volume is not the right price. So from my perspective,
Bernanke (and Japan) had to destroy their economies by replacing them with zombie economies
to rescue certain players. Not just players, but playahs – the pirates that pushed us
to this end-game. So the pirates are rescued. And the average joe inherits the after effects.
But hey, those with 401Ks got rescued too, so it's not all bad. And since the 401Kers are
competitive, they generally found safe harbor in the job market too. Yay for them.
If we were not on a debt-based monetary pump, we would not end up with a zombie economy.
One which the Fed Reserve can't figure out how to solve except for creating even more demand
at the debt pump, even more over extension to mask the issue only to fall back within the
same trap again. From what I can tell, we are truly in a doom loop and at present I don't see
any creativity in getting us out of this doom loop.
So the vollgeld initiative would ostensibly be a way to extricate an economy from that
doom loop. I suspect the Swiss don't really need it as much as other nations. But why get in
the way of that type of creativity?
And I would just add that supplanting the federal reserve note with a Lincoln greenback
type of approach would work just as well. Even better since it gives the monetary powers to
the fiscal side of the Fed Gov.
I posted a version of this last night in the previous thread. But suspect nobody is going
to go to that thread anymore. So apologies for a repeat of sort. Not trying to spam.
The idea of a real estate pumped perpetual notion machine, combined with essentially an
interest free savings plan for the proles, persuaded them to come through and help rise all
boats, and who could have figured on vacation rentals helping out housing bubble deux, the
sequel.
Looking @ the real estate listings here in a vacation rental hotspot is indicative, in
that there are only a few $250k-$300k homes for sale now, whereas there used to be a dozen,
always.
Now, on the other hand, we're swimming in $500k to $1m homes that don't make the rental
cut.
You probably read the Bernank's naive confession yesterday that fiscal stimulus "is going
to hit the economy in a big way this year and next year, and then in 2020 Wile E. Coyote is
going to go off the cliff."
Three hundred shocked staffers in the Eccles Building cocked their heads to the side and
gasped, "He said WHAT?" So I wrote this song Technodammerung for rogue banker
Ben:
He was just a Harvard hand
Workin' the QE he planned to try
The years went by
Every night when the sun goes down
Just another lonely quant in town
And rates out runnin' 'round
It's another tequila sunset
Fed's old scam still looks the same
Another frame
Pardners in chime
proseytizing in real time
Preaching, if you can touch a dime
Why wont paper rhyme
But in their zeal and haste
And self-righteous aversion to waste
Recruit disciples in bling bling
Preaching money is a thing thing
While finger wagging the bloat
Preaching fix the rate, dont let it float
But beyond the noise
Preaching with poise
Its all about them
Their stuff, jewels and gem
Might the actions of a bank be restrained more easily by requiring all payments and stock
issuances to the executives and directors be put directly into escrow accounts to be metered
out in small amounts if the bank stays healthy over time? If the bank suffers major losses,
the escrow accounts would be the first source of funds to make up for them. No Federal
Deposit Insurance or other government payments would be made to the bank until the escrow
accounts have been reduced to zero.
Randall Wray could be made Sec Treasury, Stephanie Melton Fed Chairman and if the
plutocrats still run the rest of the political show that sets priorities, we would still be
screwed. The full employment guaranteed jobs could just as easily be strip mining coal from
national parks and forests as installing a national solar grid. It could be done with forced
low paid labor camps that maximize rent for the plutocrats. MMT seems morally neutral on how
the money is spent. For a good portion of the plutocrats, helping the poor is morally suspect
.if they consider it at all. That is the larger problem than acceptance of MMT.
I didn't see any comment here going in depth with ideas on the binding money creation
decisions with socially useful goals (saving TBTF I dont consider such a goal, except for
emergency purposes), by what type of process and stakeholders – to avoid driving us
toward becoming a 3rd world oligarchy.
The rest is just mechanics – but the most important thing is what is the social
control and social purpose of money creation. I am sure we could do just fine even with the
present system (of course since it is a MMT system), if there were some limits on speculation
with asset prices, less military spending, more democratic control of enterprises, including
banks, severe constraints on the FIRE sector, etc, etc.
In the end the problem of managing money well is a political problem. And not much is
changing there for the better, despite a growing awareness that "we have a problem" as a
society. Where are the politicians that will connect the dots and take on the responsibility
to fix the travesty that we have?
More questions than answers, I know. But what we need a change in politics – then
banking will follow.
This is a common fallacy, that MMT is bad because it isn't about communal barter tokens or
some other thing. MMT exists to empirically describe how money works in the existing economy
today. You can be any sort of ideology and embrace it, anyone can use it, just like anyone
can use science, it's not inherently biased toward any ideology unlike neoclassical economics
and its baked in neoliberalism. That doesn't make it bad, that just shows that it is what it
purports to be, an empirical description of money in our existing economy.
You want a brand new type of currency in a whole new economy, well, start organizing your
revolutionary army, because that's what that will take.
The Battle for Money -- that much, it seems to me, is true. Neoliberalism is going down,
brought down by its own (unfortunate in my view) success and hubris, and one consequence,
on-going, is the urgent political need to re-invent the institutions of money.
The institutional systems of monetary/payment/finance systems are always under a lot of
strategic pressure: they tend to develop and evolve quickly and they do not usually last all
that long -- maybe, the span of three or four human generations -- except in the collective
memory of their artifacts and debris.
There's a natural human wish that it could all be made safely automatic -- taken out of
corruptible hands and fixed with some technical governor. Whether you are a fan of democracy
or loyal to oligarchy really doesn't take anyone very far toward devising or understanding a
workable system of money.
As I said in a comment on the earlier Richard Murphy post, money is a language in which we
write (hopefully) "true" fictions to paper over uncertainty. Much of what passes for a theory
of money is just meta-fiction, akin to literary criticism of a particular genre or era. That
is certainly true of Quantity Theory (1.0 re: gold and 2.0 Friedman). It is true of related
fables, like Krugman's favorite, loanable funds.
When Murphy rejects the quantity theory of money and then turns around and talks about the
need to create "enough" money, I pretty much write him off. When he embraces the Truth of
MMT, I know he is hopeless.
It's been discussed on NC before, but despite all the theories and figures, it's really a
battle of values. I'm not pushing religion, just saying it has all the makings of a holy
war.
(come to think of it, isn't religion a big part of the history of monetary theory?)
China has yet to fall under the thumb of private banks the way the west has. State still
holds the reins of regulation tight and the government bank maintains a robust public sector.
Michael Hudson just came back from China and has this to say:
"The debts are owed to government banks. A government can do what the U.S. can't do.
The government can forgive debts, at least those that are owed to itself, without creating a
political backlash. If a viable corporation has run up too much debt, the government can
forgive it. This is better than letting the debt close down a factory or force it be sold to
a predatory asset management firm as occurs in the United States. That is the advantage of
having public credit and why credit should be public. That's how it was in Babylonia. Rulers
were able to cancel debts all the time in the 3rd millennium and 2nd millennium BC, because
most debts were owed to the palace or the temples. Rulers were cancelling debts owed to
themselves.
China can cancel business debt owed to itself. It can proclaim a clean slate. It can
minimize debt service to whatever it chooses. But imagine if Chase Manhattan and Goldman
Sachs are let in. It would be much harder for the government to raise real estate taxes
leading to defaults on the banks. It could save the occupants by making new loans to those
who default – based on lower land prices.
Well, you can imagine the international furor that would erupt. Trump would threaten
to atom bomb Peking and Shanghai to save his constituency. His constituency and that of the
Democrats are the same: Wall Street and the One Percent. So China may lose its ability to
write down debts if it lets in foreign banks."
There are advantages to restoring financial management to the nation-state, as former
Deputy Secretary of the Treasury Frank Newman has pointed out in books and lectures. The
private banks have exhausted QE to the tune of $30 trillion, none of which was invested in
the industrial economy. Why blame the Swiss for wanting to be like China?
that this is a Chicago School / Friedmanesque monetary policy is made clear by
Positive Money
The Chicago Plan of the 1930s and the unrelated Friedman suggestion of 1948 were both
predicated on the false fractional reserve theory of banking. Given that individual banks
create credit unrestrained by reserves those plans would not have had the desired result.
Positive Money knows this, though they do sometimes carelessly use the term 'fractional
reserve banking'. They think their plan is different and, to the extent that it would
actually prevent banks creating credit, it is.
It is silly to suggest that Positive Money is some Neoliberal front. Neutering the banks
is the last thing Neoliberals want, and when they want something they don't bother with
democratic methods like public pressure groups, they use think-tanks and lobbying.
Murphy's main complaint is about handing the 'quantity' decision to the Bank. I don't
think Positive Money is wedded to that idea, it is just an attempt to defuse the 'profligate
politicians' argument.
Being that NC is the place I discovered MMT, and it's been explained and debated so for so
long here, I would have expected NC readers to more broadly understand that what we have
currently would work for everyone if only our masters would allow it.
IOW, it is not necessary to reinvent our system so much as insist that it be used to
finance material benefits for all, as opposed to endless war, political repression and
bail-outs for our criminal finance sector.
How can it be that we can we finance $trillions for war at the drop of a hat, but cannot
afford to 'fix' SS, or provide universal healthcare?
It seems to me that it's a political issue, not a technical problem, or am I missing
something here?
Cui bono?
The current mission of the custodians of our "money" is to keep banks afloat. It's not to
provide general benefit, or to even preserve the buying power of the scrip they issue,
despite what you might hear about the supposed "dual mandate" (which is now a "triple
mandate": prices, employment, and the stock market).
"Financing material benefits for all" could be a bank that extends credit to a small
business. Take a look at commercial credit creation to see how well that's been going. Take a
look at velocity.
The Fed gifted Citi $174 billion on a day when they could have purchased 100% of the Citi
Class A common stock for $4B. This is the difference Michael Hudson points about about China:
their instant ability to swap debt for equity because all banks are state-owned and
because they're Communists and nobody would blink an eye .
Most interesting in The Middle Kingdom are the moves to protect the state-owned banks.
They started about 18 months ago, when people were told they could only have one Tier 1
bank-linked e-commerce account. As a result 7.5 billion (with a B) accounts were closed. Next
they said all payments systems (including WeChat and Alipay) must clear through a new central
bank clearinghouse. Two weeks ago they said not only will everything clear through these but
the actual funds will need to be transferred to the new CB account .
Ant Financial announced that in the future they would be concentrating on services to
finance and e-commerce companies, and away from providing those services themselves. They
even anticipate a name change, from Ant Financial to Ant Lifestyle. All this makes perfect
sense: President Xi will see every financial transaction in the country, and presumably apply
a Social Score filter on whether he allows it to go through. 11 million people have already
been denied the right to purchase train tickets or buy a house because they spat on a
sidewalk, jaywalked, or made the wrong comments on social media.
Wow! We are clearly past the "First they ignore you.." stage and just on the other side of
" then they ridicule you.." phase. What a basket of slurs, gross omissions of fact and
outright falsehoods is this current blog post.
Anytime Milton Friedman is invoked to slur a concept developed before he was even born,
should be an indicator that there is no substance to the argument against the democratization
of money creation.
Thanks to the internet however, one can easily visit the Positive Money site, the American
Monetary Institute and International Movement for Monetary Reform sites to see those fake
progressives in action. While you're at it, go to the Vollgeld site yourself and read what
those wolves in sheep's clothing are really saying instead of the creative writing displayed
in the blog.
How can anyone who claims to be concerned over the excesses of capitalism prostrate
themselves in front of the current banking system, the driver of capitalism as it
rides off the rails.
I can't bring myself to respond to the stream of unsubstantiated assertions presented but
need to remind people that banks, MUST create money first for the most creditworthy. I won't
insult the readers any further by naming who that class represents. A child can see that
this, by definition, must lead to the accelerating inequality we see today.
As a challenge, I ask the author to show specifically in the US code where it permits the
Federal Government to spend before its accounts at the Fed are replenished either by
borrowing or taxing. Stay tuned to these pages for the evidence .
PM just wants OMF (Overt Monetary Financing) with ZIRP and a very small horizontal money
system. MMT analysis suggests OMF with ZIRP and a much more regulated horizontal system is
needed. There is actually very little difference in their policy prescriptions. They just
arrived at them from opposite sides of the track
I'll second that but for different reasons. Buried not far beneath the surface of this
issue (money's creation, how and how much) are hugely important issues. But the discussion
never seems to get beyond everyone's favorite system for creating money. The assumption seems
to run along the lines of: if we can just come up with some scheme for government or gold
backed money, those who possess or produce the real wealth for that money to buy will forever
be content to exchange it for the money we will forever create to pay for it. There seems to
be a belief countries like China or Russia can never escape the 'dollar trap' – or if
they try we can threaten and intimidate them back in line with our "full spectrum dominance"
military. Money IS debt – and sooner or later those who hold it are going to want to
call that debt in.
Both Positive Money and MMT appear to me to just be attempts to continue 'business as
usual', operating without a real definition of wealth and trusting / hoping 'the market' will
sort it out.
Money is debt, both functionally and conceptually. This is true for most of the money used
in the Main Street economy. It is created as debt – yours to a bank when you use your
credit card or borrow money; the bank's to you when you deposit money with one. In its role
as a medium of exchange money serves as a claim on society's goods and services, its real
wealth. You don't exchange real wealth for fiat or bank-created money without the expectation
you will at some future time be able to again exchange that money for real wealth at least
equivalent to what you had to give up in exchange for the money originally.
Rather than a claim on wealth, money could be viewed as a representation of value. Value
exchange is more like a giving/sharing economy, rather than debt-swapping. I think this
psychological improvement will lead to many physical/social/environmental improvements.
Of course, in any case, people need to be willing sellers/exchangers – it's not
automatic or universal; we need some freedom to choose, and the better the conditions are
generally, the better the freedom we will have.
OK but the term, "money is debt" is used too loosely and can be very misleading. Money
does not have to be issued as debt as claimed by MMT. In fact, money can first appear as
equity on the government's balance sheet with no counterbalancing debt. So this concept is
grossly misused to imply money must be issued as debt when, in fact, once issued it may
represent a claim on the wealth of society. Proponents of MMT first make the claim
that money is debt, and that the notion that money can be issued debt-free is therefore false
on its face. Pretty clever. They slyly blur the distinction between the creation of money by
a government and the role of that money once in the economy.
How can money first appear as equity? Isn't the other side of that the deficit? Granted I
am naive on these points but I thought money was a bond of zero duration.See skippy re time
and space
. A question for Paul: Unless it is 'privatized' is there even such a thing as 'government
equity'? The way the West's financial system works nothing that can't be sold appears to have
any value. What's missing from that system – and the discipline of economics (see
below) – is a definition of wealth.
steven –
I believe we know what wealth is – but I don't understand your claim that money needs
to be privatized to be considered equity. The government declares by fiat that the money it
creates can be used to purchase goods and services in the economy.
I don't believe this is anywhere nearly correct. From all over the political spectrum
commentators lament the lost of trillions of dollars (or euros or whatever) of wealth. At
least until the effects of a financial crisis start to take hold, no physical or intellectual
capital is lost. The only thing that is lost are a few zeros on some financial ledgers.
As for money as equity, you may be technically correct, i.e. the rules of accounting may
permit governments to count the stacks of paper currency they print (in any case, small
change in terms of the total money supply) as 'equity'. But for most of us the only thing
governments possess that we would count as equity are asset classes like public
infrastructure. And until the services they provide (or the assets themselves) are sold, that
infrastructure would, from a business accounting standpoint, technically be 'worthless'.
(that last is a question?)
tegnost – There is nothing in the accounting standards that prevents the inclusion
of equity on a balance sheet. If we were under the gold standard and you happened to find a
nugget of gold in your back yard, are you telling me that you would have to imagine some kind
of "debt" to balance your household balance sheet? When Lincoln issued the Greenbacks in the
1860's there was no bond or debt associated with it. It paid soldiers wages and goods and
services during he civil war.
Just as MMT states the government isn't a household, it also isn't a commercial bank either.
It has the constitutional power to coin money as needed, no debt involved.
presumably you bought the nugget of gold when you purchased the property and it's land use
rights so it's not a virgin birth, the debt is what you purchased the land for. Maybe one of
those diamonds in the outback that hardy souls find, but those may have some territorial
claim as well.
The gold nugget has no inherent value. It's just a lump of cold metal. It will only become
valuable when you go to someone else with it and try to exchange it for something, whether it
be a currency or some kind of good. And only if the other person agrees with you that it's
valuable. This is fundamentally what money is: a token of social interaction. The gold
becomes valuable when you go to exchange it for something else. In other words when a debt
comes into play. Money is debt. Or rather, it's a measurement of debt and credit. 'Store of
value' and all that econ 101 rot is so much gibberish.
Once you realize that, then a question arises: "Well, why bother with rare metals or
pressed coins? If it's just a token, you could literally just take a stick and carve marks
into it and it would be the same thing". Yes, exactly. Which is precisely the sort of thing
we see lots of in history.
Murphy sounds like one of those indecisive chaps who dispute with everyone but have no
ideas of their own. I shall ignore him. Good luck to Switzerland. They have the courage and
political system to try the experiment and we will all know the result in early course.
What am I missing? As far as I can tell, the proposal is just Modern Money with the
central bank substituted for the Treasury. Yes, that makes it less democratic.
MMT is inflation-limited, too. That's how you know you've overshot your resources. In
fact, MMT poses a technical problem: how do you know when you've reached resource limits,
EXCEPT by observing inflation? Because without that, you have a ratchet. Of course, that's
just what we have, usually, so maybe that's evidence for the theory.
"First, this puts inflation at the core of economic policy." – is a false claim. As
quoted, it treats inflation as a limitation. The core is promoting adequate economic
activity.
Finally, he treats "money is debt" as doctrine. he doesn't justify it and it makes little
sense, ESPECIALLY in MMT. How can you pay a debt with a debt? Someone's getting cheated. MMT
actually proposes free money, to a point. I've seen elaborations of the idea, but they use a
very extended sense of "debt." And I don't see how it's even relevant to his overall
thesis.
The Swiss are pretty conservative, so I doubt they'll pass it.
No, Positive Money is not remotely MMT. Wash your mouth out.
The Positive Money types want to limit the extension of credit and put it under the
control of what Lambert called "a magic board," a regular gimmick from his days back in
debate where someone needed to be in charge but no one wanted to think hard about who or how.
In practice, a central bank would be in charge. So how democratic is that?
MMT does not fetishize money the way the Positive Money does. MMT despite having Monetary
in the name is about the role of government spending in a fiat currency system. MMT argues
that (as Kalekci did) that businesses have strong incentive (not wanting workers to get
uppity) to keep the economy at less than full employment. So the government can and should
spend to mobilize resources. And it can because its role as the currency issuer means it can
never go bankrupt, it can only create too much inflation. Taxes are what contain inflation in
MMT.
By contrast, the Positive Money types want to do it by limiting credit creation. And thus
Murphy is correct. That means their priority is to preserve the value of financial assets,
not achieve full employment.
I don't believe it is accurate to say that Positive Money "fetishizes money". Irving
Fisher acknowledged his debt to Frederick Soddy for the concept of "100% Money", the
intellectual foundation for the Positive Money movement. Soddy's intent in limiting the
creation of money to the stock of wealth available for it to purchase was to retain
independence from the state in obtaining the means of subsistence. He compared the use of
monetary policy to goose the economy to a merchant putting his or her finger on the scale,
making it difficult to impossible for money to fulfill two of its primary functions: serving
as a medium of exchange and a store of value.
So long as there was wealth available for it to purchase, he – and presumably
Fisher's Positive Money crowd – would have no objection to creating as much money as
needed to keep the economy running. What he and every other respectable economist have been
trying to bring under control is the excess money creation fueling speculation and the
seemingly inevitable boom-bust cycle accompanying the private creation of money.
Rather than curbing that excess, however, the 'solution' that seems to have been adopted
is for the US and other Western governments to absorb the excess credit (money as debt)
creation by taking it on their (governments') own books. Government debt is I believe called
'near money' in the financial markets. But neither the governments nor the bankers of
countries that no longer create real wealth have any logical right to create the money to buy
it. Just retaining the right to 'print' more money or 'near money' doesn't change that,
except perhaps in an absurdly narrow legal sense.
There are, of course, some issues like globalization intimately connected with the
construction of a logical and fair monetary system. But underlying them all, including for
countries other than the US, is a logical definition of 'wealth':
a logical definition of wealth is absolutely needed for the basis of economics if it is
to be a science."
Frederick Soddy, WEALTH, VIRTUAL WEALTH AND DEBT, 2nd edition, p. 102
(Soddy might have added "if government is to be a science".)
Here in lies the rub economics will never be a Science.
Firstly the medium used by most economics – philosophy – does not even have a
functioning model of time and space and is prone to fads. Magnified by scale WRT elite tastes
or self dealing. Wealth or Capital is also a bit complicated by say the Cambridge Controversy
et al. So until some very fundamental flaws are sorted, that have nothing to do with –
money – the concept of "Science of Money" is going to be a non starter.
Worst is those that use such syntax and dialectal style are going to be called into
question – over it.
I mean we had political theory, then some bolted on science to it, and called it economic
science. Which then begat a whole time line of dominance front running the political process
regardless of political incumbents.
I think Scientists that dabble in monetary theory fall victim to the same dilemma that say
religious based views do – their optics are ground before looking.
Probably best to start with the first part of Soddy's (actually John Ruskin's)
observation, "a logical definition of wealth is absolutely needed ". "Most economics" may
indeed disguise its prostitution with a veneer of philosophy or mathematics. But I don't
think you can say that about Soddy's:
A definition of wealth must be based upon the nature of physical or material wealth, in
the sense of the physical requisites which empower and enable human life-that is, which
supply human beings with the means to live, and, as an after consequence of living, to
love, think and pursue goodness, beauty and truth.p. 108
(All citations are from Soddy's Wealth, Virtual Wealth and Debt, 2nd edition- WVWD)
For that matter, according to Michael Hudson, you can not accuse the classical economists of
just dabbling in philosophy. They were ALL about freeing society from free-lunch economic
rent seekers, freeing up the resources so they could be devoted as completely as possible to
the development of "the physical requisites which empower and enable human life".
What we have to do to develop those physical requisites – and increasingly the
limitations imposed by the requirements of sustainability – is pretty well known.
Whether a science of money can be devised to help accomplish that goal or some other
mechanism for distributing the wealth made possible by advances in science and technology is
required is increasingly open to question.
Take a look at Soddy's –THE THREE INGREDIENTS OF WEALTH (DISCOVERY, NATURAL ENERGY
AND DILIGENCE). p. 61 The first two are firmly embedded in time and space.
I have read Soddy, more so I have talked with PM sorts for a long time, hence I'm not
ignorant of the camps views or actions during said time.
Onward
"a logical definition of wealth is absolutely needed ".
I did reference the Cambridge Controversy, are you informed WRT this aspect.
"A definition of wealth must be based upon the nature of physical or material wealth, in
the sense of the physical requisites which empower and enable human life-that is, which
supply human beings with the means to live, and, as an after consequence of living, to love,
think and pursue goodness, beauty and truth.p. 108"
Sorry but . "consequence of living, to love, think and pursue goodness, beauty and truth"
has nothing scientific about it.
I reiterate – Metaphilosophy has no scientific underpinnings and attempts to "brand"
it otherwise in only to burnish its credentials without any empirical satisfaction is just
rhetorical gaming.
"you can not accuse the classical economists of just dabbling in philosophy."
Hay I respect Hudson, that does not mean I worship him, hes been invaluable to the
discovery process, but, that does not mean everything he has to say is the word of dawg, nor
would I surrender my cognitive processes just because someone uses the term classical.
If I have to go that space I would favor say Veblen or Lars P. Syll where if your to own a
thing one must accept the responsibility from a social aspect and not one of atomistic
individualism.
But hay I regress . because I'm still waiting for someone to show me a few decades of a
labour market in "action".
"BTW it would be incumbent of you to redress my concerns above without forging a new path
which excludes them." – Sorry if I did that. It was not my intent. Wikipedia is my only
exposure to the Cambridge Controversy . As
I understand it, science is supposed to be all about observing the real world and then
drawing conclusions from those observations. It looks to me like the participants in the
debate were looking at their models and maybe the logic they used to construct them, not the
world they were supposed to be modeling.
"Most of the debate is mathematical, while some major elements can be explained as part of
the aggregation problem. The critique of neoclassical capital theory might be summed up as
saying that the theory suffers from the fallacy of composition;"
This kind of cant is a far cry from something like:
"Though it was not understood a century ago, and though as yet the applications of the
knowledge to the economics of life are not generally realised, life in its physical aspect
is fundamentally a struggle for energy , in which discovery after discovery brings life
into new relations with the original source. Evolutionary development has been parasitic,
higher and higher organisms arising and obtaining the requisite supplies of energy by
feeding upon the lower. But with man and the development of conscious reason, that process
as regards energy is being reversed. "
Sorry, but where does Positive Money , in any of the publications and articles, propose
any limitations on 'credit' ?
I never saw that.
Or AMI or any of these public money types for that matter?
Thank you.
You are completely correct, they don't. This is all made up propaganda against the
democratization of the money supply. What PM proposes is sound credit creation.
PM wants to establish a non democratic administration of government issuance and then
allow a return to the free banking period of the 1800s. All based on notions of EMH and QTM
contra to all the historical data from that period. So on one had PM wants to lay claim to
scientific methodology WRT money yet still cling to scientifically refuted EMH.
As far as I can discern PM proponents advance the belief that this would compel banks to
become investment entities for "productive" activities. Don't know how that would work out
considering how corporatism views society.
The positive money people have come at it from the other angle. People like Richard Werner
have been studying the problems with privately created money since the Japanese economy blew
up in the 1980s .
They have seen all the problems with privately created money and the positive money people
were very pleased when the BoE confirmed their beliefs in 2014.
The positive money people have come to the wrong conclusion through not understanding
publicly created money.
The MMT people can learn a lot about the problems of privately created money from the
positive money people.
The two camps should merge to get the big picture.
I started looking into all the problems of privately created money after 2008 and was a
latecomer to MMT.
The two merge nicely when you think about it and realise the why the positive money people
came to the conclusion they did. They just didn't understand the way publicly created money
works now.
In the case of Japan, unless I'm misunderstanding things there, presumably they've
embraced MMT out the wazoo, in that they're willing to leverage federal gov debt out the
wazoo. And yet I think the consensus still seems to be that their economy is still zombified
(still not really recovered from the debt overhang from their go go years). In which case,
why is that?
Has Japan been hamstringing their use of MMT, so it's less effective than it could be? Do
they need to up the ante, employ MMT-on-steroids to overcome the trap that they're in, say
like the US needed WWII to get out of its trap?
Withstanding MMT-on-steroids, should it be QE-on-steroids instead that get the animal
spirits rekindled? I don't have a strong sense of whether the US central bank has done more
in that department compared to the central bank of Japan. Or if indeed, the US central bank
has been more successful on that front. It's clear that animal spirits are certainly
rekindled in the US – the usual playahs are back at it. Though whether that's
unzombified our economy, I'm not so sure – I don't think it has.
If these hurdles are so difficult, seems to me we should have a monetary system that
doesn't result in a zombified economy to begin with, per the comment I was making further
above.
And yet I think the consensus still seems to be that their economy is still zombified
(still not really recovered from the debt overhang from their go go years). In which case,
why is that?
Debt Peonage. For it to work there has to be a debt jubilee (a forgiveness of peoples
debt).
" It seems there are greater similarities between China and the US than may be visible
at first glance. China builds real estate for a shrinking population, invests for an
over-indebted client (the US, which even insists on a drastic reduction of the bilateral
trade deficit) and finances all this with money it does not have ."
MMT has always stated to whom the debt is owed is the crux of the matter and in what form
denoted.
I have trouble understanding the dramas with bank issued credit when squared with say
equities, why all the focus on one and not to be inclusive of a wide assortment of other
mediums of exchange and how they are created and why.
So tell me why J – bonds are called the death trade e.g. shorters nightmare –
albeit they will tell you their shorts are being thwarted by ev'bal forces.
Couldn't resist this. That title has me intrigued so, with apologies to Winston
Churchill-
" What (neoliberals have) called the Battle of (Credit) is over the Battle of (Money) is
about to begin. Upon this battle depends the survival of (world) civilisation. Upon it
depends our own (western) life, and the long continuity of our institutions and our
(civilization). The whole fury and might of the enemy must very soon be turned on us.
(Neoliberals) knows that (they) will have to break us in this (idea) or lose the war. If we
can stand up to (them), all (the world) may be freed and the life of the world may move
forward into broad, sunlit uplands.
But if we fail, then the whole world, including the United States, including all that we have
known and cared for, will sink into the abyss of a new dark age made more sinister, and
perhaps more protracted, by the lights of perverted science. Let us therefore brace ourselves
to our duties, and so bear ourselves, that if the (United Nations) and its (Countries) last
for a thousand years, men will still say, "This was their finest hour." "
Yet then some say AET and Neoclassical economics just needs to implement PM and all will
be well.
I've yet to see any PM advocate or proponent criticize an executive or corporatism, only
banksters and some politicians. On the other hand I've seen many PM sorts back crypto based
on the argument of decentralization. So which is it, counterfeiting of national money with a
side of corruption or a case of counterfeiting ex nihilo via some arbitrary computational
source with a predominate side of corruption.
I am completely at a loss to understand how the debate about money proceeds things like
Marginalism, supply and demand as a monolith, rational agent models, theoclassical opinions
elevated to truisms [economic laws] and a reduction of human experience as a binary condition
set in stone.
I also have issues with PM advocates and their UBI agenda, due to its original proponents
views on the need to water down democracy more to keep the unwashed from just voting
themselves more money. It is in my opinion logically incoherent, that is just what has
occurred during the neoliberal period and corporatists via the democracy of money through
lobbyists – every dollar is a vote – et al.
In light of that I can only surmise that PM is actually pro elitist, not that I have
issues with some being elite, that is another story altogether, but money itself is not the
bar.
Looks like Trump adopted Victoria Nuland "Fuck the EU" attitude ;-). There might be nasty
surprises down the road as this is uncharted territory: destruction of neoliberal
globalization.
Trump proved to be a really bad negotiator. he reduced the USA to a schoolyard bully who
beats up his gang members because their former victims have grown too big.
As the owner of world reserve currency the USA is able to tax US denominated transactions both via conversion fees and
inflation. As long as the USA has dollar as a reserve currency the USA has so called "exorbitant priviledge" : "In the
Bretton Woods system put in place in
1944, US dollars were convertible to gold. In France, it was called "America's
exorbitant privilege"[219]
as it resulted in an "asymmetric financial system" where foreigners "see themselves supporting American living standards and
subsidizing American multinationals"."... "De Gaulle openly criticised the
United States intervention in Vietnam and the "exorbitant
privilege" of the United States dollar. In his later years, his support for the slogan "Vive
le Québec libre" and his two vetoes of Britain's entry into the
European Economic
Community generated considerable controversy." Charles de Gaulle -
Wikipedia
Notable quotes:
"... Errrr, that so-called "piggy bank' just happens to; ..."
"... have the world's reserve currency ..."
"... dominates the entire planet militarily since the end of the Cold War ..."
"... dictates "regime change" around the world ..."
"... manipulates and controls the world's entire financial system, from the price of a barrel to every financial transaction in the SWIFT system. ..."
"... And Trump has the ignorance, the arrogance and the audacity to be pleading 'poverty?' ..."
"We had productive discussion on having fair and reciprocal" trade and market access.
"We're linked in the great effort to create a more just and prosperous world. And from the
standpoint of trade and creating more prosperous countries, I think they are starting to be
committed to more fair trade. We as a nation lost $870 billion on trade...I blame our leaders
and I congratulate leaders of other countries for taking advantage of our leaders."
"If they retaliate they're making a tremendous mistake because you see we have a
tremendous trade imbalance...the numbers are so much against them, we win that war 1000 times
out of a 1000."
"We're negotiating very hard, tariffs and barriers...the European Union is brutal to the
United States....the gig is up...there's nothing they can say."
"We're like the piggy bank that everybody's robbing."
"I would say the level of relationship is a ten - Angela, Emmanuel and Justin - we have a very good relationship. I won't
blame these people, unless they don't smarten up and make the trades fair."
Trump is now making the 20-hour flight to Singapore, where he will attend a historic summit with North Korea leader Kim Jong
Un. We'll now keep our eye out for the finalized communique from the group. The US is typically a leader in the crafting of the
statement. But this time, it's unclear if the US had any input at all into the statement, as only the leaders from Britain,
Canada, France, Germany, Italy and Japan as well as the presidents of the European Commission and European Council remain at the
meeting. But regardless of who writes it, the statement will probably be of little consequence, as UBS points out:
Several heads of state will be heading off on a taxpayer-financed "mini-break" in Canada today. In all of its incarnations
(over the past four years, we've gone from G-8 to G-6+1) the group hasn't really accomplished much since an initial burst of
enthusiasm with the Plaza Accords and Louvre Accords in the 1980s.
By the way, Trump is right on the tariffs in my view, Europeans should lower their tariffs
and not having the US raising it.
Trump: "We're The Piggy Bank That Everybody's Robbing"
Isn't Trump great in catch phrases? Trump's base will now regurgitate it to death.
Now reconcile Trump's remarks with reality:
Professor Werner: Germany is for instance not even allowed to receive delivery of US
Treasuries that it may have purchased as a result of the dollars earned through its current
account surplus: these Treasuries have to be held in custody by the Federal Reserve Bank of
New York, a privately owned bank: A promise on a promise. At the same time, German influence
over the pyramid structure of such promises has been declining rapidly since the abolition of
the German currency and introduction of the euro, controlled by an unaccountable
supranational international agency that cannot be influenced by any democratic assembly in
the eurozone. As a result, this structure of one-sided outflows of real goods and services
from Germany is likely to persist in the short and medium-term.
To add insult to injury:
Euro-federalists financed by US spy chiefs
The documents show that ACUE financed the European Movement, the most important federalist
organisation in the post-war years. In 1958, for example, it provided 53.5 per cent of the
movement's funds.
Okay, everyone set your "team" aside for a few minutes and let's look at the facts and
reality.
Do you really believe the rest of the world has trade advantages over the US? Well, let's
consider major industries.
Agriculture.....maybe, but only sightly. Our farmers are the richest in the workd....by
far.
Manufacturers.....probably so....because we gave it away to countries with slave labor.
Manufacturers jobs were jobs where people could earn a decent living...and that had to
go..can't be cutting into corporate profits with all that high cost labor.
Defense.....need I go here? We spend more than the next 11 countries combined! We sell
more as well.
Energy.....we rule thus space because we buy it with worthless printed fiat
debt...whenever we want to....and nd if you deny us, we will bomb the hell out of you and
take it.
Technology. ....Apple, Microsoft, Intel, Google, Amazon, Oracle, Dell, Cisco.....who can
touch that line up....not to mention all the on-line outfits like Facebook and Twitter.
Finance.....the best for last. We control the printing press that prints the dollar the
rest of the world needs. We control energy and foreign policy. Don't do what we like and we
will cut you off from SWIFT and devalue the hell out of your currency...and then move in for
the "regime" change to some one who plays ball the way we like it. 85% of all international
trade takes place in dollars everyday. We have the biggest banks, Wall Street, and infest the
world with our virus called the dollar so that we can Jeri their chain at will.
Now I ask you....just where the hell is the "trade imbalances"? Sure there are some
companies or job sectors that get a raw deal because our politicians give some foreigners
unfair trade advantages here and there, but as a whole, we dominate trade by far. The poor in
our country lives like kings compared to 5.5 billion of the world's population. Trump knows
this.....or he is stupid. He is pandering to his sheeple voting base that are easily duped
into believing someone is getting what is their's.
Hey, I am thankful to be an American and enjoy the advantages we have. But I am not going
to stick my head up Trump's ass and agree with this bullshit. It is misdirection (corporate
America and politicians are the problem here, not foreign countries) and a major distraction.
Because all the trade in the world isn't going to pull us out of this debt catastrophe that's
coming.
But, if we cut through all the verbiage, we will arrive at the elephant in the room.
American manufacturing jobs have been off-shored to low wage countries and the jobs which
have replaced them are, for the most part, minium wage service jobs. A man cannot buy a
house, marry and raise a family on a humburger-flippers wage. Even those minimum wage jobs
are often unavailable to Americans because millions of illegal aliens have been allowed into
the country and they are undercutting wages in the service sector. At the same time, the
better paid positions are being given to H-1B visa holders who undercut the American worker
(who is not infrequently forced to train his own replacement in order to access his
unemployment benefits.)
As the above paragraph demonstrates the oligarchs are being permitted to force down
American wages and the fact that we no longer make, but instead import, the things we need,
thus exporting our wealth and damaging our own workers is all the same to them. They grow
richer and they do not care about our country or our people. If they can make us all into
slaves it will suit them perfectly.
We need tariffs to enable our workers to compete against third world wages in countries
where the cost-of-living is less. (American wages may be stagnating or declining but our
cost-of-living is not declining.) We need to deport illegal aliens and to stop the flow of
them over our borders. (Build the wall.) We need to severely limit the H-1B visa programme
which is putting qualified Americans out of work. (When I came to the US in 1967 I was
permitted entry on the basis that I was coming to do a job for which there were not enough
American workers available. Why was that rule ever changed?)
You are making my point. China didn't "off shore" our jobs....our politicians and
corporations did. You can't fix that by going after other countries. You fix that by
penalizing companies for using slave labor workers from other countries. Tariffs are not
going to fix this. They will just raise prices on everyone.
I can't believe you Trumptards can't see this! Once again we will focus on a symptom and
ignore the real problem. Boy, Trump and his buddies from NYC and DC have really suffered
because of unfair trade practices, right? Why can't you people see that "government is the
problem" and misdirection your attention to China, Canada, Germany, Mexico, or whomever is
just that....misdirection.
I would tax the shit out of companies like Apple that make everything overseas with slave
labor and then ship it in here to sell to Americans at ridiculous prices.
Plenty of down votes but no one has proven that I am wrong on one point.
The EU countries have free college, health care, day care and just about everything else.
All paid for because they have no military spending.
It's all on the backs of the US tax payer. Or the fed, if you prefer.
Trump is working both angles. Forcing them to pay for their own defense. Forcing them to
allow US products with no trade disadvantages. Go MAGA and fuck the EU.
"... By Lynn Parramore, Senior Research Analyst, Institute for New Economic Thinking. Originally published at the Institute for New Economic Thinking website ..."
"... Jim Chanos, founder and managing partner of New York-based Kynikos Associates, has spent much of his career studying financial fraud. He shares his thoughts with the Institute for New Economic Thinking -- where he is a member of the ..."
"... Global Partners Council ..."
"... -- on cryptocurrency, fraud coming from China, and why fraudsters may currently be on the rise. Chanos teaches a course on the history of financial fraud at Yale University and the University of Wisconsin. ..."
Jim Chanos, founder and managing partner of New York-based Kynikos Associates, has spent
much of his career studying financial fraud. He shares his thoughts with the Institute for New
Economic Thinking -- where he is a member of theGlobal Partners Council-- on cryptocurrency, fraud coming from China, and why
fraudsters may currently be on the rise. Chanos teaches a course on the history of financial
fraud at Yale University and the University of Wisconsin.
Lynn Parramore: As someone who pays a lot of attention to financial fraud, you've noticed
that this activity has a connection to business cycles. Can you explain that and say where you
think we are right now?
Jim Chanos: I've found in my research and my teaching that what I would call the "fraud
cycle" -- instances of large-scale financial fraud over multiple platforms and companies in the
financial markets in the modern era (the last 500 years) -- follows the financial cycle with a
lag. That means that as business and particularly financial markets improve, peoples' sense of
disbelief and caution that they've often earned from the previous downturn begins to erode.
Schemes that before might have seemed too good to be true begin to be embraced.
LP: So people relax their financial vigilance.
JC: Exactly. The longer the cycle goes on, the easier it becomes for the dishonest and the
fraudsters to ply their trade because people will begin to believe in things that they
shouldn't financially. As cycles go on, we tend to see higher instances of fraud. In recent
memory, there were clearly, from a legal and prosecutorial point of view, more cases of fraud
after the dot-com bull market of the late '90s, which went from 1991 to 2000. Many of the
dot-coms turned out to be fraudulent. We then saw the Enrons and the WorldComs and the Tycos.
Frauds generally come to light after the financial cycle turns down. We saw this again after
the crisis following the bull market of 2003 to 2007.
What happens is that the new capital going into these things dries up. Many frauds are, by
their nature, Ponzi schemes that require new money and new investors to pay off the old
investors. When people want their money back, the insolvency of the venture is discovered. John
Kenneth Galbraith has this wonderful term called "the bezzle" [inventory of undiscovered
embezzlement]. That's the heart of the fraud, the nature of the fraud in the company. He points
out that in the up phase, there's this wonderful period where both the fraudsters and the
defrauded think they're getting richer. An interesting observation, right?
Of course, it works the other way on the down side. That's what I mean when I tell my
students to follow the cycles and be on guard the longer a financial and business cycle lasts
because people will get a little bit jiggy with their capital. They're willing to take risks,
willing to believe things. So today we've got bitcoin and ICOs [initial coin offerings], which
went ballistic in 2017. I suspect going forward we're going to see more and more evidence of
questionable companies as this bull market keeps advancing and aging. We're now nine years into
this bull market, same as the '90s, so I suspect that now things are starting to percolate. I
think bitcoin and the ICOs are just one manifestation of that.
LP: I just passed a huge crowd gathered around the New York Hilton Midtown for "Blockchain
Week NYC," a series of events put on to showcase the city as a hub for blockchain jobs. You
could feel the excitement in the air with all the attendees and reporters jostling on the
sidewalk. What's your take on all this hype?
JC: At one blockchain gathering there were a set of rented Lamborghinis parked outside to
entice the traders and day traders and retail investors: this, too, can be yours if you hop
aboard the blockchain and bitcoin bonanza!
I teach about a guy from the early 18th century called John Law. He was the architect of one
of the great financial frauds of all time -- the Mississippi scheme of 1718-20 in Paris. (He's
also the guy who founded New Orleans. He sent settlers there who named it after his benefactor,
the Duc d'Orléans).
Law was the first person to write about the need for foreign governments to have fiat
currencies and not be tethered to gold and silver. Because of the power of taxation and the
power of the governments through enforcement and force of arms, they could enforce their
currency to be used, and because of their ability to expand the monetary base and do all the
kinds of things that central banks now do, it was in their best interest to do so.
This was revolutionary back then. Law's failed experiment, which added lots of fraudulent
bells and whistles to that scheme in France, put the idea on the backburner for a while. But
economic historians have revisited it now and his early papers are genius. They're up there
with some of the stuff Keynes wrote in the 20th century in terms of the way he envisioned
monetary systems to work. Law points out sort of obliquely the positive ways in which the
citizenry would come to accept and trust paper money. Not only would the power of the state
compel you to accept it, but the power of the state also acted as a third party to adjudicate
problems, fraud and act as a lender of last resort in times of crisis instead of going down
into a deflationary spiral. That was the positive side.
In the new bitcoin and crypto-craze, the whole idea is that we need to get away from fiat
currencies by creating our own fiat currency for which there is no lender of last resort, no
third party adjudicator. For those who believe it's a store of value in the coming apocalypse,
the idea is that you're going to have to safeguard your key under a mountain with fingerprint
and eye scan security while the hordes are outside your bunker trying to get in to use it --
for what, I have no idea. Because for those who believe that you need to own digital currency
as a store of value in the worst-case scenario, that's exactly the case in which a digital
currency will work the least. Food would work the best!
LP: Sounds like a libertarian fantasy.
JC: That's exactly what it is. And if you say, well, fiat currency is going to bring the
world down, which could, of course, happen, then I say the last thing I'd want to own is
bitcoin if the grid goes down.
LP: It also sounds like the perfect realm for people looking to commit fraud.
JC: Well, there you go. Bitcoin is still the area for people who are trying to avoid
taxation or other examinations of their transactions. That's one thing where I think it
probably still has utility, but the governments have figured that out.
Last year, just as the mania was really going, an early convert who had gotten in early and
had made a lot of money wrote this humorous blog about trying to cash in his winnings, if you
will. He chronicled telling the exchange that he wanted to convert his bitcoins into U.S.
dollars and have them wired into his U.S. bank. It took something like eight or ten days and
numerous follow-ups and phone calls. The funniest part was his having to fax his passport to
Lithuania.
LP: That doesn't sound very high-tech or efficient.
JC: Exactly. Using a fax machine to Eastern Europe struck me as kind of the antithesis of
what you're trying to do here. So this is simply a security speculation game masquerading as a
technological breakthrough in monetary policy. Someone at Grant's interest rate conference
recently said that it was as if we had intentionally created a "monetary Somalia."
LP: So buyer beware.
JC: I think so.
LP: You recently appeared in a fascinating documentary, " The China Hustle ," which concerns the reverse
merger boom in which I believe 400 Chinese companies came to market on the U.S. stock exchange.
Can you say a bit about what these mergers are and how U.S. investors got conned?
JC: A reverse merger is simply when the company in question merges into a defunct,
U.S.-listed corporation, typically on NASDAQ, which has been moribund for years but has still
been filing with the SEC, so it may have a listing somewhere.
We can see these reverse mergers in the late '90s when they became dot-com companies, and
also in the late '70s, when gold was a hot asset and they became gold mining companies. In the
last ten years, they started to appear to take advantage of the growth of Asia and the growth
of China. It's very easy to sell small, retail investors on this idea. It sounds very
appealing.
What happens is you merge the Happy Flower High Tech Company into some defunct company and
you rename the old company with the Chinese name. Voila! The Chinese company is now public in
the U.S. without having to file an IPO [initial public offering] prospectus with the SEC. You
don't go through underwriters, a due diligence process, or a vetting process where the SEC asks
questions on the IPO. But you now have a company on NASDAQ or the U.S. Stock Exchange.
This is what "The China Hustle" was about -- this raft of companies that merged with
companies you've never heard of and created, instantaneously, reasonably large-capitalization
companies operating in China but trading in the U.S. Of course, therein lies the rub. How do
you really know what was going on in the operating company? How good was the accounting? How
good were the representations of the outside auditors and representatives of the boards? It
turned out that a lot of them were frauds.
LP: So I'm an investor and I hear that this Chinese company has come to market in the U.S.
and it has been audited by Pricewaterhouse, Deloitte, or some other well-known auditing firm. I
think it must be legit. What's wrong with this assumption?
JC: There are two big problems there. When people always ask me about the large frauds we've
dealt with, they ask, who were the auditors? And I say, who cares? Every great fraud was
basically audited, most of the time by major firms. In China it's even worse than that because
although the statements might say Pricewaterhouse, if you read the fine print it actually says,
"Pricewaterhouse reviewed the work by an affiliate in China." So it's often a smaller firm that
has a relationship with the big firm that actually does the auditing. Pricewaterhouse just puts
its stamp of approval on that.
LP: Sounds kind of like what the big credit ratings agencies did by giving triple-A ratings
to securities that were fraudulent in the lead-up to the financial crisis.
JC: Right. But you have to remember that auditors are not the financial check that most
people think they are. The financial statements are not prepared by auditors. The financial
statements in publicly traded firms are prepared by management and the auditors review the
statements. Unless they have reason to believe something is amiss or are pointed to something
being amiss by a whistleblower or short seller or journalist, they're not going to detect
anything most of the time.
LP: Auditors are not detectives.
JC: No they're not. They're really paid by the company to review the company's own financial
statements. So at the end of the day, this still comes back to the management and the board. Do
you trust them? Do you believe what they're telling you? What is your ability to check?
LP: In the case of the Happy Flower Company, I can't really check.
JC: Not only that, one of the points that the movie made very well was that even if you find
the smoking gun and the chairman runs off with all the money and you're left with nothing, the
recourse to western investors is virtually nil. None of these CEOs are prosecuted. The view of
the Chinese court system, which, I should point out, is an arm of the Communist Party, not the
Chinese state, is, "sorry, but no jurisdiction here. You're a western investor and you ought to
know better."
LP: Can the SEC do anything?
JC: The SEC did announce a crackdown after the fact, but besides monitoring companies'
ongoing disclosures and trying to halt trading in the securities if there is evidence of a
problem, there isn't a lot that the SEC can do. These are Chinese companies.
LP: How do you view the climate for financial fraud under the Trump administration? I note
that Trump's SEC nominee, who was sworn in as chair last May, was an Alibaba IPO advisor -- the
Silicon Valley lawyer Jay Clayton. You've expressed skepticism about Alibaba.
JC: I have, and so far I've been wrong, at least with respect to the stock price. But I
challenge anyone to explain to me cogently what Alibaba is doing with all its capital and
flipping companies back and forth to insider and revaluing the prices of companies upward.
Be that as it may, the real issue is, what is the sense of the administration? I'll say one
thing, when the George W. Bush administration started -- remember, he was the MBA president --
he came in on a pro-business platform and was seen as very pro-business and anti-regulation,
similar to the Trump administration. But when the wave of fraud started hitting in '01 and '02,
I have to give the John Ashcroft Justice Department a lot of credit. They did a 180 and went
after the bad guys hard.
I always joke that the two presidents who have put more executives in jail than all the rest
combined were both named Bush. W's father was instrumental in prosecuting the S&L [Saving
and Loan] crooks back in the early '90s and put about 3,000 of them in jail. I think they
realized that the public was losing money in the stock markets, not just because of the frauds,
but because the long dot-com bull market had ended. People were upset. Then when you had the
revelations of WorldCom and Enron on top of it, there was a sense that every corporation was
crooked and this was going to have exogenous impacts on the economy and the market as a whole.
I think they correctly realized that we've got to basically show that we're the cops on the
beat. And they did.
That did not happen, as you well know, after the GFC [Global Financial Crisis], for lots of
reasons, including a Justice Department that actually took the extraordinary step of admitting
that it considered economic and financial market factors in figuring out when, or if, to
prosecute a company. So justice now had an economic angle to it. We sort of know how we think
about the Trump administration -- I noted the other day that the Education Department seems to
have shut down its division investigating fraud at the for-profit education companies, which
are one of the biggest cesspools out there in terms of financial fraud and fraud upon the
taxpayer. So that's not a good sign. On the other hand, public opinion can move things quickly
as it did in the Enron case. We saw a real stepped-up effort to go after the bad guys.
I think a lot depends on circumstances at the time. We're still in the expansionary phase of
the financial cycle and, arguably, the fraud cycle, so we'll have to see what happens once that
rolls over.
LP: Let's talk about emerging markets. Do you think a big crisis could develop as investors
head back to the U.S. as the Federal Reserve raises rates here?
JC: The emerging markets are always sort of the end of the wick, right? They always go down
the most when fear is out there and they go up the most when people are euphoric. Emerging
markets had a really rough go of it from 2011 right on to 2015. They never really recovered a
lot from the GFC. Then someone hit the light switch and whether it was things changing in
Brazil or [former president] Jacob Zuma being ousted in South Africa or South America turning
the corner. I would note that Argentina issued a one hundred-year bond a year ago that was
oversubscribed, and this week Argentina went back hat in hand to the IMF [International
Monetary Fund], so we've had this amazingly quick shot across the bow in the emerging markets.
We'll see if it's the start of something bigger. But it's sort of amazing to me that after only
a two-year respite, places like Argentina and Turkey seem to find themselves in trouble again.
Time will tell.
LP: One thing you said in "The China Hustle" is that we've never seen a credit build-up like
the one we've seen in China today that hasn't been followed by a major financial crisis. That
sounds pretty worrisome.
JC: I'm always told confidently it won't matter because they owe it to themselves. Well, if
that was that were the case, then Zimbabwe would be one of the wealthiest countries in the
world today!
The build-up of China's debt and the speed of that build-up is nothing short of stunning.
There's a new book that I recommend, " China's Great Wall of
Debt ." It does a great job of chronicling just how massive this build-up has been in the
last ten years following China's stimulus in '09 to pull the world out of the GFC. You've heard
me call it the "treadmill to hell" because you have to put more and more debt on the books to
keep the growth going and this is where China is finding itself. If they don't increase the
debt, the economy hits stall speed and for all the talk about innovation and technology and
transferring to a consumer-driven, technology-driven economy, the evidence on that is kind of
scant. It's still basically an economy driven by debt-driven investment, which is still over
40% of GDP. I think when we started talk about China it was 46% and I think the most recent
number is about 43%. So it's improved slightly over the eight or nine years, but not much.
China is still basically a giant construction site and shows no signs of changing. In fact,
with the One Belt One Road Initiative [a project launched in 2013 to develop trade routes to
connect China to the world], they're trying to basically export their construction capabilities
and credit to countries along what we would call the Old Silk Road.
LP: In terms of the overall picture of fraud, are we any better off than we were after the
financial crisis?
JC: Personally, I think we're worse off. I think we were better off after the dot-com era.
Not because we enacted Sarbanes Oxley [passed by the U.S. Congress in 2002 to protect investors
from fraudulent corporate accounting activities] but because the public saw that there was
justice. The bad guys got caught and at least if I lost money, they paid the price of their
freedom. That never happened in '08 and '09 for a variety of reasons. We've just had a
continuation of the cycle and the cycle is still going.
LP: So fraudsters are emboldened?
JC: Right. And now we come back to bitcoin. What's your recourse if you lose money in an ICO
traded on an exchange offshore? If people lose lots of money, there will be an outcry, but no
recourse. So we're building into something. I suspect it's in front of us and it will be
interesting to see what happens.
LP: What happens in a capitalist system to good people who want to behave ethically? How can
they succeed in an atmosphere in which fraud and unethical behavior are constantly
happening?
JC: I think capitalism is still the best game in town, but the very best games have good
sets of rules, and, even more importantly, good umpires and referees. When the game becomes
tilted and the house has the advantage, people tend to stop playing.
When the system is seen as corrupt or dishonest, there's a political price. We saw this
after the GFC. People in New York and San Francisco and Boston might be fine with everything,
but in the South and Midwest, where you're from and where I'm from, there's still this general
sense that "the bastards got away with it and I'm still suffering." So there is an exogenous
cost to this where people don't feel that there was justice. They feel that they were taken
advantage of by those sharpies on the coasts. It brings out some of the worst in people, of
course, so that's one small step, then, away from social problems like anti-Semitism and
anti-immigrant feelings. It's us v. them. Nobody is looking after us.
Economists and financial analysts have a hard time quantifying all these things, but I think
that the point is that fair markets where there's a set of rules, where there's a cop on the
beat, where there are regulators making sure that people are adhering to the rules, are far
better markets than one in which caveat emptor is written above the casino. I think it behooves
us as a society to understand that capitalism is an amazing driver of progress and prosperity
and wealth, but it can be diverted. There's a dark side to it if we don't play by the rules and
if we don't encourage capital formation from all members of society who don't feel they're
getting a fair shake.
Everybody gets that capitalism involves risk-taking. But the asymmetric situation where
people who are dishonest get away with it while people who are honest and provide capital get
left holding the bag will really stunt capitalism. I think that's the issue which the vigilance
on fraud, why it's so important. It is part of the capitalistic system. There will always be
people trying to take advantage of other people. It's still better than when the whole system
is flawed, like totalitarian communism, where corruption starts at the very top in terms of the
planning itself. But on the other hand, the counterfactual is that it could be so much better
if everybody is participating and understands that there is a strong set of rules and penalties
when you break them and justice as well. That's what I think has been lacking in the last
generation.
Only in cryptocurrency can an enterprise that calls itself "ethical" be represented by
someone who is both an "award winning journalist" and "PR relations" pic.twitter.com/9lMcXPWSb3 -- Izabella Kaminska
(@izakaminska) June 5,
2018
Don't laugh so soon This came across my Twitter
feed a couple days ago, and I was a little taken aback.
I really like the idea of community currencies, but I'm wondering why on earth you'd want
to get them tangled up with blockchain for the purpose of trading/conversion ?
Just make a Global CC and have that be that or am I oversimplifying this?
#OrHaveIMissedSomething
PS: I also take exception to using the term Bancor as well, given what it's original purpose was. Not too sure
#JMK would be down with the blockchain .
Why wouldn't a Zimbabwe type country embrace cryptocurrency as money of the iRealm?
Seems like it wouldn't be that hard to get outsiders to believe in it, as long as it was
pretty vague, and most wouldn't know that the very same country issued $100 Trillion
banknotes not so long ago.
Zimbabwe didn't need printing facilities when they were cranking out oodles of currency,
as it was all printed in Germany. (who got stiffed on payment, if memory serves)
'John Law was the first person to write about the need for foreign governments to have
fiat currencies and not be tethered to gold and silver. Law's failed experiment, which added
lots of fraudulent bells and whistles to that scheme in France, put the idea on the back
burner for a while. But economic historians have revisited it now and his early papers are
genius.' -- Jim Chanos
This is bizarre historical revisionism. John Law didn't add "fraudulent bells and
whistles" -- fraud was the whole point of fiat currencies, then [1720 -- Mississippi
bubble] and now.
Fiat currencies were born in original sin, that is. When Bubble III blows like Kilauea,
the central banksters who engineered this global calamity may find themselves (like Law)
involuntarily expatriated by angry mobs of peasants with pitchforks.
Currency is born in sin, and may only be cleansed by the divine power of God, err, Gold.
Only by having supreme faith in its shininess will your economy be saved. Do not question how
or why, as Gold works in mysterious way. Au men.
I don't understand Jim . central banks have been staffed largely by monetarist and quasi
monetarists throughout the entire neoliberal period. Then you have the vast majority of the
politicians holding the same view.
But anyway I thought quality held true in both cases, so what agenda threatened the
quality of fiat – at onset. I mean what mob forwarded all the innovation [tm],
completely ignored poor or criminal underwriting standards, completely miss-priced risk, was
completely oblivious to obvious gaming everything for "personal" profit.
I really can't see how fiat forced some people to act in such an anti social manner by its
will alone. I mean that sort of broad social dominance is usually reserved for social
narratives.
Sorry but I really never understood the logic behind the money did it thingy .
I do wonder about folks who describe alternative forms of governance with a very clear
lack of understanding of political/economic arrangements.
You can't really have a totalitarian communism. Chanos should do some history homework on
what the USSR was, and why the system was doomed to fail starting all the way back with
Lenin. Lenin didn't believe that the Russians were ready for the revolution, he considered it
a holding pattern waiting for the revolution to happen in Germany.
Just because you (or an autocrat like Stalin) call something a communism or socialism,
doesn't make it so.
"But the asymmetric situation where people who are dishonest get away with it while people
who are honest and provide capital get left holding the bag will really stunt
capitalism."
Good. I can't think of any better evidence that the system is archaic and if left
unchecked eats itself. Chanos might think about re-reading some Marx.
"I'm always told confidently it won't matter because they owe it to themselves." Isn't
that the basis of MMT? Heck, that means Murica is heading towards eternal prosperity.
I'm still wondering if the long game is to use a crypto currency as a petro currency, to
supplant the US dollar. That way, countries (and corporations) with trade surpluses with the
US can hoard their surpluses in the crypto-cum-petro currency rather than US assets (bonds
and stocks). In an asset that has neutrality with respect to any nation state. Just like gold
used to have.
There's a book that suggests this line of thinking, but doesn't really seem to chase it
down adequately: https://www.amazon.com/dp/B07BPM3GZQ . See review
on Frances Coppola's website.
There is a 25 minute clip here that describes the creation of money and the recording of
transactions (the blockchain) and does not seem fraudulent in any way:
Just when during WW1 the British determined they were going to be backstabbed by their American cousins is unknown to me, but
hopefully my unfinished research into that era will provide an answer. Clearly, Keynes knew what would occur as he observed the
proceedings at Versailles, which prompted him to go to Marseilles to write Consequences. I greatly disagree with most of
Wikipedia's discussion of
Consequences except for this bit in the intro:
"In his book, he argued for a much more generous peace, not out of a desire for justice or fairness – these are aspects of
the peace that Keynes does not deal with – but for the sake of the economic well-being of all of Europe, including the Allied
Powers, which the Treaty of Versailles and its associated treaties would prevent. [My Emphasis]
Thanks to Wilson's stroke, we'll never know how he really felt about the last months of his administration; his wife becoming
the first de facto female president of the USA. One of the better indicators about the nascent Deep States's feeling about Versailles
is their behavior during the 1920s as it laid the ground work for the Great Depression's onslaught with Dollar Diplomacy and Teapot
Dome exemplifying its moral compass. Prohibition's gangsters and coppers provided the required distraction of the masses until
the money vanished. Then came radio, the beginnings of mass media and onset of media conglomeration.
i think what is missing in your analysis "how governments that print their own currency such as US, UK and China can print
as much as they want and use it as they like" is the key acknowledgement that the us$ has been used as world currency.
and Canada.
The US $ is the World Currency because the US is the only country in the World that exports it's currency more than $0.5 Trillion/year.
Like a virus really. It's that simple if the US didn't export $ it wouldn't be the reserve currency.
The other part about sovereigns being able to "print all they want" is a falsehood without context.
First of all, when people refer to "printing" it usually means "spending" although I'm not sure they think of it in those terms.
The actual printing of physical currency/coins moves money from checking accounts in the banking system to petty cash accounts.
No new money is created by that kind of "printing". About 2% of US $ is coins or currency, the rest exists only on balance sheets.
Secondly, a sovereign is able to buy anything for sale in it's own currency as long as the resource being bought exists and
is for sale. You can't buy something that doesn't exist. The constraint on money creation is resources not arithmetic, which is
the most widely misunderstood characteristic of fiat currencies.
Further, a sovereign that HAS NO DEBT IN A FOREIGN CURRENCY has zero risk of insolvency there is no liability (in it's own
currency) a sovereign cannot satisfy. The US holds no foreign debt. Nor does Canada, Australia, Japan, UK, etc. as far as I know.
Every member in the Eurozone is a de-facto holder of foreign debt (the Euro member countries cannot freely create Euro's. They
are more like private borrowers).
gov'ts were in a position to print their own money and not have to pay interest thru the private banking sector for it.
James, this is another myth unless you are talking about the Eurozone. The US Federal government does not pay interest to the
banking sector, it pays interest to holders of Treasury securities. To do so was a CHOICE not a requirement. Paying interest on
previously created monies was voluntary. Congress created the banking system (for the US) through the Federal Reserve Act of 1913,
which created and governs the banking system, and chose to pay interest later after WWI I believe (probably as a give-away to
bankers who didn't think they made enough money off of WWi). MRW knows a lot more about this history if he's around.
Interest paid on the "debt" (all money is debt, interest or not by definition) is a net transfer of funds to the private sector
(those who hold Treasury securities). Those funds increase the money supply. Anyone can hold Treasury securities, not just banks.
They are a risk-free investment vehicle (the only one).
Further, it is the Fed that sets interest rates, not the bond-holders ("bond vigilantes") as they are referred to. 10 years
of zero-interest rates post 2008 should be proof enough of that.
Treasury securities (bonds) move $ from a checking account at the Fed to a savings account at the FED. They are $ that earn
interest. This is all explained in the Mosler pdf I linked to.
In double-entry accounting a National Debt™ for the government is NATIONAL SAVINGS for the citizens, as are the interest payments.
All this worry about sovereign debt is silliness. Without sovereign debt the currency of issue wouldn't exist. Sovereign debt
is our money (although the elites won't let us acquire much of it).
Of course the Marxist critique of and challenge to Capitalism was central in all this ! The West was competing with the East (
simplifying)and when this situation changed with Anglo Hegemony 1990 , these balances that had seen overall development towards
the 'welfare state ' disintegrated .
Once the U S got its opportunistic run at this situation, crudely grasping for further power we rapidly reached the present
situation , with its repeat of World War scenarios , as competing economic / militarised blocs do exactly that !
Yes, Mosler not being an economist is a feature, not a bug. I agree, economists are idiots, but I suspect they're paid idiots.
What's the Upton Sinclair quote ?
From where I sit MMT savvy economists are not idiots. They are however outcasts. If your not an insider you're an outsider,
and outsiders don't get to make the big money, if they don't starve.
Here's a video excerpt regarding our pre-eminent economist Paul Krugman lest you think he isn't in on the con:
@176 paulmeli.. thanks.. i had to read your comment a few times, and it still isn't sinking in fully.. i am getting some of it,
but maybe it is my conspiracy run brain that wants to know how we've been screwed over by the banks.. that is what i believe has
happened...MRW.. haven't seen him in a good while.. every time he would come all my negative stereo types about the private banking
sector were put on hold, as i recall!
i think a lot of this has to do with exporting / importing between countries... especially the part about holding foreign debt..
how does another country pay for something? this is why we read today of how russia, china and iran are getting into financial
arrangements whereby they don't have to go thru the us$.. wasn't this a good part of the reason the usa went to war in iraq, or
libya? iraq and libya wanted to trade in euros, as opposed to us$.. well - hopefully MRW can come and bring me back to reality!
it seems the world financial markets are one big ponzi scheme... think of the derivative markets.. one is not trading in some
actual commodity.. it is increasingly opaque and shrouded in speculation, while run on computers...
i am sorry paul, but i can only go so far in my understanding here.. as i understand it, something is very wrong in the financial
system at present.. it is also the reason these financial sanction games are typically a lead up to war... one group has undue
power and influence over the worlds finances - the usa - and they exercise this clout via sanctions, and if that doesn't work
- war / regime change - etc. etc... obviously i am missing something here, but i will be damned if i buy the official hokum from
an economist! thanks for trying to educate me.. n
I despise Netanyahu but please change the headline from Netanyahoo as Yahoo was used as an antisemtic slur in the past. I'm sure
the author was not aware of this outdated meaning but it does the cause harm. Thank you.
something is very wrong in the financial system at present..
I think it's always been this way but now the corruption is so out in the open it seems like it's worse. I'm not sure it is.
The way finance corrupts is that obscene riches are offered to state leaders to sell out their own citizens for pennies on
the dollar. And they do it, because if they don't regime change will follow. It's similar to the way corporate raiders take over
businesses, sell off the assets and load the business up with debt, then sell what's left. With all of that debt said business
has no chance of success. A handful of financial guys (parasites of the worse kind) walk away with the cash.
Corporate strip-mining - the business plan is simple and it's always the same - no matter if it's a business or a country.
Something to keep in mind about all of this Iran business is that Trump can now move full speed ahead with Bolton and Pompeo in
place. I find it oddly comforting that, generally speaking, Trump and his administration make no attempt to cloak their psychopathy
in coded language. I thought these remarks from Pompeo yesterday as he addressed the lackeys at Foggy Bottom yesterday particularly
illuminating in this regard:
"I talked at my hearing about the fact that this nation is so exceptional, and so incredibly blessed and the facts that derive
from that are that it also creates a responsibility, a duty for America all across the world. And I know for certain that America
can't execute that duty, can't achieve its objectives absent you all. Absent executing America's foreign policy in every corner
of the world with incredible vigor and incredible energy. And I look forward to helping you all advance that."
Money supply increases with debt creation and decreases with debt payment. Wipe out all debt and money supply is zero. Taking
out a loan is an example of money creation. The money does not exist in the system till its deposited into your account. Paying
off the mortgage depletes the money supply.
Its true that the government does not pay interest on money the Fed loans them. Thats why so little is loaned directly to the
government until the last crash. Money is not created by interest. That money does not exist without new debt. The government
borrows the money to pay the interest.
A key reason the US is the reserve currency is OPEC. OPEC serves Big Oil interests which is interlocked with Big Banking and
requires purchases of Oil to be in USD. Hence the name Petro Dollar. OPEC may produce the oil but its The Big Oil (4 sisters)
that transports most of it to market, refines much of it and provides the equipment for OPEC members to get the oil out of the
ground.
We also export a tremendous amount of food that requires payment in USD, and US manufacturing is now in China and consumer
debt allows us to purchase a great amount of goods from China in USD. Manufacturers in China need to pay expenses in RMB so sell
USD to Chinese banks. Chinas Central Bank Prints up RMB at no interest to buy the USD and then loans it to the US at interest.
Its a perfect system and is basically why the USD will never fail unless those in control want it to.
A modern fellow of genus Homo protests his innocence. "I don't work because I worked much
harder before", says he. "I labored for ten years at a crap job earning $30,000 per year and
that earned me the right to live in miserable conditions in which the loss of my job would
have made me destitute in weeks. But, I was not content to labor as my fellows. I got a
second job at $20,000 per year and I was so thrifty that I spent not a penny of it but banked
it all so that at the end of my time I had $300,000, a princely sum. I invested it wisely at
10% and now I can live for the rest of my life, if modestly, off the proceeds of only my own
sweat, my own thriftiness, and my own discipline. And, if there was any luck to it - in my
not facing misfortune or ill health or any other calamity - that was the product of my own
luck too. I owe nothing to anyone. What I have is due to myself alone, and those who have
much more than I, it seems to me that they must have arrived at it the same as I, perhaps
over generations. What is this social power you speak of when it is only individual labor and
individual property that stems from it? It seems to me that you merely envy that which you
are too lazy to earn for yourself."
"My dear independent fellow" says we, "let us understand the simple arithmetic of your
claims. If your story is as you say and we ignore all else that you report, still at the end
of ten years, we see only $200,000. And, if you continue to live at this admittedly low
level, nevertheless, you will have run through your entire accumulated proceeds in only 6
years and eight months. More than this, by your accounting, it would take one and a third
lifetimes to create a single lifetime without labor, and this at the exceedingly low
standards and exceptionally favorable circumstances that you assume. How then are we to
explain those who live without labor for generations, and this at a thousand or ten thousand
times times the level that you report? How many generations of 'thrift' and 'hard work' would
this require? What you claim is impossible for you and beyond impossibility for those who
live above you. Where is this magic of 'individual labor and individual property' that you
speak of?"
"But you forget interest", protests our friend. "My money makes money, and simply by the
act of having some which is not consumed in day to day living, that which I save is
augmented. It is this which grants me my independence."
"We forget as much as your money 'makes'," answers we, "which is nothing at all. Set your
money on the table and leave it there for as long as you like. Nothing happens to it. It
remains the same. It is only by setting it in motion as capital that anything whatever is
'made' and that 'making' is the product of labor, the same as your own. Your interest
comes from the command of the labor of others, just as your own was once commanded and
after 6 years and eight months not a speck of 'hard work', 'thrift', 'good luck' or 'wisdom'
is left. Neither is there any trace of 'independence' or 'personal property' You now live by
the labor of others... by the transformation of your pitiful 'savings' into Capital, no
matter how small the sum. It is your ability to command the labor of others as a social
power that gives you your ability and that you have a poor man's caricature of that
process changes nothing other than to lay fraudulent your claims to the right. You might as
well claim innate superiority or the right of the sword as did the slave master or the
god-given hierarchy of obligations of the lord or even the phases of the moon, if you like.
You eat without working because you have maneuvered yourself into a position in which others
work to feed you. You are the opposite of what you claim."
"You're just trying to make me feel bad.", says our friend.
"We don't give a shit how you feel", says we. "It is modest enough what you do... just as
you claim. It is your willingness to ignore what is closer to your face than your nose that
we tire of. "
Our friend orders another beer and pretends to watch the hockey game though he would be
hard pressed to name two players on either team.
Capital is therefore not only personal; it is a social power.
"... China, Russia, et. al. realized that the debt-saturated U.S. was propped up by the fact that the U.S. "dollar" was the reserve banking and trading currency of the entire world and that the "Petrodollar" was one of the main pillars of it, and that this system was the main source of U.S. influence and power around the world and allowed the U.S. and friends to impose financial sanctions on other countries. They also saw that the U.S. was not using gold or silver as a type of support or backup for the financial system. Therefore, they developed their own computer servers to route orders between banks and financial companies that will operate outside of the SWIFT system dominated by the U.S. It is now operational and is called CIPS (Cross-Border Interbank Payment System)-- ..."
In addition to the common desire of some (or many) human beings to exercise authority over
other groups of people, I think Xi Jinping and his supporters want to complete the large and
complex economic and financial projects they have started. It is not just the road and
railroad and other infrastructure projects tied to the regional trading structure China has
been working on, but a financial structure independent of the existing banking and financial
system that was put together by the U.S. and Britain.
It is my opinion that China, Russia, Iran, and probably additional countries decided to
make a move after the brazen 2003 invasion of Iraq by the U.S. and others, and the massive
financial fraud partly exposed in the U.S. and Britain in 2008 and afterwards, which fraud
was not stopped and the perpetrators were bailed out and none were prosecuted.
China, Russia, et. al. realized that the debt-saturated U.S. was propped up by the
fact that the U.S. "dollar" was the reserve banking and trading currency of the entire world
and that the "Petrodollar" was one of the main pillars of it, and that this system was the
main source of U.S. influence and power around the world and allowed the U.S. and friends to
impose financial sanctions on other countries. They also saw that the U.S. was not using gold
or silver as a type of support or backup for the financial system. Therefore, they developed
their own computer servers to route orders between banks and financial companies that will
operate outside of the SWIFT system dominated by the U.S. It is now operational and is called
CIPS (Cross-Border Interbank Payment System)--
In addition, they are moving to break the Petrodollar. In the early 1970's, the U.S. made
a non-treaty deal with Saudi Arabia that if they got the rest of OPEC to sell oil and gas to
the whole world only in U.S. dollars and would plough some of the money back into U.S.
government debt and into the stock market casino, the U.S. would protect the Saudi ruling
family so it could run the entire country as its private business. This forced the whole
world to get U.S. dollars in order to buy oil and gas, which further put the dollar in as
banking reserves around the world, which further pushed the dollar into being used to settle
much of the trade between countries.
However, now some contracts are being made to buy and sell oil and gas not in the U.S.
dollar, but in other currencies, especially the Chinese renminbi (a/k/a yuan). Also, both
China and Russia have been buying large amounts of gold for several years. To get around some
of the U.S. sanctions prior to the Joint Comprehensive Plan of Action (JCPOA), Iran sold oil
and gas in exchange for gold. Since gold is not a government created and ordered "fiat"
money, it cannot be choked off by the SWIFT system or controlled through numbers on computer
hard drives in banks.
Russia also remembers what happened after the collapse of the Soviet Union when the U.S.
financial "experts" [sic] went there to set up a "wonderful" market-based economy, but what
happened of course was the creation of a system to loot Mother Russia and establish a new
oligarchy tied in with the U.S., Britain, and Israel.
In the early 1990's when the Soviet Union pulled out of eastern Europe, the U.S. had a
chance to help the world be a safer and more peaceful place. The methods of medical diagnosis
and surgical technology developed in the U.S. could have been the basis of a new foreign
policy that would have voluntarily opened doors across the world.
But it was not to be. The desire of some to be king of the world pushed the chance of
improvement aside. Nevertheless, today even autocratic governments see that having financial
and governmental options can be a beneficial thing.
And to our immediate south, a movement has been going on for a while in Mexico to
establish a money based on silver, promoted by Hugo Salinas Price and others--
For obvious reasons, I am not optimistic about Mexico, the deterioration of which has been
a sad thing to see. It needs a new and real revolution.
Xi's move is not a unilateral thing. He had to have the support of the ruling committees
in China. Keep your eye on the financial structure, gold, and silver.
I've been waiting to see what happens with the SDR (Special Drawing Right). The IMF
(International Monetary Fund) added it to the SDR basket in October 2016 after a lot of foot
dragging by the US. The AIIB (Asian Infrastructure Investment Bank) was setup largely as a
Chinese alternative to the US dominated IMF and World Bank because they were not being given
an appropriate "place at the table" in the IMF, which was founded as part of the Bretton
Woods Agreement at the end of WWII.
I see the global monetary reset currently underway as the slowly moving, but
unstoppable, glacier that is forcing all other events.
Sunday, January 21, 2018Blockchain: what it is, what it does, and why you
probably don't need one
Dilbert - by Scott Adams
Interest in blockchain is at a fever pitch lately. This is in large part due to
the eye-popping price dynamics of Bitcoin --the original bad-boy cryptocurrency--which
everyone knows is powered by blockchain ...whatever that is. But no matter. Given that
even big players like Goldman Sachs are getting into the act (check out their super slick
presentation here: Blockchain--The New Technology of
Trust ) maybe it's time to figure out what all the fuss is about. What follows is based on
my slide deck which I recently presented at the Olin School of Business at a Blockchain
Panel (I will link up to video as soon as it becomes available)
Things are a little confusing out there I think in part because not enough care is taken in
defining terms before assessing pros and cons. And when terms are defined, they sometimes
include desired outcomes as a part of their definition. For example, blockchain
is often described as consisting of (among other things) an immutable ledger. This is
like defining a titanic to be an unsinkable ship.
So what do people mean when they bandy about the term blockchain ? I recently had a
chance to learn about the project from a corporate perspective as represented by Ed Corno of
IBM (see IBM Blockchain ), the
other member of the panel I mentioned above. From Ed's slide deck we have the following
definition:
Blockchain: a shared, replicated, permissioned ledger with consensus, provenance,
immutability and finality.
Well, if this is what blockchain is, then maybe I want one too! The issue I
have with this definition (apart from the fact that it confounds descriptive elements with
desired outcomes) is that it glosses over what I consider to be an important defining
characteristic of blockchain: the consensus mechanism. Loosely speaking, there are two
ways to achieve consensus. One is reputation-based (trust) and the other is
game-based (trustless).
I'm not 100% sure, but I believe the corporate versions of blockchain are likely to stick to
the standard model of reputation-based accounting. In this case, the efficiency gains of
"blockchain" boil down to the gains associated with making databases more synchronized across
trading partners, more cryptographically secure, more visible, more complete, etc. In short,
there is nothing revolutionary or radical going on here -- it's just the usual advancement of
the technology and methods associated with the on-going problem of database management.
Labeling the endeavor blockchain is alright, I guess. It certainly makes for good
marketing!
On the other hand, game-based blockchains--like the one that power Bitcoin--are, in my view,
potentially more revolutionary. But before I explain why I think this, I want to step back a
bit and describe my bird's eye view of what's happening in this space.
A Database of Individual Action Histories
The type of information that concerns us here is not what one might label "knowledge," say,
as in the recipe for a nuclear bomb. The information in question relates more to a set of
events that have happened in the past, in particular, events relating to individual actions.
Consider, for example, "David washed your car two days ago." This type of information is
intrinsically useless in the sense that it is not usable in any productive manner. In addition
to work histories like this, the same is true of customer service histories, delivery/receipt
histories, credit histories, or any performance-related history. And yet, people value such
information. It forms the bedrock of reputation and perhaps even of identity. As such, it is
frequently used as a form of currency.
Why is intrinsically useless history of this form valued? A monetary theorist may tell you
it's because of a lack of commitment or a lack of trust (see Evil is the Root of All
Money ). If people could be relied upon to make good on their promises a priori ,
their track records would largely be irrelevant from an economic perspective. A good reputation
is a form of capital. It is valued because it persuades creditors ( believers ) that more reputable agencies are
more likely to make good on their promises. We keep our money in a bank not because we think
bankers are angels, but because we believe the long-term franchise value of banking exceeds the
short-run benefit a bank would derive from appropriating our funds. (Well, that's the theory,
at least. Admittedly, it doesn't work perfectly.)
Note something important here. Because histories are just information, they can be created
"out of thin air." And, indeed, this is the fundamental source of the problem: people have an
incentive to fabricate or counterfeit individual histories (their own and perhaps those of
others) for a personal gain that comes at the expense of the community. No society can thrive,
let alone survive, if its members have to worry excessively about others taking credit for
their own personal contributions to the broader community. I'm writing this blog post in part
(well, perhaps mainly) because I'm hoping to get credit for it.
Since humans (like bankers) are not angels, what is wanted is an honest and immutable
database of histories (defined over a set of actions that are relevant for the community in
question). Its purpose is to eliminate false claims of sociable behavior (acts which are
tantamount to counterfeiting currency). Imagine too eliminating the frustration of discordant
records. How much time is wasted in trying to settle "he said/she said" claims inside and
outside of law courts? The ultimate goal, of course, is to promote fair and efficient outcomes.
We may not want something like this creepy Santa Claus technology , but
something similar defined over a restricted domain for a given application would be nice.
Organizing History
Let e(t) denote a set of events, or actions (relevant to the community in question),
performed by an individual at date t = 1,2,3,... An individual history at date t is denoted
Aggregating over individual events, we can let E(t) denote the set of individual actions at
date t, and let H(t-1) denote the communal history, that is, the set of individual histories of
people belonging to the community in question:
Observe that E(t) can be thought of as a "block" of information (relating to a set of
actions taken by members of the community at date t). If this is so, then H(t-1) consists of
time-stamped blocks of information connected in sequence to form a chain of blocks. In this
sense, any database consisting of a complete history of (community-relevant) events can be
thought of as a "blockchain."
Note that there are other ways of organizing history. For example, consider a cash-based
economy where people are anonymous and let e(t) denote acquisitions of cash (if positive) or
expenditures of cash (if negative). Then an individual's cash balances at the beginning of date
t is given by h(t-1) = e(t-1) + e(t-2) + ... + e(0). This is the sense in which "
money is memory ." Measuring a person's worth by how much money they have serves as a crude
summary statistic of the net contributions they've made to society in the past (assuming they
did not steal or counterfeit the money, of course). Another way to organize history is to
specify h(t-1) = { e(t-1) }. This is the "what have you done for me lately?" model of
remembering favors. The possibilities are endless. But an essential component of
blockchain is that it contains a complete history of all community-relevant events. (We
could perhaps generalize to truncated histories if data storage is a problem.)
Database Management Systems (DBMS) and the Read/Write Privilege
Alright then, suppose that a given community (consisting of people, different divisions
within a firm, different firms in a supply chain, etc.) wants to manage a chained-block of
histories H(t-1) over time. How is this to be done?
Along with a specification of what is to constitute the relevant information to be contained
in the database, any DBMS will have to specify parameters restricting:
1. The Read Privilege (who, what, and how);
2. The Write Privilege (who, what, and how).
That is, who gets to gets to read and write history? Is the database to be completely open,
like a public library? Or will some information be held in locked vaults, accessible only with
permission? And if by permission, how is this to be granted? By a trusted person, by algorithm,
or some other manner? Even more important is the question of who gets to write history. As I
explained earlier, the possibility for manipulation along this dimension is immense. How to
guard against to attempts to fabricate history?
Historically, in "small" communities (think traditional hunter-gatherer societies) this was
accomplished more or less automatically. There are no strangers in a small, isolated village
and communal monitoring is relatively easy. Brave deeds and foul acts alike, unobserved by some
or even most, rapidly become common knowledge. This is true even of the small communities we
belong to today (at work, in clubs, families, friends, etc.). Kocherlakota (1996) labels H(t-1) in
this scenario "societal memory." I like to think of it as a virtual database of individual
histories living in a distributed ledger of brains talking to each other in a P2P fashion,
with additions to, and maintenance of, the shared history determined through a consensus
mechanism. In this primitive DBMS, read and write privileges are largely open, the latter being
subject to consensus. It all sounds so.. . blockchainy.
While the primitive "blockchain" described above works well enough for small societies, it
doesn't scale very well. Today, the traditional local networks of human brains have been
augmented (and to some extent replaced) by a local and global networks of computers capable of
communicating over the Internet. Achieving rapid consensus in a large heterogeneous community
characterized by a vast flows of information is a rather daunting task.
The "solution" to this problem has largely taken the form of proprietary databases with
highly restricted read privileges managed by trusted entities who are delegated the write
privilege. The double-spend problem for digital money, for example, is solved by delegating the
record-keeping task to a bank, located within a banking system, performing debit/credit
operations on a set of proprietary ledgers connected to a central hub (a clearing agency)
typically managed by a central bank.
The Problem and the Blockchain Solution
Depending on your perspective, the system that has evolved to date is either (if you are
born before 1980) a great improvement over how things operated when we were young, or (if you
are born post 1980) a hopelessly tangled hodgepodge of networks that have trouble communicating
with each other and are intolerably vulnerable to data breaches (see figure below, courtesy Ed
Corno of IBM).
The solution to this present state of affairs is presented as blockchain (defined
earlier) which Ed depicts in the following way, Well sure, this looks like
a more organized way to keep the books and clear up communication channels, though the details
concerning how consensus is achieved in this system remain a little hazy to me. As I mentioned
earlier, I'm guessing that it'll be based on some reputation-based mechanism. But if this is
the case, then why can't we depict the solution in the following way?
That is, gather all the agents and agencies interacting with each other, forming them into a
more organized community, but keep it based on the traditional client-server (or hub-and-spoke)
model. In the center, we have the set of trusted "historians" (bankers, accountants, auditors,
database managers, etc.) who are granted the write-privilege. Communications between members
may be intermediated either by historians or take place in a P2P manner with the historians
listening in. The database can consist of the chain-blocked sets of information (blockchain)
H(t-1) described above. The parameters governing the read-privilege can be determined
beforehand by the needs of the community. The database could be made completely open--which is
equivalent to rendering it shared. And, of course, multiple copies of the database can be made
as often as is deemed necessary.
The point I'm making is, if we're ultimately going to depend on reputation-based consensus
mechanisms, then we need no new innovation (like blockchain) to organize a database. While I'm
no expert in the field of database management, it seems to me that standard protocols, for
example, in the form of SQL Server 2017 , can
accommodate what is needed technologically and operationally (if anyone disagrees with me on
this matter, please comment below).
Extending the Write Privilege: Game-Based Consensus
As explained above, extending the read-privilege is not a problem technologically. We are
all free to publish our diaries online, creating a shared-distributed ledger of our innermost
thoughts. Extending the write-privilege to unknown or untrusted parties, however, is an
entirely different matter. Of course, this depends in part on the nature of the information to
be stored. Wikipedia seems to work tolerably well. But its hard to use Wikipedia as currency.
This is not the case with personal action histories. You don't want other people writing your
diary!
Well, fine, so you don't trust "the Man." What then? One alternative is to game the
write privilege. The idea is to replace the trusted historian with a set of delegates drawn
from the community (a set potentially consisting of the entire community). Next, have these
delegates play a validation/consensus game designed in such a way that the equilibrium
(say, Nash or some
other solution
concept ) strategy profile chosen by each delegate at every date t = 1,2,3,... entails: (1)
No tampering with recorded history H(t-1); and (2) Only true blocks E(t) are validated and
appended to the ledger H(t-1).
What we have done here is replace one type of faith for another. Instead of having faith in
mechanisms that rely on personal reputations, we must now trust that the mechanism governing
non-cooperative play in the validation/consensus game will deliver a unique equilibrium outcome
with the desired properties. I think this is in part what people mean when I hear them say
"trust the math."
Well, trusting the math is one thing. Trusting in the outcome of a non-cooperative game is
quite another matter. The relevant field in economics is called mechanism design . I'm not going to get
into details here, but suffice it to say, it's not so straightforward designing mechanisms with
sure-fire good properties. Ironically, mechanisms like Bitcoin will have to build up
trust the old-fashioned way--through positive user experience (much the same way most of us
trust our vehicles to function, even if we have little idea how an internal combustion engine
works).
Of course, the same holds true for games based on reputational mechanisms. The difference
is, I think, that non-cooperative consensus games are intrinsically more costly to operate than
their reputational counterparts. The proof-of-work game played by Bitcoin
miners, for example, is made intentionally costly (to prevent DDoS attacks ) even though
validating the relevant transaction information is virtually costless if left in the hands of a
trusted validator. And if a lack of transparency is the problem for trusted systems, this
conceptually separate issue can be dealt with by extending the read-privilege communally.
Having said this, I think that depending on the circumstances and the application, the cost
associated with a game-based consensus mechanism may be worth incurring. I think we have to
remain agnostic on this matter for now and see how future developments unfold.
Blockchain: Powering DAOs
If Blockchain (with non-cooperative consensus) has a comparative advantage, where might it
be? To me, the clear application is in supporting Decentralized Autonomous
Organizations (DAOs). A DAO is basically a set of rules written as a computer program.
Because it possesses no central authority or node, it can offer tailor-made "legal" systems
unencumbered by prevailing laws and regulations, at least, insofar as transactions are limited
to virtual fulfillments (e.g., debit/credit operations on a ledger).
Bitcoin is an example of a DAO, though the intermediaries that are associated with Bitcoin
obviously are not. Ethereum is a platform that permits the construction of more sophisticated
DAOs via the use of smart contracts . The comparative advantages
of DAOs are that they permit: (1) a higher degree of anonymity; (2) permissionless access and
use; and (3) commitment to contractual terms (smart contracts).
It's not immediately clear to me what value these comparative advantages have for registered
businesses. There may be a role for legally compliant smart contracts (a tricky business for
international transactions). But perhaps the potential is much more than I can presently
imagine. Time will tell.
So. The US economy is just fine. The
post-recession 2010 Dodd-Frank legislation has cured all. Banks have lots of cash. Congress is
your friend and that certain-to-pass Tax Cut and Jobs bill will finally allow you, your family
and America to MAGA.
Really?!
... ... ...
Oh, those evil banks! The shadowy corporatist denizens of New York, London, and Brussels,
all guilty of a staggering set of every-expanding frauds couched in the beneficent language of
greedy short-term materialistic gain. Financial "crimes of the decade," like the Savings and
Loan meltdown, the Enron Collapse, and the Great Recession are nowadays reported almost
monthly. With metered US justice amounting only to a monetary fine for the offending criminal
bank – usually a small fraction of the money it previously stole, hypothecated, leveraged
or manipulated – and with criminal prosecution no longer a possibility, these criminals
continue to shovel trillions – not billions – into off-shore, non-tax paying
accounts of the already uber-rich. There is never enough.
Just in time for Christmas, Americans received the "Tax Cut and Jobs Bill 2017" that, of
course, contains not one word about jobs, but sounds so good to the ignorant who are still
transfixed on the false mantra of MAGA.
LIBOR, FOREX, COMEX, which used high-speed program securities trading combined with insider
manipulation, were the first serious examples of recent bank frauds. Since the Great Recession
magically became the Great Recovery, Wachovia and HSBC banks plead guilty to laundering money
for Mexican drug cartels, dictators, and terrorists. Wells Fargo and Bank of America were also
guilty of defrauding 10's of thousands of homeowners of their properties during the
"robo-signing" scandal; that was a scandal until Wells and BA paid the
mortdita and all returned to business as usual. Example: In July 2017 it was revealed
that more than 800,000 customers who had taken out car loans with Wells Fargo were charged for
auto insurance they did not need. Barely a month later, Wells was forced to disclose that the
number of bogus accounts that had been created was actually 3.5 million, a nearly 70 percent
increase over the bank's initial estimate. Why not? When the predictable result will be a small
percentage fine and keep the rest. Now that's MAGA!
If the individual retail – Mom and Pop – investor actually had a choice of where
to put their cash money, then no one with better than a fifth-grade education would put a penny
into the major stock markets. However, the goal of the many banking manipulations have had one
goal: eliminate financial investment choices to one – stocks.
One choice, Gold and silver, the previous historical champion alternative in preserving
one's wealth, was deliberately eliminated from short-term, private investment. The banks,
issued and sold massive amounts of worthless certificate gold and derivative gold (not
bullion), and the same in silver, at a current ratio of 272 paper instruments to one measly
ounce of real physical gold. All this has been leveraged against real precious metals, and next
used to influence the price of gold-down- by selling huge tranches of these ostensibly
worthless gold contracts (1 contract=100 paper ounces) within seconds when the spot price of
gold begins to rise. The banks have done this so often that gold has not risen to levels it
would likely reach without this manipulation. This has driven massive liquidity that would have
gone to precious metals towards stocks. This is likely evidenced by the advent of the meteoric
rise in the price of BitCoin, one that-like gold- escapes the bank's control and a
super-inflated stock market.
Similarly, thanks to the economic trickery that has been three rounds of Quantitative
Easing, the other two conventional options; the bond market and personal bank savings accounts,
have been manipulated to also produce a very low rate of return, driving these cash funds to
stocks. It is this entire package of criminality – providing no other place for liquidity
to go – that has performed as the plot to push a surging world stock market to obscene
levels that have no basis in factually-based accounting or economic methods or
history.
Banks Are Ready for the Next Crash – You're Not!
The banks know the next crash is coming. Like 2007, they have set in motion the next
great(est) recession. Predator banks know that most people, thanks to the aforementioned
financial control, media omission and an inferior education system, are "stupid,"
especially regarding the nuances of financial fraud. As the majority of Americans and Europeans
live in the illusion that their financial institutions will protect their savings, they miss
their bank's greedy preparations for the next stock market crash slithering through the halls
of their Parliament or Congress. This already completed legislation states in plain English,
and the language of endemic corruption, that your bank intends to steal your money directly
from your savings account. And your government will let them do this to you.
30,000 pages make up the Dodd-Frank post-recession legislation, authored by the banks in the
aftermath of the Great Recession. The Dodd-Frank legislation was touted as eliminating the
massive bail-outs the US gave virtually every ill-defined too big to fail worldwide bank and US
corporation in 2008-9. In reality, Dodd-Frank was as much a fraud against Americans as LIBOR or
COMEX manipulation, et al .
Title II of the media-acclaimed 2010 Dodd-Frank Wall Street Reform and Consumer Protection
Act provides the Federal Deposit Insurance Corporation (FDIC) with new powers and methods to
again guarantee – first and foremost – the massively leveraged derivatives trade
once this massive leverage plummets as it did with AIG in 2007-09. However, that collapse was
singular. The next will include all banking sectors.
The bank's paid-for politicians made sure a post-crash congress did not regulate derivatives
via Dodd-Frank, and thereby encouraged a further increase in this financial casino betting,
despite it being the root cause of the original problem. Thanks to Dodd-Frank and its
predecessor, the 2005 Bankruptcy Act, Congress made sure these new fraudulent bets on stock
market manipulation would surely be paid. But, not to worry; there would be no more "Bail
Outs." Next time, these banks would use their depositors' savings, including yours. Meet:
the "Bail-In."
Really?!
All Americans recall the massive "Bail-Outs" of 2007-9 and how their corporately
controlled Federal Reserve Bank and an equally controlled US Congress threw several trillions
of US taxpayer dollars at US banks, dozens of foreign banks, and any corporation with enough
political pull to be defined as "Too Big To Fail" (TBTF). In the aftermath a year later, the
banks understood that Americans and European citizens had lost enthusiasm for any future
government Bail-Out, most preferring instead that any institution suffering
self-inflicted financial duress should enjoy the fruits of their crimes next time, via the
reality of formal bankruptcy proceedings.
The will or financial safety of the public is, of course, no concern to criminal
corporations, and so easily circumvented via congress and the president. So, the banksters have
redefined their criminality using two newly defined methods, both rebranded to be far more
palatable to the public.
Currently, "Too Big to Fail," (TBTF) has a very fraudulent and elitist connotation
just like, "Bail-Out." To millions across the world who have lost their homes, pension
funds, retirement plans, and dreams, this decade-old moniker for financial oppression and fraud
has now been conveniently re-branded. The bailed-out TBTF banks now have a far more magnificent
definition: TBTFs are now, "Globally Active, Systemically Important, Financial
Institutions" (G-SIFI).
This sounds so much better.
But, "Bail-Out"? No No. Would you not prefer a "Bail-In"? Not if you know
the details. "Bail-Outs," may have also lost their flavour but in the new world of the
G-SIFI, the next one is actually just a "Bail-In," away.
Yes, Bail-Ins, the new "systemically" correct term for publicly guaranteed bank
fraud are already named as such in new national policies and laws, appearing in multiple
countries. These finance laws, such as Dodd-Frank and its pending UK and European Union
version, make upcoming Bail-Ins legal. These Bail-Ins allow failing G-SIFI banks to legally
convert the funds of "unsecured creditors" (that's you) into bank capital (that's
them). This includes "secured" creditors, like state and local government funds.
Really?!
With this in mind, I entered the main branch of Wells Fargo. The two checks in hand. On the
way in I was greeted warmly, one after the other, by three more fresh-faced and eager proteges,
all smartly uniformed to match the Wells décor, and who proffered, "Good morning,
Sir!," again, and again and again. Certainly, these little fish were not in possession of
authority enough to cash my mammoth checks, so I asked for bigger game, the Branch Manager.
Thus, I explained my plight to a very lovely lass who predicted she "would be glad to
help me."
"Cheryl," patiently explained that I had come to the right place and she would be
glad to cash both checks. Regarding my previous polite banking experience, she admitted that it
was indeed bank policy to have limits on the availability of cash for withdrawals and that
different branches had different limits. This was the main branch so my request here was
meritorious. Further, she admitted that whatever daily cash coming into the branches in the
form of deposits was not available for withdrawal, but was sent from the main branch for daily
accounting at a central point common to all area Wells bank branches. Only a prescribed amount
of cash was provided with each bank for daily customer cash withdrawals.
Really?!
"A couple of times your current request," was her cautious response to my question about her
branch's limits on check cashing. Not to be put-off, I asked about a hypothetical US$25,000
check. She admitted this would be beyond her branches authority. "But," she smiled,
"Today, you've come to the right place."
The financial law firm Davis Polk estimates the final length of Dodd-Frank, the single
longest bill ever passed by the US government, is over 30,000 pages. Before passage, the six
largest banks in the US spent $29.4 million lobbying Congress in 2010 and flooded Capitol Hill
with about 3,000 lobbyists prior to Obama predictably signing its final unread version. No US
congressman or senator had read it. But, the bank's congressional minions were told to vote for
it. And dutifully they did.
The major cause of the upcoming financial meltdown, as with the pre-2008 conditions, is
globally systemic gambling against national economies, called derivatives. Derivatives are sold
as a kind of betting insurance for managing fraudulent banking profits and risk. So, why fix
systemic banking fraud when the final result allowed these same banks to make even more money
in the aftermath of the national and personal financial destruction they originated in the
first recession?
Instead, thanks to Dodd-Frank, derivatives suddenly have "super-priority" status in
any bankruptcy. The Bank for International Settlements quoted global OTC derivatives at $632
trillion as of December 2012. Naked Capitalism states that $230 trillion in worthless
derivatives are on the books of US banks alone. Applied to Dodd-Frank this means that all these
bad bank bets on derivatives will be paid-off first before you may have your savings
cash. If there's actually any cash left once you get to the teller's counter.
Normally in a capital liquidation or bankruptcy proceeding, secured creditors such as a
bank's personal depositors are paid off first because these are hard assets, not investments,
and thus normally have a mandated priority. Under these new "Bail-In" Dodd-Frank
mandates, your government has re-prioritized your bank's exposure and your cash deposit.
Derivatives and other similar banking high-risk ventures are now more highly protected than
bank depositor's savings. In the 2013 example of Cyprus, Germany and the ECB also made
depositors inferior to other bank holdings leaving depositors with, after many months, a small
fraction of their deposits.
And then came Greece.
Selling the lie while using the language of Dodd-Frank, we are told by media whores that
banks will not be given taxpayer bailouts next time. True. The preamble to the Dodd-Frank Act
claims "to protect the American taxpayer by ending bailouts." But how, then, to Bail-In the
G-SIFIs without another taxpayer Bail-Out? No problem.
Enter the FDIC and another new banking term, "cross-border bank resolution." As the
sole US agency required to pay back depositors who lose savings up to $250,000, FDIC is armed
with a paltry US$25 billion war chest to pay depositors. Under Dodd-Frank, the FDIC will be the
mechanism to replace deposits lost or squandered by bank fraud. The public, however, has an
estimated total US cash deposits of US$7.36 trillion so, once the banks steal your savings,
FDIC will be just a little bit short of funds. How to fix this mathematical shortfall? With, of
course, more of your money via emergency taxes or a massive new round of Quantitative Easing
(QE). Either way, by the time this happens your money is long gone. And it gets worse.
Really?!
Say, "Goodbye" to your Savings- Two Greedy Methods
It's [FDIC] already indicated that they will confiscate [savings] funds .
-- US congressman Ron Paul
On December 10, 2012, a joint strategy paper was drafted by the Bank of England (BOE) in
conjunction with the Federal Deposit Insurance Corporation (FDIC) titled, "Resolving
Globally Active, Systemically Important, Financial Institutions." Here the plot to steal
depositor savings is clearly laid out.
The report's "Executive Summary" states:
the authorities in the United States (US) and the United Kingdom (UK) have been working
together to develop resolution strategies These strategies have been designed to enable
[financial institutions] to be resolved without threatening financial stability and without
putting public funds at risk.
Sounds good until you read the fine print; i.e., whose risk are they actually
protecting?
While claiming to protect taxpayers, Title II of Dodd-Frank gives the FDIC an enforcement
arm, the Orderly Liquidation Authority (OLA) which is similar to its British counterpart the
Prudent Regulation Authority (PRA). Both now have the authority to punish the personal
depositors of failing banking institutions by arbitrarily making their savings deposits
subordinate – actually tertiary – to bank claims for the replacement value of their
derivatives. Before Dodd-Frank savings deposits were legally senior and primary to these same
claims in a routine bankruptcy.
With the US banks holding only $7 trillion in personal cash savings deposits compared to
$230 trillion is US derivative obligations, FDIC's $25 billion will not be enough. The creators
of Dodd-Frank knew this before it was signed. As John Butler points out in an April 4, 2012,
article in Financial Sense :
Do you see the sleight-of-hand at work here? Under the guise of protecting taxpayers,
depositors are to be arbitrary, subordinated when in fact they are legally senior to those
claims Remember, its stated purpose [Dodd-Frank] is to solve the problem namely the existence
of insolvent TBTF institutions that were "highly leveraged with numerous and dispersed
financial operations, extensive off-balance-sheet activities, and opaque financial
statements.
Oh, but bank depositors can rest easy in the knowledge that replacing their savings will not
come out of their pockets via another bank Bail-Out. Thanks to Dodd-Frank, the first line of
defence will allow Congress to instead replace personal savings with a government paid for $7
trillion bail-in to FDIC to "replace" these savings.
But, that's the good choice.
Worse, Dodd-Frank gives new powers to FDIC and its OLA that allow an even more powerful and
draconian resolution: any deposited funds in a bank, from $1 to $250,000 (the FDIC limit), and
everything above, can instead be converted to bank stock! FDIC has provisions so this can be
done, via OLA, quite literally overnight.
Really?!
An FDIC report released in 2012 ago reads:
An efficient path for returning the sound operations of the G-SIFI to the private sector
would be provided by exchanging or converting a sufficient amount of the unsecured debt from
the original creditors of the failed company [meaning the depositor's cash] into equity [or
stock].
Additionally, per April 24, 2012 IMF report, conversion of bank debt to stock is an
essential element of Bail-Ins included in Dodd-Frank.
The contribution of new capital will come from debt conversion and/or issuance of new
equity, with an elimination or significant dilution of the pre-bail in shareholders. Some
measures might be necessary to reduce the risk of a 'death spiral' in share prices.
Really?!
For affected depositors to retrieve the value of what was formerly the depositor's account
balance, the stock must next be sold. When Lehman Brothers failed, unsecured creditors
(depositors are now unsecured creditors) got eight cents on the dollar.
This type of conversion of deposits into equity already had another test-run during the
bankruptcy reorganization of Bankia and four other Spanish banks in 2013. The conditions of a
July 2012 Memorandum of Understanding resulted in over 1 million small depositors becoming
stockholders in Bankia when they were sold without their permission -- "preferences"
(preferred stock) in exchange for their missing deposits. Following the conversion, the
preferences were converted into common stock originally valued at EU 2.0 per share, then
further devalued to EU 0.1 after the March restructuring of Bankia.
Canada has also stated they are planning a similar "Bail-In" program. The Canadian
government released a document titled the Economic Action Plan 2013 which says, "the Government
proposes to implement a "Bail-In" regime for systemically important banks."
However, don't be getting cute by hiding your cash, precious metals, or passport in a bank
safe deposit box. There are no longer safe either. Dodd-Frank took care of that, too.
Under Dodd-Frank the FDIC, using the auspices of Dept. of Homeland Security (DHS) can
legally, without a warrant, enter the bank vault, have the manager secretly open any and/or all
safe deposit boxes and inventory, or seize the contents. Further, if the manager is honest
enough to inform the depositor of the illegal incursion he is subject to criminal charges and
termination from bank employ. Independent reports reveal that all of America's safe deposit
boxes have already been invaded and inventoried for future confiscation.
This already happened in Greece. Depositors who removed their jewellery or precious metals
were met at the bank's door by security, a metal detector and confiscation.
Really?!
The power of the now remaining G-SIFI banks and FDIC was further evident when, cash finally
in hand, I headed to my bank, JP Morgan Chase, right next door to Wells Fargo. The manager
confirmed that the cash withdrawal policy at Chase was in keeping with that at Wells; very
little cash available on demand. I posed a slight untruth and inquired as to what I should do
about my upcoming need for $50,000 in hard cash. No, her bank would not do that on demand, but
arrangements could be made to have the cash transferred to her bank. That would only take
"about two days." Of course, I would need to fill out a few forms.
What a Difference a Congress Makes!
With the American and UK public again on the hook by law for the anticipated loss of the
banks a distressed depositor might think the plot to defraud them now complete. Au
Contraire .
In its rush to transfer further wealth upwards to off-shore bank accounts, US president
Trump and his recently re-aligned republican bootlickers have left no stone unturned. First,
Trump issued a memorandum that sets in motion his plan to scale back the provisions of
Dodd-Frank and repeal the Fiduciary Rule.
It should be noted that the only voice of economic reason at the White House, Former Fed
Chairman, Paul Volker, divorced himself from this growing scandal of basic mathematics very
publicly. As head of Obama's recession inspired, President's Economic Recovery Advisory Board,
Volker ran into the headwinds of fiscal insanity for too long, resigning in January of 2011 in
disgust. His departure thus coincided with the renewal of the litany of criminal financial
manipulation already discussed here. And now
The House approved legislation on February 2, 2017, to erase a number of core financial
regulations put in place by the 2010 Dodd-Frank Act, as Republicans moved a step closer to
delivering on their promises to eliminate rules that they claim have strangled small businesses
and stagnated the economy. Said Trump:
I have so many people, friends of mine, with nice businesses, they can't borrow money,
because the banks just won't let them borrow because of the rules and regulations and
Dodd-Frank.
Poor banks!
Never mind, of course, that these poor banks are holding derivative exposure thirty-five
times the total cash deposits of US savers nor that their ill-gotten riches – such as the
UBS, Wells Fargo, Bank of America, RBS multi-billion dollar frauds – were taken
off-calendar in Federal court for approximately 15% of the total crime. The banks kept the
rest.
And they want more?!
"We expect to be cutting a lot out of Dodd-Frank," Trump said further defining the
mantra of MAGA. This will likely see the deterioration of the newly created Financial Stability
Oversight Council (FSOC) and the Consumer Financial Protection Bureau (CFPB) since these
agencies curb further excessive risk-taking and the existence of too-big-to-fail institutions
on Wall Street.
Well, depositors, your extreme caution is required. The wording of these new, bank-inspired
sets of legislation is silently waiting to be used by many nations to prioritize banks before
their citizen's. When the time comes, the race to the bank will be a short-lived event
indeed.
With this in mind, I stepped into the bright sunshine outside the walls of JP Morgan/Chase
bank, all but $100.00 of my day's take stuffed deep- and securely- in my pocket, its final
outcome no one's business but my own.
However, for almost everyone else? Well when YOUR bank fails, don't walk, run!
YOU do not want to be second in line.
Really!
Brett Redmayne-Titley is an Independent Journalist, Photographer/ World Citizen. He is a
former columnist: PRESS TV/IRAN; writer and contributor to: Earth First! Journal; Zero Hedge;
Veterans Today; Activist Post; Off-Guardian; Western Journalism; Intellihub; UK Progressive;
Fars News Agency; Russia Insider; Mint Press News; State of the Nation; News of Globe;
Blacklisted News; Before It's News; Common Dreams; Shift Frequency; etc
"... They have behaved badly with an unstable value of bitcoin (huge unpredictable Bitcoin deflation damages any use of bitcoin as a means of exchange as much as huge inflation would). ..."
"... Now no one is really interested in cryptocurrency except as a way to gamble and take money from fools. But if anyone were, linking the blockchain program to prices on an exchange would make it more nearly possible to use the cryptocurrency as a means of exchange. ..."
"... The system is vulnerable to a tacit agreement to trade only on unofficial exchanges. It is necessary that the problem is also made easier if daily trading volume on the official exchange is zero. The problem is the price could shoot up on unofficial exchanges, but this would not affect the price on the official exchange if there were no transactions on the official exchange. ..."
"... The basis was and remains to remove any and all national gov'ts across he globe from any influences on values of currencies, thus pure laissez-faire in the extreme .. as you say libertarian chaos. ..."
"... There is a much more severe problem with bitcoin. As the number mined asymptotically approaches the pre-determined maximum, the cost of mining approaches infinity. As miners are the ones who validate coins, what will happen to the reliability of bitcoin when it becomes uneconomical for anyone to participate in mining? ..."
I am going to make a fool
of myself by suggesting that a cryptocurrency might actually be useful. Bitcoin et al have
negative social utility. They are pure speculative assets which enable people to gamble. Also
bitcoin miners use as much electricity as Denmark. The problem is exactly the aspect which has
made bitcoin famous and which bitcoin enthusiasts consider a strength -- the enormous increase
in the dollar price of bitcoin. This increase, and the recent sharp decline, make bitcoin
useless as a means of exchange. Most firms don't want to gamble.
So I (semi-seriously this time) propose botcoin which might have a more stable dollar
exchange rate. The idea is to link the blockchain verification program to an official
exchange.
Backing up, there are two very different sorts of web-servers related to bitcoin. One set,
the bitcoin miners, implements the original idea using the Bitcoin shareware. They keep a copy
of the ledger of all bitcoin transactions -- the blockchain, race to create new blocks, and
evaluate new blocks and add valid new blocks to the chain. The other servers are bitcoin
exchanges in which bitcoin is traded for regular currency. They are not part of the original
plan in which bitcoin would be traded for goods and services and function as a means of
exchange. They have behaved badly with an unstable value of bitcoin (huge unpredictable
Bitcoin deflation damages any use of bitcoin as a means of exchange as much as huge inflation
would).
I propose linking the blockchain program to an exchange. So there would be an official
botcoin exchange (this means it isn't entirely free-entry shareware libertarian anarchism). If
anyone were interested in a new cryptocurrency designed so that speculators can't become rich
(and pigs fly) there would be other unofficial exchanges.
The bitcoin program regulates the frequency of creation of new blocks to roughly one every
six minutes. It does this by adjusting the difficulty of the pointless arithmetic problem which
must be solved to make a new valid block. The idea was to limit the total amount of bitcoin
which will ever be created (to 21 million for some reason). This was supposed to make bitcoin
valuable. So far it has succeeded all too well (I am confident that in the end bitcoin will
have price 0).
It is possible to make the supply of botcoin flexible so the dollar price doesn't shoot up.
I would aim at a price of, say, 1 botcoin = $1000. The idea is to make the pointless problem
which must be solved to add a block easier if the dollar price of botcoin exceeds the target,
and harder if it falls below the target. This should stabilize the price.
Now no one is really interested in cryptocurrency except as a way to gamble and take
money from fools. But if anyone were, linking the blockchain program to prices on an exchange
would make it more nearly possible to use the cryptocurrency as a means of exchange.
The system is vulnerable to a tacit agreement to trade only on unofficial exchanges. It
is necessary that the problem is also made easier if daily trading volume on the official
exchange is zero. The problem is the price could shoot up on unofficial exchanges, but this
would not affect the price on the official exchange if there were no transactions on the
official exchange.
Lyle , December 25, 2017 11:22 pm
Of course Goldman Sachs and its competitors are doing just this building an options and
futures exchange. (it is not really that much different than any other futures and options
business)
Longtooth , December 26, 2017 5:01 am
But Robert,
then the entire foundation for Bitcoin's purpose disappears entirely, so what advantage
remains?
The basis was and remains to remove any and all national gov'ts across he globe from any
influences on values of currencies, thus pure laissez-faire in the extreme .. as you say
libertarian chaos.
By making crypto-currency values subject to national currency exchange rates they cease to
have any reason to exist at all.
We / globally in fact already use crypto exchange via electronic transactions .. adding
block chain to it would be a benefit but a separate cryptocurrency is a worthless redundancy
if it is subject to valuation by exchange rates of national currencies.
What am I missing?.
likbez , December 26, 2017 5:27 am
Great Article !!! I wish I can write about this topic on the same level. Thank you very much. P.S. Happy New Year for everybody !
rick shapiro , December 26, 2017 10:26 am
There is a much more severe problem with bitcoin. As the number mined asymptotically
approaches the pre-determined maximum, the cost of mining approaches infinity. As miners are
the ones who validate coins, what will happen to the reliability of bitcoin when it becomes
uneconomical for anyone to participate in mining?
"A minority of Fed officials, however, have become increasingly forceful in registering their concerns. Those officials are
more worried about moving too fast than too slow. They fear that the persistence of sluggish inflation could damage the economy,
for example, by permanently eroding public expectations about the future pace of inflation.
The minutes said that some of those officials are reluctant to vote for additional rate increases until they are convinced
that inflation is indeed gaining strength.
The officials "indicated that their decision about whether to increase the target range in the near term would depend importantly
on whether the upcoming economic data boosted their confidence that inflation was headed toward the Committee's objective.""
"... permanently eroding public expectations about the future pace of inflation..."
[The public, being voting age people at large and all working people and so on, really would rather not expect any inflation
at all. It usually does not work out for them all that well since food prices and other headline inflation goods often rise ahead
of wages and core inflation goods. The public is not going to bail us out of this one. Poor and lower middle income people do
not even have mortgages to refinance. Economic illiteracy among the public is not our friend. The establishment however cannot
afford to make the public more economically literate for fear they will understand how the balance of trade over the last forty
year has ripped them off.]
"It usually does not work out for them all that well since food prices and other headline inflation goods often rise ahead of
wages and core inflation goods."
People also don't like being taxed to pay for infrastructure and public services.
Except for older voters, most people in advanced nations have never experienced moderate inflation.
If macro policy was done entirely by fiscal policy/better trade policy and interest rates were left alone, we'd still see higher
inflation after years of running the economy hot.
I just think that had the government did more fiscal/monetary policy after the financial crisis and allowed inflation to run over
target instead of being paranoid about accelerating inflation, the recovery would have been much quicker and people would have
been much happier even with a little inflation. Hillary would have won and inflation expectations would be higher among people
who think about such things.
When sellers of groceries, household goods, utility services, etc. can successfully raise prices, then shouldn't one think there
is still untapped consumer surplus? People with "extra money" will probably pay more, what do people with no extra money do? Buy
less, substitute down, forgo other more discretionary expenses? Shift other expenses to loaned money? Furniture and appliances
have always had financing programs, not obvious that more is bought on loan.
OTOH where I'm currently shopping, it seems grocery prices were stable over the last year. OTOH "sales" and other frequent short
term price variations are of a larger magnitude than inflation, so it's hard to tell. But a number of years ago I have definitely
noticed YOY price moves - not so now.
Grocery stores operate with very thing margins. Retail prices rise when wholesale prices rise. Rising transportation fuel costs
can push wholesale grocery prices, but a lot of food prices has to do with supply variances due to weather. Demand is not very
price elastic on staples, but luxury demand can fall severely with rising prices. Chuck roast is more of a staple for many people.
Filet mignon is a luxury for most people. Or maybe milk is a staple and candy is a luxury most of the time.
"A minority of Fed officials, however, have become increasingly forceful in registering their concerns. Those officials are
more worried about moving too fast than too slow. They fear that the persistence of sluggish inflation could damage the economy,
for example, by permanently eroding public expectations about the future pace of inflation.
The minutes said that some of those officials are reluctant to vote for additional rate increases until they are convinced
that inflation is indeed gaining strength.
The officials "indicated that their decision about whether to increase the target range in the near term would depend importantly
on whether the upcoming economic data boosted their confidence that inflation was headed toward the Committee's objective.""
"... permanently eroding public expectations about the future pace of inflation..."
[The public, being voting age people at large and all working people and so on, really would rather not expect any inflation
at all. It usually does not work out for them all that well since food prices and other headline inflation goods often rise ahead
of wages and core inflation goods. The public is not going to bail us out of this one. Poor and lower middle income people do
not even have mortgages to refinance. Economic illiteracy among the public is not our friend. The establishment however cannot
afford to make the public more economically literate for fear they will understand how the balance of trade over the last forty
year has ripped them off.]
"It usually does not work out for them all that well since food prices and other headline inflation goods often rise ahead of
wages and core inflation goods."
People also don't like being taxed to pay for infrastructure and public services.
Except for older voters, most people in advanced nations have never experienced moderate inflation.
If macro policy was done entirely by fiscal policy/better trade policy and interest rates were left alone, we'd still see higher
inflation after years of running the economy hot.
I just think that had the government did more fiscal/monetary policy after the financial crisis and allowed inflation to run over
target instead of being paranoid about accelerating inflation, the recovery would have been much quicker and people would have
been much happier even with a little inflation. Hillary would have won and inflation expectations would be higher among people
who think about such things.
When sellers of groceries, household goods, utility services, etc. can successfully raise prices, then shouldn't one think there
is still untapped consumer surplus? People with "extra money" will probably pay more, what do people with no extra money do? Buy
less, substitute down, forgo other more discretionary expenses? Shift other expenses to loaned money? Furniture and appliances
have always had financing programs, not obvious that more is bought on loan.
OTOH where I'm currently shopping, it seems grocery prices were stable over the last year. OTOH "sales" and other frequent short
term price variations are of a larger magnitude than inflation, so it's hard to tell. But a number of years ago I have definitely
noticed YOY price moves - not so now.
Grocery stores operate with very thing margins. Retail prices rise when wholesale prices rise. Rising transportation fuel costs
can push wholesale grocery prices, but a lot of food prices has to do with supply variances due to weather. Demand is not very
price elastic on staples, but luxury demand can fall severely with rising prices. Chuck roast is more of a staple for many people.
Filet mignon is a luxury for most people. Or maybe milk is a staple and candy is a luxury most of the time.
So when you cut through all the steam and the boilerplate, how do they plan to do it so it's
fairer to poor Ukrainians, but the state spends less?
Ah. They plan to
raise the age at which you
qualify for a pension
, doubtless among other money-savers. If the state plays its cards
right, the target demographic wil work all its adult life and then die before reaching
pensionable age. But as usual, we must be subjected to the usual western sermonizing about
how the whole initiative is all about helping people and doing good.
This is borne out in one of the other 'critical reforms' the IMF insisted upon before
releasing its next tranche of 'aid' – a land reform act which would allow Ukraine to
sell off its agricultural land
in the interests of 'creating a market'. Sure: as if.
Land-hungry western agricultural giants like Monsanto are drooling at the thought of
getting their hands on Ukraine's rich black earth
plus a chink in Europe's armor against
GMO crops. Another possible weapon to use against Russia would be the growing of huge volumes
of GMO grain so as to weaken the market for Russian grains.
Another element of the plan to reduce pension obligations is the dismantling of whatever
health care system that remain in the Ukraine. That is a twofer – save money on
providing medical services and shortening the life span. This would be another optimization
of wealth generation for the oligarchs and for those holding Ukraine debt.
I can just see Ukrainian health authorities giving away free cigarettes to patients and their
families next!
That remark was partly facetious and partly serious: life these days in the Ukraine sounds
so surreal that I wouldn't put it past the Ministry of Healthcare of Ukraine to come up with
the most hare-brained "reform" initiatives.
I recall a news story about the adverse effects of a reduction in smoking on the US Social
Security Trust Fund. Those actuaries make those calculations for a living. The trouble with
shortening life spans via cancer is that end-of-life treatment tends to be very expensive
unless
people do not have or have very basic health insurance, then there is a likely
net gain. Alcohol, murder and suicides are generally much more efficient economically. I just
depressed myself.
Something does not add up. Any government expenditure is an economic stimulus. The only
potentially negative aspect is taxation. Since taxation is not excessive and in fact too
small on key layers (e.g. companies and the rich), there is no negative aspect to government
spending on pensions. So we have here narrow-definition accounting BS.
Agree that in a world where the people, represented by their governments, are in charge of
money creation and governments ran their financial systems independently of Wall Street and
Washington, any government spending would be welcomed as stimulating economic production and
development. The money later recirculates back to the government when the people who have
jobs created by government spending pay the money back through purchases of various other
government goods and services or through their taxes.
But in capitalist societies where increasingly banks are becoming the sole creators and
suppliers of money, government spending incurs debts that have to be paid back with interest.
In the past governments also raised money for major public projects by issuing treasury bonds
and securities but that doesn't seem to happen much these days.
Unfortunately also Ukraine is surviving mainly on IMF loans and the IMF certainly doesn't
want the money to go towards social welfare spending.
In fact, the IMF specifically intervenes to prevent spending loan money on social welfare, as
a condition of extending the loan. That might have been true since time out of mind for all I
know, but it certainly was true after the first Greek bailout, when leaders blew the whole
wad on pensions and social spending so as to ensure their re-election. They then went
sheepishly back to the IMF for a second bailout. So there are good and substantial reasons
for insisting the loan money not be wasted in this fashion, as that kind of spending
customarily does not generate any meaningful follow-on spending by the recipients, and is
usually absorbed by the cost of living.
But as we are all aware, such IMF interventions have a definite political agenda as well.
In Ukraine's case, the IMF with all its political inveigling is matched against a crafty
oligarch who will lift the whole lot if he is not watched. Alternatively, he might well blow
it all on social spending to ensure his re-election, thus presenting the IMF with a dilemma
in which it must either continue to support him, or cause him to fall.
"... It implies that it is money supply that contributes to inflation. However it is not money supply that contributes to inflation it is income. That is money times the velocity of money ..."
Now I just read an article by some guy with the typical quantitative easing is bad because it
just dilutes everyones wealth , debases the currency value and and all that
This is nonsense
It implies that it is money supply that contributes to inflation. However it is not money
supply that contributes to inflation it is income. That is money times the velocity of money
and in fact it is not income that contributes to inflation it is income times the propensity
to consume of that income
money in bonds is not really actively involved in income except for the interest it's earning
so when the central bank "prints money" and then uses that money to buy bonds all the central
bank is doing is exchanging one form of inactive wealth with another form of inactive wealth
that is neither the value of the bond nor the value of the money that the fed printed by the
bond were actively involved in income anyway, except for the interest earned
therefore they do not affect inflation
in fact the value that bond at this point wasn't about to be used for consumption anyway, it
was just being held
after the fed purchases the bond, that the former bondholder now has cash that is no longer
getting a return, (as now the fed is getting the return)
which will prompt the former bondholder to look for a place to put that money
the idea is that the former bondholder will invest the money, that that money will find its
way into funding ventures that cause increased employment, income and production
and it is that investment that will stimulate the economy
like maybe buy other bonds and the issuer of the bond gets that money and can invest in their
business, creating jobs and income and production for their employees.
Which then will have the usual multiplier effect if we are at less than full employment
and at any point the fed can sell back the bond reducing the money supply
in the meantime we might have been able to keep the economy functioning at a high level, keep
more people from being excluded from the benefits, and not lose all that production that is so
essential to increasing our quality of life
I would say precious metals are subject to tighter physical
constraints (first of all, availability) than most of what
have been considered "fiat" currencies.
E.g. emergency
"fiat" coin has been produced from cheaper metals, e.g. iron,
aluminum, or brass. Forgery-resistant paper currency is not
cheap, but probably still cheaper than precious metals.
All that is beside the point - today's currencies are only
virtual accounting entries (though with a not so cheap
supervision and auditing infrastructure attached to enforce
scarcity, or rather limit issuance to approved parties).
Gold and silver prices are
determined by labor costs of production.
Cartels act to limit global supply to push prices above
labor costs, but even the Cartels have trouble resisting
selling into the market when the price far exceeds labor cost
of the marginal unit of production.
In today's political economy, the barrier to entry is rule
of law which requires paying workers to produce without
causing harm to others. The lowest cost new gold production
is all criminal, involving theft of gold from land the miners
have no property rights, done by causing harm and death to
bystanders, with protection of the criminal operations coming
from criminals who capture most of the profit from the
workers.
Estimates vary, but some believe 90% of all gold mined in
5000 years is still held by humans as property. If a method
of extracting gold from sea water at a labor cost of $300 an
ounce, the "destruction of wealth" would be many trillions of
dollars.
All that's needed is a method of processing sea water that
could be built for $300 per ounce of lifetime asset life. A
$300 million in labor cost processing ship that kept working
for 30 years producing over that 30 years a million ounces of
gold would quickly drive the price of gold to $350-400. If it
doesn't, a thousand ships would be quickly built that would
add a billion ounces to the global supply in 30 years
representing 1/6th global supply after 5000 years.
Unless gold suddenly gained new uses, say dresses that
every upper middle class women had to have, and that cost
more than $300 an ounce to return to industrial gold, such
production would force the price of gold to or below labor
cost.
However, a dollar coin plated one atom thick in 3 cents of
gold will always have a value of a dollar's worth of labor.
The number of minutes of labor or the skills required for
each second of labor can change, but as long as the dollar
buys labor, it will have a dollar of value.
If robots do all the work, then a dollar becomes
meaningless. A theoretical economy of robots doing all the
work means a car can be priced at a dollar or a gigadollars,
but the customers must be given that dollar or that
gigadollars, or the robots will produce absolutely nothing.
Robots producing a million cars a month which no one has the
money to buy means the cars cost zero. To simply produce cars
that are never sold means the marginal cost is zero.
Money is a rationing mechanism to control the use and
distribution of scarce economic resources. Labor (of various
specializations) is a scarce resource, or the scarcest
resource commanding the highest price, only if other
resources are more plentiful.
There are many cases where
labor, even specialized labor, is not the critical
bottleneck, and is not the majority part of the price. E.g.
in the case of patents where the owner can charge what the
market will bear due to intellectual property enforcement. Or
any other part of actual or figurative "toll collection" with
ownership or control of critical economic means or
infrastructure. That's pure rent extraction.
Some things cost a lot *not* because of the labor involved
- a lot of labor (not spent on producing the actual good) can
be involved because the obtainable price can pay for it.
The value of precious metals or gems is also entirely
arbitrary. They only have value because someone says they do,
as they have little utilitarian value.
The initial allure of bitcoin has been "anonymity", until
people figured out that all transactions are publicly
recorded with a certain amount of metadata. This can be
partially defeated by "mixing services", i.e. systematic
laundering. There have also been alleged frauds (complete
with arrests) that got a lot of press in the scene, where
bitcoin "safekeeping services" (I don't quite want to say
"banks") "lost" currency or in any case couldn't return
deposits to depositors. No deposit insurance, not much in the
way of contract enforcement, etc.
Then there were stories
about computer viruses and malware targeted at stealing
account credentials or "wallet files".
FWIW, I regard bitcoin as a colossal folly intended to appeal
to crazed libertarian idiots, goldbug nutters, and criminals
and has little utility or real value. Investing in bubble gum
cards makes more sense.
Posted on
April 25, 2017
by
Yves Smith
Yves here. The article makes a comment in passing
that bears teasing out. The inflation that started
in the later 1960s was substantially if not entirely
the result of Lyndon Johnson refusing to raise taxes
because it would be perceived to be to pay for the
unpopular Vietnam War. Richard Nixon followed that
approach.
By Michael Bordo, Professor
of Economics, Rutgers University. Originally
published at
VoxEU
Scholars and policymakers interested in the
reform of the international financial system have
always looked back to the Bretton Woods system as an
example of a man-made system that brought both
exemplary and stable economic performance to the
world in the 1950s and 1960s. Yet Bretton Woods was
short-lived, undone by both flaws in its basic
structure and the unwillingness of key sovereign
members to follow its rules. Many commentators hark
back to the lessons of Bretton Woods as an example
to possibly restore greater order and stability to
the present international monetary system. In a
recent paper, I revisit these issues from over a
half century ago (Bordo 2017).
The Bretton Woods system was created by the 1944
Articles of Agreement at a global conference
organised by the US Treasury at the Mount Washington
Hotel in Bretton Woods, New Hampshire, at the height
of WWII. It was established to design a new
international monetary order for the post war, and
to avoid the perceived problems of the interwar
period: protectionism, beggar-thy-neighbour
devaluations, hot money flows, and unstable exchange
rates. It also sought to provide a framework of
monetary and financial stability to foster global
economic growth and the growth of international
trade.
The system was a compromise between the fixed
exchange rates of the gold standard, seen as
conducive to rebuilding the network of global trade
and finance, and the greater flexibility to which
countries had resorted in the 1930s to restore and
maintain domestic economic and financial stability.
The Articles represented a compromise between the
American plan of Harry Dexter White and the British
plan of John Maynard Keynes. The compromise created
an adjustable peg system based on the US dollar
convertible into gold at $35 per ounce along with
capital controls. The compromise gave members both
exchange rate stability and the independence for
their monetary authorities to maintain full
employment. The IMF, based on the principle of a
credit union, whereby members could withdraw more
than their original gold quotas, was established to
provide relief for temporary current account
shortfalls.
It took close to 15 years to get the Bretton
Woods system fully operating. As it evolved into a
gold dollar standard, the three big problems of the
interwar gold exchange standard re-emerged:
adjustment, confidence, and liquidity problems.
The
adjustment
problem in Bretton Woods
reflected downward rigidity in wages and prices
which prevented the normal price adjustment of the
gold standard price specie flow mechanism to
operate. Consequently, payment deficits would be
associated with rising unemployment and recessions.
This was the problem faced by the UK, which
alternated between expansionary monetary and fiscal
policy, and then in the face of a currency crisis,
austerity – a policy referred to as 'stop-go'. For
countries in surplus, inflationary pressure would
ensure, which they would try to block by
sterilisation and capital controls.
A second aspect of the adjustment problem was
asymmetric adjustment between the US and the rest of
the world. In the pegged exchange rate system, the
US served as central reserve country and did not
have to adjust to its balance of payments deficit.
It was the
n-1th
currency in the system of
n
currencies (Mundell 1969). This asymmetry
of adjustment was resented by the Europeans.
The US monetary authorities began to worry about
the balance of payments deficit because of its
effect on
confidence
. As official dollar
liabilities held abroad mounted with successive
deficits, the likelihood increased that these
dollars would be converted into gold and that the US
monetary gold stock would eventually reach a point
low enough to trigger a run. Indeed by 1959, the US
monetary gold stock equalled total external dollar
liabilities, and the rest of the world's monetary
gold stock exceeded that of the US. By 1964,
official dollar liabilities held by foreign monetary
authorities exceeded that of the US monetary gold
stock (Figure 1).
Figure 1.
US gold stock and
external liabilities, 1951-1975
Source
: Banking and Monetary
Statistics 1941‐1970, Washington DC Board of
Governors of the Federal Reserve System, September
1976, Table 14.1, 15.1.
A second source of concern was the dollar's role
in providing
liquidity
to the rest of the
world. Elimination of the US balance of payments
deficits (as the French and Germans were urging)
could create a global liquidity shortage. There was
much concern through the 1960s as to how to provide
this liquidity.
Robert Triffin (1960) captured the problems in
his famous dilemma. Because the Bretton Woods
parities, which were declared in the 1940s, had
undervalued the price of gold, gold production would
be insufficient to provide the resources to finance
the growth of global trade. The shortfall would be
met by capital outflows from the US, manifest in its
balance of payments deficit. Triffin posited that as
outstanding US dollar liabilities mounted, they
would increase the likelihood of a classic bank run
when the rest of the world's monetary authorities
would convert their dollar holdings into gold
(Garber 1993). According to Triffin when the tipping
point occurred, the US monetary authorities would
tighten monetary policy and this would lead to
global deflationary pressure. Triffin's solution was
to create a form of global liquidity like Keynes'
(1943) bancor to act as a substitute for US dollars
in international reserves.
Policies to Shore Up the System
The problems of the Bretton Woods system were
dealt with by the IMF, the G10 plus Switzerland, and
by US monetary authorities. The remedies that
followed often worked in the short run but not in
the long run. The main threat to the system as a
whole was the Triffin problem, which was exacerbated
after 1965 by expansionary US monetary and fiscal
policy which led to rising inflation.
After a spike in the London price of gold to
$40.50 in October 1960 – based on fears that John F
Kennedy, if elected, would pursue inflationary
policies – led the Treasury to develop policies to
discourage Europeans from conversing dollars into
gold. These included:
Moral suasion on Germany with the threat of
pulling out US troops;
The creation of the Gold Pool in 1961, in
which eight central banks pooled their gold
reserves in order to keep the London price of
gold close to the $35 per ounce parity price;
The issue of Roosa bonds (foreign currency
denominated bonds);
The General Arrangements to Borrow in 1961,
which was an IMF facility large enough to offer
substantial credit to the US;
Operation Twist in 1962, in which the US
Treasury bought long term debt to lower long
term interest rates and encourage investment,
while the Federal Reserve simultaneously sold
short-term Treasury bills to raise short-term
rates and attract capital inflows; and
The Interest Equalization Tax in 1963, which
imposed a tax on capital outflows.
The US Treasury, aided by the Federal Reserve,
also engaged in sterilised exchange market
intervention.
The main instrument used by the Fed to protect
the gold stock was the swap network. It was designed
to protect the US gold stock by temporarily
providing an alternative to foreign central bank
conversion of their dollar holdings into gold. In a
typical swap transaction, the Federal Reserve and a
foreign central bank would undertake simultaneous
and offsetting spot and forward exchange
transactions, typically at the same exchange rate
and equal interest rate. The Federal Reserve swap
line increased from $900 million to $11.2 billion
between March 1962 and the closing of the gold
window in August 1971 (see Figure 2 and Bordo et al.
2015)
Figure 2.
Federal Reserve swap
lines, 1962 –1973
Source
: Federal Reserve System.
The swaps and ancillary Treasury policies
protected the US gold reserves until the mid-1960s,
and were viewed at the time as a successful policy.
The Breakdown of Bretton Woods, 1968 to 1971
A key force that led to the breakdown of Bretton
Woods was the rise in inflation in the US that began
in 1965. Until that year, the Federal Reserve
Chairman, William McChesney Martin, had maintained
low inflation. The Fed also attached high importance
to the balance of payments deficit and the US
monetary gold stock in its deliberations (Bordo and
Eichengreen 2013). Beginning in 1965 the Martin Fed
shifted to an inflationary policy which continued
until the early 1980s, and in the 1970s became known
as the Great Inflation (see figure 3).
Figure 3
. Inflation rates
Source
: US Bureau of Labor
Statistics, IMF (various issues).
The shift in policy mirrored the accommodation of
fiscal deficits reflecting the increasing expense of
the Vietnam War and Lyndon Johnson's Great Society.
The Federal Reserve shifted its stance in the
mid-1960s away from monetary orthodoxy in response
to the growing influence of Keynesian economics in
the Kennedy and Johnson administrations, with its
emphasis on the primary objective of full employment
and the belief that the Fed could manage the
Phillips Curve trade-off between inflation and
unemployment (Meltzer 2010).
Increasing US monetary growth led to rising
inflation, which spread to the rest of the world
through growing US balance of payments deficits.
This led to growing balance of payments surpluses in
Germany and other countries. The German monetary
authorities (and other surplus countries) attempted
to sterilise the inflows but were eventually
unsuccessful, leading to growing inflationary
pressure (Darby et al. 1983).
After the devaluation of sterling in November
1967, pressure mounted against the dollar via the
London gold market. In the face of this pressure,
the Gold Pool was disbanded on 17 March 1968 and a
two-tier arrangement put in its place. In the
following three years, the US put considerable
pressure on other monetary authorities to refrain
from converting their dollars into gold.
The decision to suspend gold convertibility by
President Richard Nixon on 15 August 1971 was
triggered by French and British intentions to
convert dollars into gold in early August. The US
decision to suspend gold convertibility ended a key
aspect of the Bretton Woods system. The remaining
part of the System, the adjustable peg disappeared
by March 1973.
A key reason for Bretton Woods' collapse was the
inflationary monetary policy that was inappropriate
for the key currency country of the system. The
Bretton Woods system was based on rules, the most
important of which was to follow monetary and fiscal
policies consistent with the official peg. The US
violated this rule after 1965 (Bordo 1993).
Conclusion
The collapse of the Bretton Woods system between
1971 and 1973 led to the general adoption by
advanced countries of a managed floating exchange
rate system, which is still with us. Yet this
outcome (at least at the time) was not inevitable.
As was argued by Despres et al. (1966) in
contradistinction to Triffin, the ongoing US balance
of payments deficit was not really a problem. The
rest of the world voluntarily held dollar balances
because of their valuable service flow – the deficit
was demand-determined. In their view, the Bretton
Woods system could have continued indefinitely. This
of course was not the case, but although the par
value system ended in 1973 the dollar standard
without gold is still with us, as McKinnon (1969,
1988, 2014) has long argued.
The dollar standard was resented by the French in
the 1960s and referred to as conferring "the
exorbitant privilege" on the US, and the same
argument was made in 2010 by the Governor of the
Central Bank of China. However, the likelihood that
the dollar will be replaced as the dominant
international currency in the foreseeable future
remains remote. The dollar standard and the legacy
of the Bretton Woods system will be with us for a
long time.
'Because the Bretton Woods parities, which
were declared in the 1940s, had undervalued the
price of gold, gold production would be insufficient
to provide the resources to finance the growth of
global trade.'
Twenty years on from Britain's "lost decade" of
the 1920s - caused by repegging sterling to gold at
the pre-World War I parity - the same mistake was
repeated at Bretton Woods. (The US had made the
identical error in 1871, which required 25 years of
relentless deflation to sweat out Civil War
greenback inflation.)
Even as the Bretton Woods conference was underway
in 1944, it went unnoticed that the US Federal
Reserve had embarked on a vast buying spree of US
Treasuries. This was done to peg their yield at 2.5%
or below, in order to finance WW II at negative real
yields. By 1945, US Treasuries (shown in blue and
orange on this chart) loomed larger in the Fed's
balance sheet than gold (shown in chartreuse):
Obviously a fixed gold price is utterly
incompatible with a central bank expanding its
balance sheet with government debt, reducing its
gold holdings to the tiny residual that they
constitute today.
Bretton Woods might have worked by limiting
central banks' ability to monetize gov't securities.
Or it might have worked with the gold price allowed
to float with expanding central bank assets,
according to a formula.
What was lost with Bretton Woods was fixed
exchange rates, which are conducive to trade. Armies
of traders seeking to extract rents from
fluctuations between fiat currencies are a pure
deadweight loss to the global economy.
In North America, sharp depreciations of the
Mexican and Canadian currencies against the USD are
fanning US protectionism, in forms ranging from a
proposed border wall to countervailing duties on
Canadian lumber and dairy products. What a mess.
Irredeemable fiat currencies are a tribulation
visited on humanity. When the central bank blown
Bubble III explodes in our fool faces, this insight
will be more widely appreciated.
Fiat currency is a tribulation visited on
capitalist trade advocates and their financial
backers.
International trade, which is hobbled by fiat
currencies as you say, was a rounding error in
most peoples lives until the Thatcher/Reagan
neoliberal innovations.
Since then that rounding error has rounded
away most of the distributive properties of the
economic systems so distorted to facilitate
capital profits through long distance trade that
they are impoverishing enough people that Brits
vote Brexit, Yanks vote Trump and French vote Le
Pen.
Bretton Woods would have worked a lot better
if Keynes had won the argument in favor of
"bancor", but he was arguing from a position of
weakness and lost out.
And yes, when this blows, as it will, it will
all become more widely appreciated.
missing from the article is the decision to
raise the price of oil in order to put most of
the 3rd world into debt slavery. This
exasperated the inflation mentioned, caused by
US deficits. Because the US was still a
manufacturing leader and the Unions were strong
– we had the wage price stagflation of the
70's,. The elites solution – Nixon went to China
– not to open up a market of a billion people
but to make use of a disciplined labor force
that would work for cheap – breaking the power
of the unions with globalisation aided by
computers. The Republicans in the US and
Thatcher in England broke the unions in the
80s.Clinton went along in the 90s. Was that plan
a factor in the decision to leave the gold
standard?
This was most interesting for its lack of regret
for losing a dollar pegged to $35 oz. gold. It is
almost a rationale for letting inflation and deficit
spending occur because in the end the system using a
reserve currency works as good as anything. I do
think the expense of the Vietnam war and the obvious
policy that it was necessary to allow inflation
(from the 70s onward) was incomplete, looking at
everything today, because it was based on an
assumption that we humans could just aggressively
keep growing our way into the future like we had
always done. Already in 1970 there were
environmental concerns, well-reasoned ones, and
global warming was being anticipated. If it had been
possible to use a hard gold standard we might not be
in this ecological disaster today, but there would
have been some serious poverty, etc. The obvious
policy today is to put our money into the
environment and fix it and by doing that put people
to work for a good and urgent cause. As opposed to
bombing North Korea; building a Wall to nowhere;
giving money to corporations which do not contribute
to repairing the planet; and impoverishing people
unnecessarily, etc. Money, in the end, is only as
valuable as the things it accomplishes.
Wrong on your poverty concept. It is the
inflation associated with a reckless fiat
monetary system that causes much of the poverty.
Prior the fiat era there was minimal inflation.
As Keynes explained in his prophetic criticism
of the Treaty of Versailles, The Economic
Consequences of the Peace, when he called
attention to Lenin, of all people:
"By a continuing process of inflation,
governments can confiscate, secretly and
unobserved, an important part of the wealth of
their citizens. By this method, they not only
confiscate, but they confiscate arbitrarily;
and, while the process impoverishes many, it
actually enriches some. The sight of this
arbitrary rearrangement of riches strikes not
only at security, but at confidence in the
equity of the existing distribution of wealth.
Those to whom the system brings windfalls . . .
become 'profiteers', who are the object of the
hatred of the bourgeoisie, whom the inflationism
has impoverished not less than the proletariat.
As the inflation proceeds . . . all permanent
relations between debtors and creditors, which
form the ultimate foundation of capitalism,
become so utterly disordered as to be almost
meaningless.
Lenin was certainly right. There is no
subtler, nor surer means of overturning the
existing basis of society that to debauch the
currency. The process engages all the hidden
forces of economic law on the side of
destruction, and does it in a manner which not
one man in a million is able to diagnose."
The core problem with hard currency is
the power asymmetry of the fixed interest
contract in whatever form.
Because costs are constant and growing
under such contracts, income requirements
become "sticky": in a market reverse, wage
earners, renters, mortgage holders etc are
obligated by these contracts and cannot
accept a cut in their wage unless they have
adequate financial reserves. Recessions soak
these reserves from debtors to creditors
despite the loose underwriting of creditors
in the speculative and ponzi phases of the
Minsky cycle being the root cause of the
business cycle, not profligacy or
irresponsibility by wage earners and small
business people. In a depression, this
liquidationist dynamic starts working its
way up the the industrial supply chain,
dismantling the actual means of production.
The main potential public benefit of fiat
currency is that in such conditions it costs
the state nothing to preserve the wealth of
those not implicated in causing the collapse
and to preserve those means of production.
Unfortunately, what we saw in 2008 was
Bush/Obama using the innocent victims of the
business cycle to "foam the runway" for the
institutions that caused it.
Poverty is a simple result of being cut
off from possible income sources. To the
extent that inflation is managed with what
Keynes called "a reserve army of the
unemployed", high levels of poverty are
assured. In the high wage, high cost era of
the New Deal, the intent was take what
burden of financial risk could be taken off
of workers and small producers and to
provide good paying opportunities for one
cycle's economic losers to get back on their
feet in the next cycle. But this only works
with full employment where labor has the
power to bid for a share of the overall
returns on investments.
I found this fascinating and quite
persuasive.
But unless you can posit the existence
of a state that will reliably act to
"preserve the wealth of those not
implicated in causing the collapse and
to preserve those means of production"
it is just a useless academic exercise.
I do not see any such state anywhere in
view, with the possible exception of the
Chinese, who seem to understand
"preserving the means of production" as
a state priority. For the West however
that idea is a real howler.
If it had been possible to use a hard
gold standard we might not be in this
ecological disaster today, but there would
have been some serious poverty, etc.
Some serious poverty only if because the
elites would have been even more neoliberal.
The last gold-standard-free 50 years of
innovation and growth have made extinct
1. Shoes that last more than a few months
2. Clothes that you can pass on to future
generations
3. Likewise, furniture
4. Milk or Coke in glass bottles
etc.
Isn't that because we have evicted
competition from our global commercial model
and replaced it with planned production so
every factory knows the size of its likely
market?
At what point would China, for example, be able
to assert more of a reserve currency, or at least
alternative, role based on its economic and trade
power and build-up of hard and financial assets? Or
is their near-term internal surplus recycling
through uneconomic lending enough to keep them
off-balance for quite a while on the world financial
stage? Many in the West are watching the development
of the One Belt/One Road infrastructure and shifting
country linkages and alliances with grave concern.
The key to reserve status is large external
holdings of your monetary instruments: for
foreigners to transact in your currency they
must have it. China, thus far, fails profoundly
on this count, no one has its currency.
The inverse of this is that the best way for
the US to end the dollars reserve status is to
eliminate the "National Debt", which is in fact
nothing other than the inventory if dollar
instruments the rest of the world holds in order
to be able to spend dollars into our system:
eliminate that inventory and the dollar will no
longer be a reserve currency.
This raises the large question of whether
"reserve status" is actually beneficial.
Apparently it consists largely of being
enormously in debt – and in fact, it's been
a way for Japanese and Chinese to buy up
large chunks of our "means of production."
The prosperity of my original home town,
Columbus, IN, rests on Japanese
"investment." It does mean some good
Japanese restaurants in town.
To me the question is, who benefits
from it? It has been of great benefit to
a very particular set of people here in
the US and quite destructive since the
70s to most everyone else.
It is a power relationship that has
been used for imperial aims rather than
for the good of citizens. It needn't be
that way, but as US power has become
increasingly unaccountable its abuse of
this particular tool has grown.
First, the US could just as easily
deficit spend. We are not "in debt"
because the US can always create more
dollars to retire Treasury bonds.
The requirement for being a reserve
currency is running trade deficits. That
does require that furriners take and
hold your paper. They prefer bonds or
other investments to cash to get some
yield.
Running ongoing trade deficits also
means that you are using your domestic
demand to support jobs overseas. That is
the problematic feature, not all of this
other noise.
The concept of a reserve currency came
about from resolution 9 of the Genoa
Monetary Conference of 1922. The idea was
that any currency that was convertible to
gold was de facto equivalent to gold and
therefore an acceptable central bank reserve
asset. In other words there is really no
such thing as an international reserve
currency without gold in the system
according to the very reasoning that
established the idea. The U.S. pulled off
the greatest bait and switch in history when
it "suspended" the gold window in 1971. The
whole system because an enormous debt based
Ponzi scheme after that and we are now
dealing with the consequences.
And yes the key to reserve status: is
large external holdings of your monetary
instruments for foreigners to transact in".
But what incentive do they have to hold such
a currency and transact in it? Remember they
don't need it since they generally run trade
surpluses. The answer was, because that
currency was convertible to gold. What about
now when it is not tied to gold? Why hold
the currency of profligate debtor nation?
Answer provided in post below.
And anyone who thinks that running large
trade and budget deficits is the secret to
reserve currency status is a moron.
Argentina or Paraguay could just as easily
produce the necessary surplus liquidity
under that logic.
" But what incentive do they have to
hold such a currency and transact in it?
Remember they don't need it since they
generally run trade surpluses. "
Restart back at the very beginning,
forget everything you know, and try
again.
"They" got foreign reserve currency
by selling to the US and getting paid in
dollars. Their banks then traded the
dollars to the PBoC central bank for
freshly printed renimbi.
yes, but why would the central
bank endlessly collect another
country's debt?
And you inadvertently point out
one of the key frauds in the system.
The dollar supports a double pyramid
of credit, one domestic and the
other foreign. There is also a third
pyramid of credit, the euro dollar
market, which is built on top of the
U.S. domestic pyramid of credit, but
lets ignore that for now.
So "they" give us real stuff made
of raw material and labor inputs and
we give them wampum!!! Greatest scam
in history.
"The dollar supports a double
pyramid of credit, one domestic
and the other foreign. "
Except the PBoC prints the
Many Yuan to buy dollars from
the Chinese banking system. The
value of the Many Yuan is backed
by sales of exports, in that
case. A tiny little subset where
MMT (The imaginary version) is
actually in force. Then the PBoC
buys our debt with these foreign
reserves, which we wisely spend
on our country and citizens.
Next, the Chinese banking
system, thru the power of The
Money Multiplier, uses that base
money to make loans and expand
credit to Chinese.
" The value of the Many
Yuan is backed by sales of
exports, in that case."
WTF? The value the "Many
Yuan" is backed by the sale
of exports which yields
wampum, uh I mean dollars,
and they purchase the
dollars with the many yuan
they created. The PBoC
expands its balance sheet to
buy those dollars with yuan
created from nothing, hence
the double pyramid of
credit. The dollars get lent
back to us in the form of
U.S. government securities
because we issue the word's
"boomerang" currency.
And yes you can run a
system like this; for how
long? That is the big
question.
And you have misunderstood
what those reserves are for. The
Fed also can't spend all of
those US assets it holds on its
balance sheet either, now can
it?
The use of foreign currency
reserves is to defend the
currency and keep the IMF away.
Having a currency depreciate
rapidly leads to a big inflation
spike (unless you are close to
being an autarky) due to the
prices of foreign goods, in
particular commodities, going up
in your currency.
China is not self sufficient
in a whole bunch of things,
including in particular energy.
It had a spell last year when
it was running through its FX
reserves at such a rate that it
would have breached the IMF
trouble level for an economy of
its size if it had persisted for
4-6 months more.
A chemist, a physicist and
economist are ship wrecked on a
deserted island with only some
canned goods for food. They sit down
to figure out how they are going to
open the cans. To which the
economist says: "assume we have a
can opener"
Three MMT Economists are
stranded on a desert island.
They say, "WTF's a can
opener? That sounds like work!"
and live 3 months and are then
rescued by Skipper, Gillian,
Mary Ann and the Perfesser too,
on an Easter Break Tour. Ginger
and Mr. Howe are downstairs busy
downstairs knocking up.
They are living happily ever
after in Kansas City, Mo.
Seems to me the dollar system will work until
it doesn't. And those who run it have been doing
all within their power for about 15 years to
encourage anyone who can to come up with an
alternative.
None look viable, and they won't until
suddenly one is.
The euro isn't one due to the mess its
banking system is in. Japan doesn't want the
job and in any event is a military
protectorate of the US.
China is a minimum of 20 years away. Even
though it would like the status of being the
reserve currency, it most decidedly does not
want the attendant obligations, which are
running ongoing trade deficits, which is
tantamount to exporting jobs. Maintaining
high levels of employment and wage growth
are the paramount goals for China's leaders.
There are underreported riots pretty much
all the time in China due to dissatisfaction
over labor conditions now. The officialdom
is not going to commit political suicide.
Domestic needs always trump foreign goals.
Just getting around to reading Piketty's
doorstopper and was struck by his argument that
prior to WWI there had been very little inflation
worldwide for centuries. It was the need to pay off
all the war debt that shook things up.
Graeber's book on debt also makes the argument
that money as physical circulating metal currency
came about because of the need to pay for wars.
Something similar seems to have been going on
with the Bretton Woods agreement.
I know it's crazy but I'm just going to throw it
out there – maybe if we'd like a more stable economy
we could try starting fewer very destabilizing,
extremely expensive wars???
That is exactly my thought. There is a
disturbing cycle of war, monetary expansion to
pay for the war, post-war deflation leading to
political instability, leading to a repeat of
the cycle, at least in Europe and the U.S.
One can see this even in the period between
the creation of the Bank of England through the
end of the Napoleonic wars.
It is evident as well in the United States
pre- and post-Civil war.
Deficit hawks never seem to have a problem
with war-time deficit spending, only general
welfare deficit spending.
We could have a system where the fiscal power
of the state is fully harnessed for the general
welfare, but that would threaten the current
system which allows a small minority to
overwhelmingly reap the benefits of the money
creation power of the state and private banks.
This renders the issue a political one more
than a purely economic one. If history is any
guide, we will continue to have the kind of
political uncertainty we've experienced until
there has been enough war spending to start the
cycle over again. :(
" The inflation that started in the later 1960s
was substantially if not entirely the result of
Lyndon Johnson refusing to raise taxes "
I'm almost afraid to ask, but how does this make
sense? Any increase in taxes will be passed on to
the consumer to increase prices even more. If you
doubt this, watch what Trump's import taxes do to
prices.
No, you have been propagandized by the right
wing anti tax people.
Taxes drains demand from the economy. Lower
demand means more slack, more merchants having
to compete with each other, some headcount cuts,
etc.
By deficit spending in an economy that was
already at full employment, Johnson basically
guaranteed inflation. Both his own former
economist, Walter Heller, and Milton Friedman
warned against it. But because Heller was a Dem
and an outlier (most Dems weren't gonna
challenge their own party's policies), it was
Friedman's warnings that were publicized.
Another subject that is relevant to the current
post 2008 collapse and FED shenanigans to save the
day. i.e. save their cronies. And what it is
completely missing in this piece written by the
insiders is exactly that Bretton Woods; Cui
Bono:namely US ruling elite and new world order
after WWII.
Bretton Woods was a monetary session of the
overall conference 1944-1945 of new world order
namely a formal switch from British empire global
dominance system into American global dominance
system and trade/monetary policies were just an
important but small part of overall new global
political and military arrangement.
Global pound was killed, global dollar has been
created and blessed by western sphere of influence
and defended by supposedly the most powerful US
militarily in the world, [as was British navy
before] US military of global reach via US navy and
air force.
The political symbolism of Bretton Woods
conference correlated with invasion of Normandy in
June 1944, the last step in defeating Nazism in
Europe cannot be understated.
Also the dominance of two figures of White and
Keynes in this conference is an exemplification of
closing era of British empire as a world [decaying
at that time] leader which was accelerated by the
role of Japanese and German/Italian aggression in
colonial Asia, Africa [also helped by French
surrender to Nazis that spurred western support for
independent French colony of Algeria] and ME boosted
up the anti-colonial movements and political
parties, which like in Vietnam even US supported
during WWII.
Little known fact is that Nazis championed
themselves as anti-colonial force in ME while they
attempted to colonize eastern Europe.The many Arabs
fell for this propaganda siding with Nazis against
British colonialism in Palestine setting themselves
against Jews vehemently anti Nazi at that time.
In other words Bretton Woods was a consequence of
the fact that British empire was collapsing fast
ironically with the help of its allies and that
Included Soviets. Also helped that British were
broke and all the British Gold was already in the US
as a payment for bankrolling British defenses in
Europe since 1940 and elsewhere, so were Soviet gold
payments for military technology and materiel they
received from US and allies.
The political void had to be filled or it would
have been filled by Soviets, and hence the Bretton
Woods system was not based on unfettered
exploitation of slaves of newly expanded US empire
what US Oligarchy would have liked and was freely
practicing before 1929, but for ideological reason
was aimed for economic improvements in order to stem
massive anti-capitalist, communist and anti-colonist
movements that threatened western hegemony over the
world and hence the dreaded anti-capitalist words
used by in Bretton Woods system like fixed exchange
rate or blasphemous capital controls, things the
would crucify you if you utter them today during a
seminar in any Ivy league economy department.
Bretton Woods was primarily a tool into an
ideological war west and Soviets knew they would
have to fight, cold or hot.
This [economic dominance] war ended in mid
nineteen sixties when seeds of collapse of Soviet
Union and betrayal of leftist ideals and
socialist/communists movements all over the world
were sawed and hence Bretton Woods was no longer
needed and brutality of unfettered capitalist could
begin to return starting with Kennedy tax cut
freeing capital in private hands and then FED going
full fiat in later 1960-ties, capital flow
deregulation, free floating currencies, all that for
benefit of oligarchic class and of colossal
detriment to American workers, devastating result of
which we are experiencing now.
One of the great ironies of Bretton Woods is
that Harry Dexter White, the US rep at the talks
was in fact a Soviet agent. I wonder if he
understood monetary economics enough to hope
that the Bretton Woods gold standard system, as
opposed to Keynes bancor proposal, would self
immolate with a run on US gold stocks and take
the West down with it.
Let's think of "root causes", both Keynes
and White were big fans of Soviet-style
command and control top-down planned
economies ("I have seen the future and it
works!"). So that's what they divined and
devised for money: a top-down price-fixing
regime.
So while people would laugh themselves
silly if you told them we were going to
price things the way the Soviets did ("we'll
raise X number of cows because we'll need Y
quantity of shoe leather"), we somehow
accept central planning for the price of the
most important item of all: money itself.
The supreme geniuses at the Fed et al, with
their supreme formulae, can divine at any
moment precisely what the price of money
should be. This, of course, is folly.
And people should understand that the
gold standard (not the gold-exchange
standard it is often confused with) was not
designed, was not somehow imposed, and was
not agreed upon by some collective body. It
simply arose organically because time and
again through painful experience throughout
history it was shown that any system where
people can simply vote themselves more money
ends in tears. Not usually, but always.
You'd think that a 100% historical failure
rate would clue people in to rethink the
head-hammer-hitting approach.
And as Dr. Haygood points out above,
"everything floating against everything
else" is nothing but a colossal waste of
time and money. You wouldn't attempt to
build or make something without an agreed
and immutable unit of measure.
Completely untrue of Keynes. He ran
the UK Treasury twice very pointedly in
the interests of industrial capitalists.
He was however very opposed to financial
rents, a real classicist in that regard.
Keynes ran the UK treasury twice more
or less along classical lines: in favor
of industrial capitalism and against
financial rents. Not top down, not
Soviet. Its not clear where you get your
facts, fiat systems have lasted hundreds
of years many times. They tend to arise
in empires with secure borders. They
depend on the productive relations of
their societies for the value of their
money rather than a commodity hedge.
Warfare favors the commodity hedge
because the productive relations in a
society are frequently destroyed by war.
Because of the stickyness of wages, hard
currency tends to choke economic growth
because a fixed money supply has to be
spread increasingly thin as more real
wealth is created to be denominated with
a fixed quantity of specie, requiring
wages to drop because there is more
stuff to purchase.
Each has benefits and costs, both are
tools and while the one favors growth
and the other war, neither must be used
for either. A representative system will
use either as its constituencies direct,
an authoritarian one according to the
intent of the authority. It isn't tools
that make the problems, though some are
better for some purposes than others. It
is the intent of the powerful that is
expressed and from which others suffer.
@jsn " fiat systems have lasted
hundreds of years many times."
what? can you please back that
statement up. Only major fiat system
in history that I have ever seen
written about is the one that
existed in China several hundred
years ago. If there were others you
need to give some examples.
I think you objected to my
comments without actually refuting
them:
1. We have a top-down price fixing
money system;
2. Keynes and White were a big fans
of Soviet central planning (see The
Battle for Bretton Woods for chapter
and verse);
3. And I've never understood the
"fixed quantity of specie" argument.
Surely it's about price, not
physical quantity. You could easily
run the world economy on 100 tons of
gold if it was priced accordingly.
Michael Hudson's book Superimperialism, published
astonishingly in 1972, nailed it. Details some great
history of FDR's economic diplomacy during the late
Depression and WW2 period that preceded the Bretton
Woods settlement. Worth a read.
yes Michael Hudson is great, but that is why
he must be marginalized/ignored. Can't maintain
control of the official narrative if people like
Hudson were to ever be taken seriously..
"However, the likelihood that the dollar will be
replaced as the dominant international currency in
the foreseeable future remains remote. The dollar
standard and the legacy of the Bretton Woods system
will be with us for a long time."
That is the BIG question and the answer remains
to be seen. I for one don't believe it will continue
much longer, but then again nobody knows. Bordo also
leaves out a critical part of the narrative, i.e.,
the U.S. secret deal with Saudi Arabia in 1974 to
officially tie the dollar to oil. See link below for
details. Without this secret arrangement the dollar
would have never survived as the international
reserve currency. The Saudis reportedly pushed for
greater use of the SDR, but the U.S. made them a
deal they couldn't refuse and the Saudi royal family
realized that if they didn't go along with U.S.
demands the CIA would find some other branch of the
family that would.
The system is a mess and it is retarded to allow
one country's currency to serve as the main reserve
asset for the system. That is the ultimate free
lunch and the equivalent to believing in a perpetual
motion machine. It is hard to believe in can
continue much longer despite of Bordo's view that it
will. It has reached a point where it has created
massive problems that can not continue.
So in a sense when China and Russia are
forced to hold dollars for global trade,
they're essentially paying for the Pentagon
to do what it's doing. You can see why
they'd be mad.
It is almost a gift from heaven when fixing a
single problem offers the chance to fix a whole
bunch of them. This IMHO is very possibly one of
those gifts. Without this "ultimate free lunch"
the globalization scam of allowing this
country's and the world's 1% to keep adding
zeros to their bank accounts ("to keep score" as
Pres. Trump puts it) would not have been
possible. Without countries like Saudi Arabia
willing to keep accepting more "debt that can't
be repaid (and) won't be", the US military
industrial complex would not be able to keep
increasing its threat to world peace and
threatening the survival of humanity. Without
the Saudi stranglehold over politics and US
Middle Eastern policy the US could stop killing
Muslims in its bogus 'war on terror'. It could
get busy replacing its fossil fuel energy
sources with renewable ones and its oil-powered
transportation system with an electrified one
(yes, maybe even a few EVs)
It is hard to believe in can continue
much longer despite of Bordo's view that it
will.
And yet where is the dollar's replacement?
If you'd told me ten years that the
petrodollar as an institution enforcing
compliance w. the dollar as global reserve
currency could end and yet the dollar would
continue with that status, I'd have laughed at
you. However, that increasingly looks like it
might happen.
Yes, yes, I know - we await the basket of
currencies solution pushed by China and Russia,
and others sick of the situation. We've been
waiting for a while now.
I'm thinking globalization has something
to do with the dollar's longevity. Strip a
country of the ability to support itself by
exporting its jobs and it's people become
dependent on a strong military to insure
it's money continues to be "accepted" even
when it's people no longer have anything to
trade for what they really need.
@Moneta, these numbers are
roughly correct. The U.S. defense
budget is about $600 billion, the
trade deficit is about $600 billion
and last year we issued $1.4
trillion in incremental debt.
Foreigners own about 40% of U.S.
debt. 40% of of $1.4 trillion is
$560 billion so yes there is a
pretty strong correlation. Massive
defense budget wouldn't be possible
without reserve currency scam.
I'm completely confused. Anything available in
plain English for laypeople?
"The adjustment problem in Bretton Woods
reflected downward rigidity in wages and prices
which prevented the normal price adjustment of the
gold standard price specie flow mechanism to
operate"
Canada which was one of the founding members of
Bretton Woods pulled out as early as 1949 in order
to move to a floating exchange rate and full capital
mobility. Bretton Woods was dead before it ever
began.
If the Federal Reserve can create trillions of dollars with a single keystroke, and the Fed
is the government's bank, then why does President Obama claim we've "run out" of money?
Why have Democrats and so-called progressives supported job-killing budget cuts in the name
of "shared sacrifice"? Why are we throwing away the equivalent of $9.8 billion in lost output
every single day? Why don't we do something about our $2.2 trillion infrastructure deficit, 25
million underemployed and unemployed Americans, 100 million Americans in or very near poverty,
and so on?
The answer is simple. Most of us don't understand the monetary system. Instead of deciding
how the government should wield its power over the dollar, we live in fear of the ratings agencies,
the Chinese, the bond market vigilantes and other imaginary evils. And this holds all of us back.
Unused resources abound, human needs go unmet, and the vast majority of Americans believe that
'There Is No Alternative' (TINA). Or, as Warren Mosler says, "Because we fear becoming the next
Greece, we're turning ourselves into the next Japan."
There is an alternative. And it begins with an understanding of the monetary system. The cat
is already out of the bag. Chairman Bernanke confirms it. Money is no object.
RGC,
the people here have been brainwashed and can not think for themselves. If it has not been approved
by their favorite academic, it is a crank theory. they'd rather believe in fairy tales like NGDP
level targeting - the fed will wish it into reality. Rather than pay attention to the MMT that
you and I subscribe to.
Moreover it is logical for them to stick to the "the Fed is omnipotent" as it bids up asset prices
and maintains the status quo. It vests more power in the institutions that benefit the people
you see here.
Blame the right, blame the deregulators, blame the tax cutters, blame the liberatarians, etc.
that is the how they maintain the status quo. And Mosler is right on - Bernanke turned us into
Japan trying to save us from that fate. And he is sliding down the rabbit hole - "I should have
doubled down on my failed strategy"
why? because he was able to bid up the stock market? I bet you everyone of the Fed worshippers
here benefit personally from the asset price binges that the stupid Fed has gotten us addicted
to.
Per Rubin and his cronies in the Wall Street banking cartel, the Fed is fine as it is...serving
the interests of the Wall Street banking cartel. The cartel has a good think going...why disrupt
it by taking into account the public good?
Has Rubin ever done anything in the interest of the public?
China and Currency Values: Fast Growing Countries Run
Trade Deficits
I don't generally comment on pieces that reference me, but
Jordan Weissman has given me such a beautiful teachable
moment that I can't resist. Weissman wrote * about Donald
Trump's reversal on his campaign pledge to declare China a
currency manipulator. Weissman assures us that Trump was
completely wrong in his campaign rhetoric and that China does
not in fact try to depress the value of its currency.
"It's pretty hard to argue with that. Far from devaluing
its currency, China has actually spent more than $1 trillion
of its vaunted foreign reserves over the past couple of years
trying to prop up the value of the yuan as investors have
funneled money overseas. There are some on the left, like
economist Dean Baker, who will argue that Beijing is still
effectively suppressing the redback's value by refusing to
unwind its dollar reserves more quickly. But if China were
really keeping its currency severely underpriced, you'd
expect it to still have a big current account surplus,
reminiscent of 10 years ago, which it doesn't anymore."
Okay, to start with, I hate the word "manipulation" in
this context. China isn't doing anything in the dark of the
night that we are trying to catch them at. The country pretty
explicitly manages the value of its currency against the
dollar, that is why it holds more than $3 trillion in
reserves. So let's just use the word "manage," in reference
to its currency. It is more neutral and more accurate.
It also allows us to get away from the idea that China is
somehow a villain and that we here in the good old US of A
are the victims. There are plenty of large U.S. corporations
that hugely benefit from having an under-valued Chinese
currency. For example Walmart has developed a low cost supply
chain that depends largely on goods manufactured in China. It
is not anxious for the price of the items it imports rise by
15-30 percent because of a rise in the value of the yuan
against the dollar.
The same applies to big manufacturers like GE that have
moved much of their production to China and other developing
countries. These companies do not "lose" because China is
running a large trade surplus with the United States, they
were in fact big winners.
Okay, but getting back to the issue at hand, I'm going to
throw the textbook at Weissman. It is not true that we should
expect China "to still have big current account surplus" if
it were deliberately keeping its currency below market
levels.
China is a developing country with an annual growth rate
of close to 7.0 percent. The U.S. is a rich country with
growth averaging less than 2.0 percent in last five years.
Europe is growing at just a 1.0 percent rate, and Japan even
more slowly. Contrary to what Weissman tells us, we should
expect that capital would flow from slow growing rich
countries to fast growing developing countries. This is
because capital will generally get a better return in an
economy growing at a 7.0 percent rate than the 1-2 percent
rate in the rich countries.
If capital flows from rich countries to poor countries,
this means they are running current account surpluses. The
capital flows are financing imports in developing countries.
These imports allow developing countries to sustain the
living standards of their populations even as they build up
their infrastructure and capital stock. In other words, if
China was not depressing the value of its currency we should
it expect it to be running a large trade deficit.
This is actually the way the world worked way back in the
1990s, a period apparently beyond the memory of most
economics reporters. The countries of East Asia enjoyed
extremely rapid growth, ** while running large trade
deficits. This all changed following the East Asian financial
crisis and the disastrous bailout arranged by Secretary of
Treasury Robert Rubin and friends. *** Developing countries
became huge exporters of capital as they held down the value
of their currencies in order to run large trade surpluses and
build up massive amounts of reserves.
But Weissman is right that China is no longer buying up
reserves, but the issue is its huge stock of reserves. As I
explained in a blogpost **** a couple of days ago:
"Porter is right that China is no longer buying reserves,
but it still holds over $3 trillion in reserves. This figure
goes to well over $4 trillion if we include its sovereign
wealth fund. Is there a planet where we don't think this
affects the value of the dollar relative to the yuan?
"To help people's thought process, the Federal Reserve
Board holds over $3 trillion in assets as a result of its
quantitative easing program. I don't know an economist
anywhere who doesn't think the Fed's holding of assets is
still keeping interest rates down, as compared to a scenario
in which it had a more typical $500 billion to $1 trillion in
assets.
"Currencies work the same way. If China offloaded $3
trillion in reserves and sovereign wealth holdings, it would
increase the supply of dollars in the world. And, as Karl
Marx says, when the supply of something increases, its price
falls. In other words, if China had a more normal amount of
reserve holdings, the value of the dollar would fall,
increasing the competitiveness of U.S. goods and services,
thereby reducing the trade deficit."
So, there really are no mysteries here. China is holding
down the value of its currency, which is making the U.S.
trade deficit worse. It is often claimed that they want their
currency to rise. That may well be true, which suggests an
obvious opportunity for cooperation. If the U.S. and China
announce a joint commitment to raise the value of the yuan
over the next 2-3 years then we can be fairly certain of
accomplishing this goal.
This should be a very simple win-win for both countries.
Walmart and GE might be unhappy, but almost everyone else
would be big winners, especially if we told them not to worry
about Pfizer's drug patent and Microsoft's copyright on
Windows.
It is unfortunate that Donald Trump seems closer to the
mark on China and trade than many economists and people who
write on economic issues for major news outlets. Today,
Eduardo Porter gets things partly right in his column *
telling readers "Trump isn't wrong on China currency
manipulation just late." The thrust of the piece is that
China did in fact deliberately prop up the dollar against its
currency, thereby causing the U.S. trade deficit to explode.
However, he argues this is all history now and that China's
currency is properly valued.
Let's start with the first part of the story. It's hardly
a secret that China bought trillions of dollars of foreign
exchange in the last decade. The predicted and actual effect
of this action was to raise the value of the dollar against
the yuan. The result is that the price of U.S. exports were
inflated for people living in China and the price of imports
from China were held down.
Porter then asks why the Bush administration didn't do
anything when this trade deficit was exploding in the years
2002–2007. We get the answer from Eswar Prasad, a former
I.M.F. official who headed their oversight of China:
"'There were other dimensions of China's economic policies
that were seen as more important to U.S. economic and
business interests,' Eswar Prasad, who headed the China desk
at the International Monetary Fund and is now a professor at
Cornell, told me. These included 'greater market access,
better intellectual property rights protection, easier access
to investment opportunities, etc.'"
Okay, step back and absorb this one. Mr. Prasad is saying
that millions of manufacturing workers in the Midwest lost
their jobs and saw their communities decimated because the
Bush administration wanted to press China to enforce Pfizer's
patents on drugs, Microsoft's copyrights on Windows, and to
secure better access to China's financial markets for Goldman
Sachs.
This is not a new story, in fact I say it all the time.
But it's nice to have the story confirmed by the person who
occupied the International Monetary Fund's China desk at the
time.
Porter then jumps in and gets his story completely 100
percent wrong:
"At the end of the day, economists argued at the time,
Chinese exchange rate policies didn't cost the United States
much. After all, in 2007 the United States was operating at
full employment. The trade deficit was because of Americans'
dismal savings rate and supercharged consumption, not a cheap
renminbi. After all, if Americans wanted to consume more than
they created, they had to get it somewhere."
Sorry, this was the time when even very calm sensible
people like Federal Reserve Board Chair Ben Bernanke were
talking about a "savings glut." The U.S. and the world had
too much savings, which lead to a serious problem of
unemployment. Oh, we did eventually find a way to deal with
excess savings.
Anyone remember the housing bubble? The demand generated
by the bubble eventually pushed the labor market close to
full employment. (The employment rate of prime age workers
was still down by 2.0 percentage points in 2007 compared to
2000 - and the drop was for both men and women, so skip the
problem with men story.)
Yeah, that bubble didn't end too well. So much for
Porter's no big deal story.
But what about the present, are we all good now?
Porter is right that China is no longer buying reserves,
but it still holds over $3 trillion in reserves. This figure
goes to well over $4 trillion if we include its sovereign
wealth fund. Is there a planet where we don't think this
affects the value of the dollar relative to the yuan?
To help people's thought process, the Federal Reserve
Board holds over $3 trillion in assets as a result of its
quantitative easing program. I don't know an economist
anywhere who doesn't think the Fed's holding of assets is
still keeping interest rates down, as compared to a scenario
in which it had a more typical $500 billion to $1 trillion in
assets.
Currencies work the same way. If China offloaded $3
trillion in reserves and sovereign wealth holdings, it would
increase the supply of dollars in the world. And, as Karl
Marx says, when the supply of something increases, its price
falls. In other words, if China had a more normal amount of
reserve holdings, the value of the dollar would fall,
increasing the competitiveness of U.S. goods and services,
thereby reducing the trade deficit.
At the beginning of the piece, Porter discusses the
question of China's currency "manipulation." (I would much
prefer the more neutral and accurate term "currency
management." There is nothing very secret here.) He tells
readers:
"It would be hard, these days, to find an economist who
feels China fits the bill."
Perhaps. Of course it would have been difficult to find an
economist who recognized the $8 trillion housing bubble, the
collapse of which wrecked the economy. As the saying goes,
"economists are not very good at economics."
Dr Krugman ignored another wrinkle in France leaving the euro; the euro
itself.
While GB joined the EU, it retained the british pound. So, Brexit won't
affect it monetarily. France, on the other hand, did convert to the euro
(in hindsight, another enormous mistake). Each euro has an identifier, similar
to how we designate the origin by Fed Reserve, which designates it's country
of origin.
So, should France leave the EU, would euros held by, say, someone in
Italy then become worthless? This isn't someone most people concern themselves
with. When was the last time someone on this blog check to see which dollars
in your wallet came from the Denver Fed? But, it may well be that the EU
would stop honoring French euros, should they leave.
Interesting conjecture, but a Euro printed in France belongs to the Euro
Area rather than to France in the same way that a dollar printed in Denver
belongs to the United States. There is by the way, to my understanding,
no treaty provision describing how any country in the Euro Area might leave.
"Start with the euro. The single currency was and is a flawed project, and
countries that never joined – Sweden, the UK, Iceland – have benefited from
the flexibility that comes from independent currencies. There is, however,
a huge difference between choosing not to join in the first place and leaving
once in."
Okay, but then the bank reserves
which are held at the Fed by law could be defined as part of "outside money", because they
aren't backed by anything in the private economy. Those reserves are established, or insisted
upon, by government fiat, in essence. We know those reserves are not really backed by a precious
metal or anything else but faith. So why are bank reserves held at the Fed not included in
the definition of "outside money"?
From the standpoint of the private
economy, reserves are 'outside money", because they circulate only within the Fed system. Currency
is inside money because it circulates within the private economy, although it also circulates
between government and private banks.
The monetary base is both currency and reserves.
So it takes a clear understanding of the purpose of the discussion and maybe even a Venn
diagram.
Outside money
is money that is either of a fiat nature (unbacked) or backed by some asset that is not in
zero net supply within the private sector of the economy.
Thus, outside money is a net asset for the private sector. The qualifier outside is short
for (coming from) outside the private sector.
Inside money is an asset representing, or backed by, any form of private credit that circulates
as a medium of exchange.
Since it is one private agent's liability and at the same time some other agent's asset,
inside money is in zero net supply within the private sector.
The qualifier inside is short for (backed by debt from) inside the private sector.
These are entries in accounts owned by the banks and put there by the banks and
are money. These can not be 'taken' by the govt without compensation per law.
JF, Sorry, I only meant that
the minimum reserves are established by the decree of the public-private partnership known
as the central bank. So I was using "fiat" in the sense of "law". I should not have written
that the bank reserves are established by gov't "fiat" in a discussion about money, because
that is confusing.
And the reason for this law is to make sure that banks can cover their
needs for cash, to prevent a run on the banking system.
But what this means, is that the ultimate foundation of part of the individual's trust in
the money that is used, is based upon the existence of the requirement for bank reserves. Otherwise,
people wouldn't trust the money supply. The trust is not based on any function more basic than
bank reserves.
What else do people trust? Well of course people already trust paper notes and coins in
daily transactions: they automatically suppose that the gov't backs it up. Backs it up, with
what?, they do not know; but it works. And for checks and debits, they suppose that the bank
is good for the cash -- which ultimately is based on the reserve requirement. So therefore,
"trust" of money by the common folk is presently based upon 2 things, the existence of currency
and the (vaguely understood yet reassuring) existence of bank reserves.
Well, the "money base" is defined as reserves + cash & coin. However, this seems to me to
be the same definition as "outside money". So I am still wondering if there is another difference
between the definitions.
Certainly people think of gold & silver as money, but if that is the only difference between
"monetary base" and "outside money", I think it would be easy to alter the definition of "currency"
to include them.
"... Probably the biggest single factor was public employment was savagely cut during the Obama presidency which would have kept economic activity higher at a fairly cheap cost. ..."
"... the owning/lending class tends to dislike inflation for some reason... ..."
"... I think this is highly dependent on one's understanding of "equitable". Monetary policy can be used in a way that ensures safe income streams to those who already own many financial assets. Some people think that is how it should be and therefore "equitable". ..."
"The central bank remains important for useful tasks - the clearing of checks, the replacement of
worn and dirty banknotes, as a loan source of last resort. These tasks it performs well.
With other public agencies in the United States, it also supervises the subordinate commercial
banks. This is a job which it can do well and needs to do better. In recent years the regulatory
agencies, including the Federal reserve, have relaxed somewhat their vigilance. At the same time
numerous of the banks have been involved in another of the age-old spasms of optimism and feckless
expansion. The result could be a new round of failures. It is to such matters that the Federal Reserve
needs to give its attention.
These tasks apart, the reputation of central bankers will be the greater, the less responsibility
they assume. Perhaps they can lean against the wind - resist a little and increase rates when the
demand for loans is persistently great, reverse themselves when the reverse situation holds.
But, in the main, control must be - as it was in the United States during the war years and the
good years following - over the forces which cause firms and persons to seek loans and not over whether
they are given or not given the loans."
-From "Money: Whence it came,Where it went" 1975 - pgs 305,6.
[Mariner Eccles explained it
way back in the 1930's:]
"Pushing on a String: An Origin Story
There's a long-standing metaphor in monetary policy that the central bank "can't push on
a string." It means that while a central bank can certainly slow down an economy or even drive
an economy into recession with an ill-timed or too-large increase interest rates, the power
of monetary policy is not symmetric.
When a central bank reduces interest rates in an attempt to stimulate the economy, it may
not make much difference if banks don't think it's a good time to lend or firms and consumers
don't think it's a good time to borrow. In other words, monetary policy is like a string with
which a central bank can "pull" back the economy, but pushing on a string just crumples the
string.
The "can't push on a string" metaphor appears in many intro-level economics texts.
It has also gotten a heavy work-out these last few years as people have sought to understand
why either economic output or inflation wasn't stimulated more greatly by having the Federal
Reserve's target interest rate (the "federal funds" rate) near zero percent for going on seven
years now, especially when combined with "forward guidance" promises that this policy would
continue into the future and a couple trillion dollars of direct Federal Reserve purchases
of Treasury debt and mortgage-backed securities.
The first use of "pushing on a string" in a monetary policy context may have occurred in
hearings before House Committee on Banking and Currency on March 18, 1935, concerning the proposed
Banking Act of 1935. Marriner Eccles, who was appointed Chairman of the Fed in 1934 and served
on the Board of Governors until 1951, was taking questions from Rep. Thomas Alan Goldsborough
(D-MD) and Prentiss M. Brown (D-MI). The hearings are here; the relevant exchange is on p.
377, during a discussion of what the Fed might be able to do to end deflation."
The Fed didn't try very hard
with its unconventional monetary policy. It was always worried about inflation. Plus it had
to overcome the unprecedented austerity which Congress pushed on the economy.
If you look
at the recovery and say monetary policy didn't work, you are either insane or highly ideological.
Now, the recovery could have been much quicker and better with the help of fiscal policy
and other policies.
Must be so, because the following certainly is not true =
"We are all Keynesians now"
OK, not all one way or the other but the Keynesians are under siege by monetarists including
ones that do not know what a monetarist is or that they are one.
It is not that monetary policy
is entirely ineffective at stimulating demand, but that its effects are very limited according
to the very narrow channels in which its effects are most pronounced, intermediation risks,
widening the term spread or yield curve, and making short term business loans and related prime
rate small short term loans. It does next to nothing towards reducing credit rationing by financial
institutions after a shock, which would be highly stimulative compared to just lowering the
FFR. Purchase of the riskiest assets by the Fed was probably most effective at reducing credit
rationing since it lowered the risk of bank loan portfolios. Just buying up safe assets had
mixed results on lowering long term interest rates, but was more successful on that than reducing
credit rationing.
All your jargon obscures the
point that the Fed didn't really try that hard with its unconventional policy b/c of politics.
It's like arguing that the ARRA didn't work very well. It did work and could have been bigger
and better but policymakers are too conservative when it comes to macro policy.
Tight money means credit rationing.
Cheap money does not necessarily get looser. Yes, widening the term spread helps loosen, but
narrowing the term spread does not. Other forms of monetary policy such as government loan
guarantees on small business loans loosen money more than QE.
Because you're wrong and misleading.
The Fed does the minimal amount of experimental unconventional policy - always paranoid over
inflation - while Congress forces unprecedented fiscal austerity on the economy. I'd say monetary
policy works. Doesn't mean fiscal policy doesn't work better.
"Now here we are, in 2017, after
the Obama Administration has brought the deficit down from $1.5 trillion in Fiscal Year 2009
to $621 billion in FY2016, "
Via Max Sawicky, below. $900 billion in austerity that monetary
policy had to fight against.
I don't think it is as simple
as you have outlined here. Debt as a percentage of GDP has doubled since 2009 so that has provided
some relief.
Probably the biggest single factor was public employment was savagely cut
during the Obama presidency which would have kept economic activity higher at a fairly cheap
cost.
"Debt as a percentage of GDP
has doubled since 2009 so that has provided some relief."
wut?
The largest difference was there was little to no Federal aid to the states which had to
run balanced budgets.
We can all agree after the ARRA ran its course, there was massive, unprecedented austerity
forced on the economy by Republicans, just as in the UK and we see the results when central
banks didn't do enough unconventional policy to fully offset it.
A crappy recovery and the election of Trump/Brexit.
I think this is highly dependent
on one's understanding of "equitable". Monetary policy can be used in a way that ensures safe
income streams to those who already own many financial assets. Some people think that is how
it should be and therefore "equitable".
I have no idea how monetary policy with its currently defined policy tools can be used effectively,
by itself, to redistribute wealth in the other direction, which is probably most people's understanding
of "equitable".
If it was, by itself, able to cause large jumps in inflation, that might feed back into
rapidly rising nominal wages and large losses to the current holders of financial assets like
bonds and loan books. That might be considered more "equitable" to some, but current limitations
on monetary policy prevent it from creating inflation all by itself.
"... When the Federal Reserve lowered interest rates to close to zero during the financial crisis, it was an extraordinary move. The central bank had hit the limits of conventional monetary policy, leaving the recovery to sputter along with less help than it needed ..."
"... A new study suggests that near-zero interest rates - accompanied by a lackluster recovery - may become a common occurrence. ..."
" When the Federal Reserve lowered interest rates to close to zero during the financial
crisis, it was an extraordinary move. The central bank had hit the limits of conventional monetary
policy, leaving the recovery to sputter along with less help than it needed ."
This is a huge lie. The Fed did not do what it could have done. It did the minimal amount possible,
always afraid of setting off inflation. The Fed said it delivered the recovery it wanted. It gave
the economy exactly the help the Fed thought it needed. Then why the dishonesty from Wulfers.
It's the kind we get from PGL the Facile.
Why did the Fed deliver a lame recovery is the question Wolfers should be asking, but it's
the kind of thing mainstream economists like him and PGL avoid. It's class war.
" A new study suggests that near-zero interest rates - accompanied by a lackluster recovery
- may become a common occurrence.
That's troubling for many reasons. If the Fed can't cut rates as much as required to fight
a slowing economy, then recessions will become more common and more painful. It suggests an urgent
need to reconsider how we will counter the next bout of bad economic news, preferably before it
arrives. If monetary policy won't be enough, perhaps fiscal policy will be. Certainly, this is
no time for complacency."
Yes fiscal policy would help deliver a better recovery as the Fed has repeatedly said, but
again Wolfers is misleading his readers. The Fed could do more. It's not out of bullets. It's
raising rates. Wolfers is really doing a disservice to his readers in an apparent attempt to talk
up fiscal policy in a dishonest way. WTF.
"But when normal interest rates are closer to 3 percent, the Fed can cut rates only a few times,
because rates can only go so low - perhaps as low as zero, maybe a tad lower. This means that
in even a typical downturn, the Fed may be unable to cut rates as much as it would like."
But then it turns to unconventional policy. Seriously. WTF.
"This dynamic can feed on itself. The less ammunition the Fed has to blast the economy out
of its malaise, the weaker and slower will be the recovery, making it more likely that the next
bad shock will require the Fed to cut rates more than is feasible."
It doesn't have less ammunition. Now Wolfers finally admits there's something called unconventional
policy.
"The Fed has already been experimenting with monetary policy, but it hasn't been enough. In
the wake of the financial crisis, for example, it bought bonds in a program known as quantitative
easing, cutting long-term interest rates once short-term rates were near zero. The resulting stimulus
was relatively small, reducing long-term rates by only a fraction of a percentage point, and the
program was politically unpopular.
The authors suggest an alternative approach in which the Fed makes up for "missing stimulus"
by promising to keep rates lower, for longer periods. In their view, the Fed needs to make up
for the interest rate cuts that it wishes it could have made, but couldn't. Promising this in
the depths of a downturn would offer businesses reason to be optimistic, they say, boosting the
recovery. The Fed would need to keep rates low, even as inflation overshot its target.
It's a promising approach, but would people really believe the Fed's promises? I know a lot
of central bankers, and I fear they are incapable of sitting still while inflation rises above
their stated target."
Wolfers admits that central bankers haven't pushed very hard on unconventional policy, shattering
his thesis. They're paranoid over inflation.
"Perhaps the answer lies outside the Fed. It may be time to revive a more active role for fiscal
policy - government spending and taxation - so that the government fills in for the missing stimulus
when the Fed can't cut rates any longer. Given political realities, this may be best achieved
by building in stronger automatic stabilizers, mechanisms to increase spending in bad times, without
requiring Congressional action."
That's a good idea no matter whether unconventional monetary policy works or not. But Republicans
are blocking it, so monetary policy is all we have. It doesn't help to say it doesn't work and
we must suffer long painful recoveries.
"The general distrust of fiscal policy may well have made sense; many economists are more likely
to trust the technocrats at the Fed to manage the business cycle than the election-driven politicians
on Capitol Hill. But in a world of low interest rates in which the Fed is frequently hamstrung,
we may not have that choice."
No the sidelining of fiscal policy never made any sense. But that doesn't mean we should sideline
monetary policy when fiscal policy isn't forthcoming.
Captain Renault: I'm shocked, shocked
to find that gambling is going on in here!
– From the classic scene in
Casablanca,
made in 1942
The latest scandal du jour seems to be about what is now called
LIBORgate. But is it a scandal or is it really just business as
usual?
And if we don't know which it is, what does that say about how
we organize the financial world, in which $300-800 trillion, give
or take, is based on LIBOR?
This is actually just the second verse of the old song about
derivatives, which is a much larger market. Which of course is a
problem that was not solved by Dodd-Frank and that has the
potential to once again create true havoc with the markets, whereas
LIBOR can only cost a few billion here and there. (Sarcasm
intended.)
The problem is the lack of transparency. Why would banks want to
reveal how much profit they are making? The last thing they want is
transparency. This week I offer a different take on LIBOR, one
which may annoy a few readers, but which I hope provokes some
thinking about how we should organize our financial world.
There Is Gambling in the House? I Am Shocked...
Let's quickly look at what LIBOR is. The initials stand for
London InterBank Offered Rate. It is the rate that is based on what
16 banks based in London (some are US banks) tell Thomson
Reuters
they expect to pay for overnight loans (and other
longer loans). Thomson Reuters throws out the highest four numbers
and the lowest four numbers and then gives us an average of the
rest. Then that averaged number becomes about 150 other "rates,"
from overnight to one year and in different currencies. The key is
that the number is not what the banks actually paid for loans, it's
what they
expect
to pay. Also, please note that the
British Banking Association, on its official website, calls this a
price "fixing."
Most of the time the number is probably pretty close to real, or
close enough for government work. But then, there are other times
when it is at best a guess and at worst manipulated.
Back in the banking and credit crisis panic of 2008 the
interbank market dried up. No bank was loaning other banks any
money at any price. Thus there was clearly no way for the LIBOR
number to be anything
but
fictitious. Anyone who was not
aware of this was simply not paying attention.
The regulators certainly knew on both sides of the Atlantic. All
along there were clear records, we now learn, that bankers were
telling the FSA (the Financial Services Authority) that they had
problems. Regulators were worried about what was happening but were
pointing out that there was a large hole in the ship that was
already admitting water, and they didn't want to make it any
bigger. Timothy Geithner, then President of the New York Federal
Reserve Bank (and now Secretary of the Treasury) wrote a rather
pointed letter to the FSA, suggesting the need for better
practices.
Some banks reported lower rates, to make it appear they were
better off than they were (since no one was actually lending to
them), and others might have given higher rates, for other reasons.
Remember, this was a British Banking Association number. Whether
you personally won or lost money on the probably wrong price
information depends on whether you were lending or borrowing and
whether you really wanted the entire market to appear worse than it
already was.
This was the equivalent of an open-book test where you got to
grade your own paper. And we are supposed to be shocked that there
might have been a few bad "expectations" here and there by bankers
acting in their own self-interest, with the knowledge of the
regulators? The more amazing proposition would be that in a time of
crisis the number had any close bearing on reality to begin with.
Call me skeptical, but I fail to see how we should be surprised.
The larger question that really needs to be asked is how in the
name of all that is holy did we get to a place where we base
hundreds of trillions of dollars of transactions worldwide on a
number whose provenance is not clearly transparent. Yes, I get that
the methodology of the creation of the number
after
the
banks call in their "expectations" is clear, but the process of
getting to that number was evidently not well understood and looks
to be even muddier than my rather cynical previous understanding of
it.
It now seems that there will be a feeding frenzy as politicians
and regulators hammer the various banks for improper practices. And
they are pretty easy targets: there is just no way you can explain
this that does not sound bad.
You're a big banker. The world is falling down before your eyes.
No one trusts anyone. If you put out a bad number (whatever "bad"
means in a time of sheer utter blind panic) the markets will kill
you even more than they already are and you could lose your job.
You have got to come up with a number in ten minutes.
"Hey, Nigel, what do you think we
should tell Tommie [Thomson Reuters]?"
"I don't know, Winthorpe, maybe
Mortimer has an idea; let's ask him."
Simply fining a few bankers is not going to fix the larger
problem: the lack of transparency for arguably the most important
number in financial markets. A very clear methodology needs to be
developed, along with guidelines for what to do in times of crisis
when the interbank market is frozen and there really is no number.
Having no number might be worse than having a number that is a
guess. But having a number that can be fudged by banks for their
benefit is also clearly not in the public's interest.
The point of the rule of law is that it is supposed to level the
playing field. But the rule of law means having a very transparent
process with very clear rules and guidelines and penalties for
breaking the rules.
I had dinner with Dr. Woody Brock this evening in Rockport. We
were discussing this issue and he mentioned that he had done a
study based on analysis by an institution that looks at all sorts
of "fuzzy" data, like how easy it is to start a business in a
country, corporate taxes and business structures, levels of free
trade and free markets, and the legal system. It turned out that
the trait that was most positively correlated with GDP growth was
strength of the rule of law. It is also one of the major factors
that
Niall Ferguson
cites in his book
Civilization
as a
reason for the ascendency of the West in the last 500 years, and a
factor that helps explain why China is rising again as it emerges
from chaos.
One of the very real problems we face is the growing feeling
that the system is rigged against regular people in favor of "the
bankers" or the 1%. And if we are honest with ourselves, we have to
admit there is reason for that feeling. Things like LIBOR are
structured with a very real potential for manipulation. When the
facts come out, there is just one more reason not to trust the
system. And if there is no trust, there is no system.
Opacity and Credit Default Swaps
Which brings me to my next point. We just went through a crisis
where derivatives were a major part of the problem, and
specifically the counterparty risk of over-the counter (OTC)
derivatives.
Taxpayers
had to back-stop derivatives sold by banks (and
specifically
AIG
) that were clearly undercapitalized. That cost tens of
billions. Yet the commissions and bonuses paid for selling those
bad derivatives went on being paid. Congress held hearings and
expressed outrage, but in the end Dodd-Frank sold out.
"Efforts to create an exchange-traded futures contract tied to
credit-default swaps haven't yet gained traction after 18 months of
talks, but banks dealing in the private multitrillion-dollar market
for credit derivatives believe such contracts will eventually
appear for a simple reason: They should attract new players.
"Credit-default swaps function like insurance for bonds and
loans. Investors use them to hedge or speculate against changes in
a borrower's creditworthiness. If a borrower defaults, sellers of
the protection compensate buyers.
"The swaps – traded over the phone or on-screen, with prices
known only to trading partners – are the domain of asset managers
and hedge funds with the sophistication and financial wherewithal
to take on complex risks.
"Futures, by contrast, are more routine instruments used by
institutions and individual or "retail" investors. Futures prices
are displayed publicly on exchanges, and customers can trade them
directly with other customers – unlike in the swaps market, where a
dealer is on one side of every trade.
"Dealers have long been fiercely protective of keeping the
status quo in credit-default swaps or 'CDS' because they have
booked fat profits from customers not being able to see where other
customers are trading." (Market Watch)
And that is the issue. Bankers do not want transparency, because
it will seriously cut into their profits. And while I like everyone
to make a profit, the implicit partner in every trade is the
taxpayer and, last time I looked, we do not get a piece of that
trade. Derivatives traded on an exchange were not part of the
problem during the last credit crisis; OTC derivatives were.
An exchange makes it very clear where the counterparty risk is
and what the price mechanism is. It creates a transparent rule of
law and places the risk on the backs of those buying and selling
derivatives and not on the taxpayer. Exchange-traded derivatives do
not pose a potential threat to the economies of the world, while we
don't know the extent of the threat posed by OTC trades. JPMorgan
has lost around $6 billion on the trading of their "London Whale."
If
Jamie Dimon
and the JPM board couldn't guarantee reasonable
corporate governance, then why should we assume that in another
crisis we won't find another AIG?
Dodd-Frank needs to be repealed and replaced. The last time, the
process was too clearly in the hands of those being regulated and
has contributed to their profits. Enough already.
Credit default swaps and any other derivative large enough to
put the system at risk must be moved to an exchange, to make clear
the counterparty risks.
This FT -- the most deep neoliberal swamp among mainstream newspaper. So they do not like any
critique of thier beloved neloneral world order with the dominance of reckless financial oligarchy
as one of the key components.
Notable quotes:
"... She argues that under our deregulated financial system "commercial bankers can create credit . . . effectively without limit, and with few regulatory constraints." She says that because the government and central banks impose no restrictions on what credit is used for, banks increasingly lend for speculative activities, rather than "sound, productive investment". ..."
"... The collateral for this borrowing is in the form of "promises to pay", which can "evaporate" and be defaulted upon - which risks dragging down the rest of the system. ..."
"... many of the remedies Pettifor recommends are, as she acknowledges, fairly mainstream: monitoring the evolution of credit relative to national income, limiting loan-to-value mortgage ratios more strictly, imposing stronger regulation on banks and issuing government debt at low interest rates across the maturity spectrum. ..."
"... Less mainstream are her calls for controls on international capital flows through a Tobin tax on financial transactions, and for central banks to "manage exchange rates over a specified range by buying and selling currency". ..."
"... its confrontational style - criticising financial market players, most economists, politicians and ideas from other left-leaning economists ..."
'The Production of Money', by Ann Pettifor - a financial education
16 HOURS AGO by: Review by Gemma Tetlow
Ann Pettifor's The Production of Money, is a work in three parts. It provides an explanation
of how money and credit are created in modern economies and of some of the problems that helped
foment the financial crisis. The author, an economist, then sets out her views on how these problems
should be fixed, including introducing controls on international capital flows. Finally, and less
obviously from the title, the book strays into a critique of fiscal austerity.
"Citizens," Pettifor argues, "were unprepared for the [financial] crisis, and remain on the
whole ignorant of the workings of the financial system." This is one reason why policymakers have
failed to address its failings. One of her objectives is to "simplify key concepts in relation
to money, finance and economics, and to make them accessible to a much wider audience".
Chapter two provides a clear, intuitive explanation of how money is created and how this can
facilitate economic growth. Money creation is a complex and intangible concept in a world where
it is no longer backed by gold bars held by the central bank, and Pettifor provides the most accessible
and thorough explanation I have seen.
In the rest of the book, the author sets out her diagnosis of the problems afflicting the world's
monetary system and her prescription for how they should be fixed. She argues that under our deregulated
financial system "commercial bankers can create credit . . . effectively without limit, and with
few regulatory constraints." She says that because the government and central banks impose no
restrictions on what credit is used for, banks increasingly lend for speculative activities, rather
than "sound, productive investment".
The collateral for this borrowing is in the form of "promises to pay", which can "evaporate"
and be defaulted upon - which risks dragging down the rest of the system.
The description is informative as far as it goes. However, it does not provide the sort of
compelling, insightful account of the problems before the crisis that is provided by, for example,
Michael Lewis in The Big Short.
She strikes a revolutionary tone when setting out the problem. But many of the remedies Pettifor
recommends are, as she acknowledges, fairly mainstream: monitoring the evolution of credit relative
to national income, limiting loan-to-value mortgage ratios more strictly, imposing stronger regulation
on banks and issuing government debt at low interest rates across the maturity spectrum.
Less mainstream are her calls for controls on international capital flows through a Tobin tax
on financial transactions, and for central banks to "manage exchange rates over a specified range
by buying and selling currency".
Her support for these measures is consistent with her belief - expressed throughout the book
- that everything was well until the global financial system began to liberalise following the
breakdown of the Bretton Woods system in 1971.
The evidence she provides to support her belief that policies in place during the Bretton Woods
era were superior to those operating now appears rather selective. She cites data presented in
Carmen Reinhart and Kenneth Rogoff's book, This Time is Different, as evidence that "financial
crises proliferated" after the 1970s. However, Reinhart and Rogoff's thesis was that we have been
here before in centuries past - and will be again.
The Production of Money presents one view of issues afflicting the world's financial systems
and how they should be dealt with, and will be useful to readers unfamiliar with these issues.
But in other places it provides a partial or rather confusing descriptions of aspects of the monetary
system. Saying the global economy "is once again at risk of slipping into recession" and faces
"deflation" are statements that have aged badly.
This book will help the public "develop a much greater understanding" of how banking and financial
systems work. However, its confrontational style - criticising financial market players, most
economists, politicians and ideas from other left-leaning economists - may put some readers off
before they get to the meat of the argument. The characterisations of these groups' views are
selective and her criticisms are at times not well supported by the evidence she presents.
How Money Made Us Modern
: About 9,500 years ago in the
Mesopotamian region of Sumer, ancient accountants kept track of
farmers' crops and livestock by stacking small pieces of baked
clay, almost like the tokens used in board games today. One piece
might signify a bushel of grain, while another with a different
shape might represent a farm animal or a jar of olive oil.
Those humble little
ceramic
shapes might not seem have much in common with today's
$100 bill, whose high-tech anti-counterfeiting features include a
special security thread designed to turn pink when illuminated by
ultraviolet light, let alone with credit-card swipes and online
transactions that for many Americans are rapidly taking the place
of cash.
But the roots of those modern modes of payment may lie in the
Sumerians' tokens. ...
The article is poorly researched. The author needs to read
Innes, Graeber, Ingham, Wray and Hudson on the history of
money from the perspective of credit instead of relying on
Davies, who emphasizes commodity money and doesn't
distinguish between bullion and chartal.
I was speaking specifically of the early history in my
comment, but the entire article was rather one-sided. The
debated on the history and nature of money is nuanced and
the author made it seem as through the article presents a
definitive version. The audience to which it is addressed
would not glean that from the article and would likely
come away with a one-sided and simplistic perspective on
the history and nature of money.
Michael Hudson offers a wonderful piece on the ancient
middle east, how they handled oppressive debt, and how, in
the Anglo-Saxon word, the biblical word for debt got
translated into 'sin.'
"From the actual people who study
cuneiform records, 90% of which are economic, what we have
surviving from Sumer and Babylonia, from about 2500 BC to
the time of Jesus, are mainly marriage contracts, dowries,
legal contracts, economic contracts, and loan contracts.
Above all, loans....
The rulers had what we would call an economic model.
They realized that every economy tended to become unstable
as a result of compound interest. We have the training
tablets that they trained scribal students with, around
1800 or 1900 BC. They had to calculate: How long does it
take debt to double its size, at what we'd call 20%
interest? The answer is 5 years. How does long it take to
multiply four-fold? The answer is 10 years. How much to
multiply 64 times? The answer is 30 years. Well you can
imagine how fast the debts grew.
So they knew how the tendency of every society was that
people would run up debts. Now when they ran up debts in
Sumer and Babylonia, and even in in Judea in Jesus' time,
they didn't borrow money from money lenders. People owed
debts because they were in arrears: They couldn't pay the
fees owed to the palace. We might call them taxes, but
they actually were fees for public services. And for beer,
for instance. The palace would supply beer and you would
run up a tab over the year, to be paid at harvest time on
the threshing floor. You also would pay for the boatmen,
if you needed to get your harvest delivered by boat. You
would pay for draught cattle if you needed them. You'd pay
for water. Cornelia Wunsch did one study and found that
75% of the debts, even in neo-Babylonian times around the
5th or 4th century BC, were arrears.
Sometimes the harvest failed. And when the harvest
failed, obviously they couldn't pay their fees and other
debts. Hammurabi canceled debts four or five times during
his reign. He did this because either the harvest failed
or there was a war and people couldn't pay.
What do you do if you're a ruler and people can't pay?
One reason they would cancel debts is that most debts were
owed to the palace or to the temples, which were under the
control of the palace. So you're canceling debts that are
owed to yourself.
Rulers had a good reason for doing this. If they didn't
cancel the debts, then people who owed money would become
bondservants to the tax collector or the wealthy
creditors, or whoever they owed money to. If they were
bondservants, they couldn't serve in the army. They
couldn't provide the corvée labor duties – the kind of tax
that people had to pay in the form of labor. Or they would
defect. If you wanted to win a war you had to have a
citizenry that had its own land, its own means of
support."
http://michael-hudson.com/2017/01/the-land-belongs-to-god/
"The focus of my talk today will be Jesus' first sermon
and the long background behind it that helps explain what
he was talking about and what he sought to bring about."
Glad you are researching the ancient history of monetary
regimes. Especially since your research into monetary
history over the past 150 years is so incredibly wrong.
"... Privilege: still exorbitant. Here's a nice analysis of the international role of the dollar. This is the same argument I tried to make in my Roosevelt Institute piece on trade policy last summer. The Economist* says it better: ..."
"... "Unlike other aspects of American hegemony, the dollar has grown more important as the world has globalised, not less. As economies opened their capital markets in the 1980s and 1990s, global capital flows surged. Yet most governments sought exchange-rate stability amid the sloshing tides of money. They managed their exchange rates using massive piles of foreign-exchange reserves Global reserves have grown from under $1trn in the 1980s to more than $10trn today. ..."
"... Dollar-denominated assets account for much of those reserves. Governments worry more about big swings in the dollar than in other currencies; trade is often conducted in dollar terms; and firms and governments owe roughly $10trn in dollar-denominated debt. the dollar is, on some measures, more central to the global system now than it was immediately after the second world war. ..."
"... America wields enormous financial power as a result. It can wreak havoc by withholding supplies of dollars in a crisis. When the Federal Reserve tweaks monetary policy, the effects ripple across the global economy. Hélène Rey of the London Business School argues that, despite their reserve holdings, many economies have lost full control over their domestic monetary policy, because of the effect of Fed policy on global appetite for risk. ..."
"... America's return on its foreign assets is markedly higher than the return foreign investors earn on their American assets That flow of investment income allows America to run persistent current-account deficits -- to buy more than it produces year after year, decade after decade." ..."
Privilege: still exorbitant. Here's a nice analysis of the international role of the dollar.
This is the same argument I tried to make in my Roosevelt Institute piece on trade policy last
summer. The Economist* says it better:
"Unlike other aspects of American hegemony, the dollar has grown more important as the
world has globalised, not less. As economies opened their capital markets in the 1980s and 1990s,
global capital flows surged. Yet most governments sought exchange-rate stability amid the sloshing
tides of money. They managed their exchange rates using massive piles of foreign-exchange reserves
Global reserves have grown from under $1trn in the 1980s to more than $10trn today.
Dollar-denominated assets account for much of those reserves. Governments worry more about
big swings in the dollar than in other currencies; trade is often conducted in dollar terms; and
firms and governments owe roughly $10trn in dollar-denominated debt. the dollar is, on some
measures, more central to the global system now than it was immediately after the second world
war.
America wields enormous financial power as a result. It can wreak havoc by withholding
supplies of dollars in a crisis. When the Federal Reserve tweaks monetary policy, the effects
ripple across the global economy. Hélène Rey of the London Business School argues that, despite
their reserve holdings, many economies have lost full control over their domestic monetary policy,
because of the effect of Fed policy on global appetite for risk.
During the heyday of Bretton Woods, Valéry Giscard d'Estaing, a French finance minister (later
president), complained about the "exorbitant privilege" enjoyed by the issuer of the world's reserve
currency. America's return on its foreign assets is markedly higher than the return foreign
investors earn on their American assets That flow of investment income allows America to run
persistent current-account deficits -- to buy more than it produces year after year, decade after
decade."
Exactly right. You can have free capital mobility, or you can have a balanced trade for the
US. But you can't have both, as long as the world depends on dollar reserves."
By Scott Ferguson, Assistant Professor, University of South
Florida. He is also a Research Scholar at the Binzagr Institute for
Sustainable Prosperity. His current research and pedagogy focus on Modern
Monetary Theory and critiques of neoliberalism, aesthetic theory; the
history of digital animation and visual effects; and essayistic writing
across media platforms. Originally published at
Arcade
James Livingston has responded to
my
critique
of his Aeon essay, "
Fuck
Work
." His response was published in the Spanish magazine
Contexto
y Accion
. One can find an English translation
here
.
What follows is my reply:
... ... ...
This brings me to Modern Monetary Theory (MMT). Far from an "obscure
intellectual trend," MMT is a prominent heterodox school of political
economy that emerged from
post-Keynesian
economics
and has lately influenced the economic platforms of
Bernie
Sanders
,
Jeremy
Corbyn
, and Spain's
United
Left
. For MMT, money is not a private token that states amass and
hemorrhage. Rather, it is a boundless government instrument that can easily
serve the needs of the entire community. International monetary agreements
such the Eurozone's
Maastricht
Treaty
may impose artificial limits on fiscal spending, but these are,
MMT argues, political constraints. They are not economically inevitable and
can immediately be dissolved. In truth, every sovereign polity can afford to
take care of its people; most governments simply choose not to provide for
everyone and feign that their hands are tied.
To be sure, Liberalism has debated the "designation and distribution of
rival goods," as Livingston explains. In doing so, however, it has
overlooked how macroeconomic governance conditions the production of these
goods in the first place. MMT, by contrast, stresses money's creative role
in enabling productive activity and places government's limitless spending
powers at the heart of this process.
In lieu of Liberal "redistribution" via taxation, MMT calls for a
politics of "
predistribution
."
Redistributive politics mitigate wealth disparity by purportedly
transferring money from rich to poor. This is a false and deeply
metaphysical gesture, however, since it mistakes the monetary relation for a
finite resource instead of embracing government's actual spending
capacities. MMT's predistributive politics, meanwhile, insist that
government can never run out of money and that meaningful transformation
requires intervening directly in the institutions and laws that structure
economic activity. MMT does not imply a crude determinism in which
government immediately commands production and distribution. Rather, it
politicizes fiscal spending and the banking system, which together
underwrite the supposedly autonomous civil society that Livingston
celebrates.
MMT maintains, moreover, that because UBI is not sufficiently productive,
it is a passive and ultimately
inflationary
means
to remedy our social and environmental problems. It thus recommends a
proactive and politicized commitment to public employment through a
voluntary
Job
Guarantee
. Federally funded yet operated by
local
governments
and
nonprofits
,
such a system would fund communal and ecological projects that the private
sector refuses to pursue. It would stabilize prices by maintaining aggregate
purchasing power
and
productive activity during market downturns.
What is more, by eliminating forced unemployment, it would eradicate
systemic poverty, increase labor's bargaining power, and improve everyone's
working conditions. In this way, a Job Guarantee would function as a form
of
targeted
universalism
: In improving the lives of particular groups, such a
program would transform the whole of economic life from the bottom up.
Unlike the Job Guarantee, UBI carries no obligation to create or maintain
public infrastructures. It relinquishes capital-intensive projects to the
private sector. It banks on the hope that meager increases in purchasing
power will solve the
systemic
crises
associated with un- and underemployment.
Let us, then, abandon UBI's "end of work" hysteria and confront the
problem of social provisioning head on. There is no escape from our broken
reality. We do better to seize present power structures and transform
collective participation, rather than to reduce politics to cartoonish
oppositions between liberty and tyranny, leisure and toil. Technology is
marvelous. It is no substitute, however, for governance. And while civil
society may be a site of creativity and struggle, it has limited spending
abilities and will always require external support.
It is essential, therefore, to construct an adequate welfare system. On
this matter, Livingston and I agree. But Livingston's retreat from
governance strikes me as both juvenile and self-sabotaging. Such thinking
distracts the left from advancing an effective political program and
building the robust public sector we need.
I really need to be kicked out of the house, to go someplace and do
something I don't really want to do for 8 hours a day.
I've already got too much time to fritter away. I'm fairly certain,
giving me more time and money to make my own choices would not make the
world a better place.
Hmm. No "sarc" tag Really?? More free time and money wouldn't be a
benefit to you and your surroundings? That's hard to believe. To each
their own I guess.
I can see it both ways. Most people see that as sarcasm but I have
more than a few friends whose jobs are probably the only thing keeping
them out of jail. Idle hands being the devil's plaything and all. For
instance, the last thing you want to give a recovering addict is a lot
of free time and money.
As a recovering addict, I must vehemently disagree with ur
statement.
I would love to have as much money and free time on my hands to
work on the fun hobbies that keep me sober like Political Activism,
Blogging, Film, etc.
At no point in the "Job Guarantee" discussion did anyone advocate
forcing you to go to work. However, if you decide to get ambitious and
want a paid activity to do that helps make society a better place to
live, wouldn't it be nice to know that there'd be work available for you
to do?
Right now, that's not so easy to do without lots of effort searching
for available jobs and going through a cumbersome and dispiriting
application process that's designed to make you prove how much you
REALLY, REALLY want the job.
For me, the real silver bullet is the moral/political argument of a
Job Guarantee vs. Basic Income. Job Guarantee gives people a sense of
pride and accomplishment and those employed and their loved ones will
vigorously defend it against those who would attack them as 'moochers'.
Also, defenders can point to the completed projects as added ammunition.
Basic income recipients have no such moral/political defense.
The guaranteed jobs could be for a 20 or 30 hour week. I fear they
won't be as most job guarantee advocates seem to be Calvinists who
believe only work gets you into heaven though.
"MMT, by contrast, stresses money's creative role in enabling productive
activity and places government's limitless spending powers at the heart of
this process."
" [money] is a boundless government instrument "
Limitless spending power is identical to infinite spending powers. If
this is a central tenet of MMT, the whole conceptual construct can easily be
disproved by reductio ad absurdum.
"And while civil society may be a site of creativity and struggle, it has
limited spending abilities and will always require external support."
Sure, the support of Nature, but I guess the author is referring to Big
Brother, the all-knowing and benevolent government, source and creator of
all money, indispensable provider of jobs, jobs, jobs.
Before there was nothing, then came the Government and the Government
said: let there be money.
I would like to see you do that via "reductio ad absurdum" because I
find you absolutely clueless regarding MMT's propositions. Maybe you just
like to spout off?
It's a common 'argument' by people defending status quo. They claim
something is ridiculous and easily disproven and then leave it at
that. They avoid making argument that are specific enought to be
countered, because thay know they don't actually have a leg to stand
on.
Limitless may not have been the best word. Of course the government
can print money till the cows come home; but MMT recommends stopping when
you approach the real resource constraint.
Sloppy language does not help so thank you. So the next question is
how do constraints (natural or other) affect spending power under MMT,
is it asymptotic, is there an optimum, discontinuities?
The other major issue is that although spending power is controlled
by legislatures it must be recognized that wealth creation starts with
the work of people and physical capital, not by the good graces of
gov't. MMT makes it sound as if money exists just because gov't wills
it to exist, which is true in the sense of printing pieces of paper
but not in the sense of actual economic production and wealth
creation. Taxes are not the manner in which gov't removes money but it
really is the cost of gov't sitting on top of the economic production
by people together with physical capital.
Help me understand your last sentence. So, if I'm a farmer, the
time I spend digging the field is economic production, but the time
I spend sitting at my desk planing what to plant and deciding which
stump to remove next and how best to do it, and the time I spend
making deals with the bank etc, these are all unproductive hours
that make no contribution to my economic production?
Yes, Jamie. And as you point out, Ferguson is giving us a
better definition of "productive". He is not saying productivity
produces profits – he is saying productive work fixes things and
makes them better. But some people never get past that road bump
called "productivity."
"MMT makes it sound as if money exists just because gov't wills
it to exist "
No, this is inaccurate, MMT says that the government must SPEND
money into existence, not just issue a legal fiat. Collecting taxes
in the currency creates a need for the currency. This is
historically accurate and can be traced from British colonial
history. They imposed taxes on the colonies in pound sterling, that
compelled the colonies to find something to export to Britain in
order to generate the foreign exchange to pay the taxes.
The debate is over how to get the currency in people's hands.
Should the govt just cut checks and let citizens spend as they see
fit? Or should the government directly employ resources to improve
society where the private sector isn't interested?
Regarding user Jamie's point, I hope I can add to it by saying
that someone is going to do the planning, whether it's the public
sector or the private sector, planning must be done. When
government does the planning, then it's decided democratically (at
least in theory). If the government doesn't do the planning, then
the private sector is left to do it on its own. This gets chaotic
if the private sector doesn't coordinate, or can get parasitic if
the private sector colludes against public interest.
I don't think there's anything wrong with calling money a
"boundless government instrument". The problem here comes from
confounding a potentially infinite resource (money) with the
inherently limited application of that resource. Sovereign money
really is limitless, what one can do with it is not. The distinction
needs to be clarified and emphasized, not glossed over.
"Limitless" is a pretty good word for some arguments. Look what you
get with "limited": every year congress up and says, "Hey dudes,
dudettes, we know you expected some governing from us, but we've
decided not to do that, because we've decided that the money we've
spent has taken us past the Debt Limit. So we're gonna stop now."
They're jerking you around. The rules of fiat money that they're using
don't work that way. In fact, Richard Nixon took the U.S. into a full
fiat money system so he could keep governing without having to worry
about running out of money to do it with.
International monetary agreements such the Eurozone's Maastricht
Treaty may impose artificial limits on fiscal spending, but these are,
MMT argues, political constraints. They are not economically
inevitable and can immediately be dissolved.
So no, not limitless. Rather, the limitations are political ones, not
economic. As long as the sovereignty of the currency is not in threat,
the money supply can be increased.
The author is making some assumptions, and then goes and takes them
apart. It's possilble (I didn't read the article he refers to), that the
assumptions he responds to directly are made by the article, but that
doesn't make them universal assumptions about UBI.
UBI is not a single exact prescription – and in the same way, JG is not a
single exact prescription. The devil, in both cases, is in details. In fact,
there is not reason why JG and UBI should be mutually exclusive as a number
of people are trying to tell us.
and if we talk about governance – well, the super-strong governance that
JG requires to function properly is my reason why I'd prefer a strong UBI to
most JG.
Now and then we get a failed UBI example study – I'm not going to look at
that. But the socialist regimes of late 20th century are a prime example of
failed JG. Unlike most visitor or writers here, I had the "privilege" to
experience them first hand, and thanks but no thanks. Under the socialist
regimes you had to have a job (IIRC, the consitutions stated you had "duty"
to work). But that become an instrument of control. What job you could have
was pretty tightly controlled. Or, even worse, you could be refused any job,
which pretty much automatically sent you to prison as "not working
parasite".
I don't expect that most people who support JG have anything even
remotely similar in mind, but the governance problems still stay. That is,
who decides what jobs should be created? Who decides who should get what
job, especially if not all jobs are equal (and I don't mean just equal pay)?
Can you be firedt from your JG job if you go there just to collect your
salary? (The joke in the socialist block was "the government pretends to pay
us, we pretend to work"). Etc. etc.
All of the above would have to be decided by people, and if we should
know something, then we should know that any system run by people will be,
sooner or later, corrupted. The more complex it is, the easier it is to
corrupt it.
Which is why I support (meaningfull, meaning you can actually live on it,
not just barely survive) Basic Income over JG. The question for me is more
whether we can actually afford a meaningful one, because getting a "bare
survival one" does more damage than good.
That's why any JG would have to be filtered through local governments
or, more ideally, non-profit community organizations, and not a
centralized government. New York City's
Summer Youth Employment Program
offers a good model for this. Block
grants of money are delivered to a wide range of community organizations,
thus ensuring no one group has a monopoly, and then individual
businesses, other community groups, schools, non-profits, etc., apply to
the community organizations for an "employee" who works for them, but the
payment actually comes from the block grant. The government serves as the
deliverer of funds, and provides regulatory oversight to make sure no
abuses are taking place, but does not pick and choose the jobs/employers
themselves.
I don't see it as either/or. Provide a UBI and a job guarantee. The job
would pay over and above the UBI bit, if for some reason, you don't want to
work or cannot, you still have your Universal BASIC Income as the floor
through which you cannot fall.
Private employers will have to offer better conditions and pay to
convince people getting UBI to work for them. They wouldn't be able to
mistreat workers because they could simply bolt because they will not fall
into poverty if they quit. The dirtbags needing workers won't be able to
overpay themselves at the expense of workers because they feel completely
free to leave if you are a self worshipping douche.
It seems that over time the "floor through which you cannot fall"
becomes just that, the floor, as the effect of a UBI becomes the
universal value, well floor.
Was going to be my response as well, why such absolute yes or no
thinking? The benefit of the UBI is that is recognizes that we have been
increasing productivity for oh the last couple millenia for a REASON! To
have more leisure time! Giving everyone the opportunity to work more and
slave away isn't much of a consolation. We basically have a jobs
guarantee/floor right now, its called McDonalds, and no one wants it.
Labor needs a TON of leverage, to get us back to a reasonable
Scandinavian/Aussie standard of living. Much more time off, much better
benefits, higher wages in general. UBI provides this, it says screw you
employers unless you are willing to offer reasonable conditions we are
going to stay home.
Why the Job Guarantee versus Universal Basic Income is not about work,
BUT ABOUT GOVERNANCE!
Yep, agree 100%.
We live in a capitalist society which is dependent on a (wage) slave
population.
UBI? Are you mad?
I for one am mad, give me UBI!
Time to end the insanity of U.S. capitalism
I'm curious to know if either of these systems work if there is no
guarantee of "free" access to healthcare through single-payer or a national
insurance? I'm only marginally informed about UBI or MMT, and haven't found
adequate information regarding either as to how healthcare is addressed. It
seems clear that neither could work in the US, specifically for the reason
that any UBI would have to be high enough to pay insane insurance premiums,
and cover catastrophic illnesses without pushing someone into bankruptcy.
Can anyone clarify, or point me in the direction of useful information on
this?
I think they're basically separate issues although MMT provides a way
of thinking that federal single payer is possible.
MMT is basically anti-austerity and in favor of 'smart' deficits ie
not deficits for no reason but deficits that can improve the economy and
the overall social structure such as single payer, affordable education,
job guarantee program.
Stephanie Kelton has commented that MMT has no real problem with a UBI
if it is done in conjunction with a good job guarantee program. She is
well aware of the dangers of a UBI if it eliminates most other social
programs.
I think that a job guarantee at a living wage would provide a much
better standard for private employment than a UBI which could just work
as a supplement allowing private industry to pay lower wages. As a
supplement to a job guarantee a UBI could help address issues such as
payment for reproductive type work.
There are different flavors of UBI, most don't mention healthcare at
all. Milton Friedman's UBI flavor prefers that it replace all government
spending on social welfare to reduce the government's overall burden. MMT
says there is no sense in not having single payer.
My thought on the last thread of this nature is that if UBI were ever
enacted in the U.S., healthcare access would become restricted to those
with jobs (and the self-employeed with enough spare income to pay for
it). You don't have to be healthy to collect a subsistence payment from
to the government.
Here in Canada we have universal healthcare, as well as a basic income
guarantee for low income families with children and seniors. There is a
movement to extend that as well,
details of one plan here
.
In theory, I think it could be possible for the JG to build and staff
hospitals and clinics on a non-profit basis or at least price-controlled
basis, if so directed (*huge* question, of course - by what agency? govt?
local councils?). Ditto housing, schools, infrastructure, all kinds of
socially useful and pleasant stuff. However, the way the US tends to do
things, I would expect instead that a BIG or a JG would, as others have
pointed out, simply enable employers to pay less, and furthermore,
subsidize the consumption of overpriced goods and services. IOW, a repeat
of the ACA, just a pump to get more $$ to the top.
The problem is not the money, but that the Americans govern themselves
so poorly. No idea what the cure could be for that.
Fixing worker pay is actually VERY easy. It's purely a political
issue. You tie corporate taxes to worker compensation. More
specifically, you set the maximum compensation for CEOs at NO MORE
than (say) 50x average worker pay in their corporation (INCLUDING
temps AND off-shored workers IN US DOLLARS no passing the buck to Temp
Agencies or claiming that $10/day in hellhole country x is equivalent
to $50k in the US. NO, it is $10/day or $3650/yr, period). At 50x,
corporate taxation is at the minimum (say something like 17%). The
corporation is free to pay their top exec more than 50x but doing so
will increase the corporate tax to 25%. You could make it step-wise:
51-60x average worker pay = 25% corporate tax, 61-80x = 33% corporate
tax, etc.
It is time to recognize that CEO pay is NOT natural or earned at
stratospheric levels. THE best economic times in the US were between
the 50s to early 70s when top tax rates were much higher AND the
average CEO took home maybe 30x their average worker pay. We CAN go
back to something like that with policy. Also, REQUIRE that labor have
reps on the Board of Directors, change the rules of incorporation so
it is NOT mainly focused on "maximizing profit or shareholder value".
It must include returning a social good to the local communities
within which corporations reside. Profits and maximizing shareholder
value must be last (after also minimizing social/environmental harm).
Violate the rules and you lose your corporate charter.
There is no right to be a corporation. Incorporation is a privilege
that is extended by government. The Founders barred any corporate
interference in politics, and if a corporation broke the law, it lost
its charter and the corporate officers were directly held responsible
for THEIR actions. Corporations don't do anything, people in charge of
corporations make the decisions and carry out the actions so NO MORE
LLCs. If you kill people due to lax environmental protections or
worker safety, etc, then the corporate officers are DIRECTLY and
personally responsible for it. THEY made it happen, not some ethereal
"corporation".
Durned hippys imagine an IRON boot stamping on a once human face –
forever. OK, now everybody back to the BIG house. Massa wanna reed yew sum
Bible verses. We're going to be slaves to the machines, ya big silly!
I'm sceptical whether a guaranteed job policy would actually work in
reality. There are plenty of historical precedents – for example, during the
Irish potato famine because of an ideological resistence to providing direct
aid, there were many 'make work' schemes. You can still see the results all
along the west coast of Ireland – little harbours that nobody has ever used,
massive drainage schemes for tiny amounts of land, roads to nowhere. It
certainly helped many families survive, but it also meant that those
incapacitated by starvation died as they couldn't work. It was no panacea.
There are numerous practical issues with make work schemes. Do you create
a sort of 2-layer public service – with one level permanent jobs, the other
a variety of 'temporary' jobs according to need? And if so, how do you deal
with issues like:
1. The person on a make work scheme who doesn't bother turning up till 11
am and goes home at 2.
2. Regional imbalances where propering region 1 is desperately short of
workers while neighbouring region 2 has thousands of surplus people sweeping
streets and planting trees.
3. What effect will this have on business and artistic innovation?
Countries with strong welfare systems such as Sweden also tend to have a
very high number of start ups because people can quit their jobs and devote
themselves to a couple of years to develop that business idea they always
had, or to start a band, or try to make a name as a painter.
4. How do you manage the transition from 'make-work' to permanent jobs
when the economy is on the up, but people decide they prefer working in
their local area sweeping the street?
I can see just as many practical problems with a job guarantee as with
universal income. Neither solution is perfect – in reality, some sort of mix
would be the only way I think it could be done effectively.
To provide some context for passers-by, this seemingly too-heated
debate is occurring in the context of the upcoming Podemos policy meeting
in Spain, Feb 10-12.. Podemos seems to have been unaware of MMT, and has
subscribed to sovereign-economy-as-household policies. Ferguson, along
with elements of the modern left, has been trying to win Podemos over to
MMT-based policies like a Jobs Guarantee rather than the Basic Income
scheme they have heretofore adopted rather uncritically.
(Of course Spain is far from "sovereign", but that's another matter
:-(
1) Fire them
2) Prospering region 1 isn't "short on workers" they just all have
private jobs.
3) What a good argument to also have single payer healthcare and some
sort of BIG as well as the JG
4) private companies must offer a better compensation package. One of the
benefits of the JG is that it essentially sets the minimum wage.
Yeah, those are pretty good answers right off the bat. (Obviously I
guess for #1 they can reapply in six months or something.)
Plutonium- I feel like true progress is trading shitty problems for
less shitty ones. I can't see any of the major proponents like Kelton,
Wray or Mitchell ever suggesting that the JG won't come with it's own
new sets of challenges. On the overly optimistic side though: you
could look at that as just necessitating more meaningful JG jobs
addressing those issues.
I was writing that on my phone this morning. Didn't have time to
go into great detail. Still, I wanted to point out that just
because there will be additional complexities with a JG, doesn't
mean there aren't reasonable answers.
1. If you fire them its not a jobs guarantee. Many people have
psychological/social issues which make them unsuitable for regular
hours jobs. If you don't have a universal basic income, and you don't
have an absolute jobs guarantee, then you condemn them and their
families to poverty.
2. The area is 'short on workers' if it is relying on a surplus
public employee base for doing things like keeping the streets clean
and helping out in old folks homes. It is implicit in the use of
government as a source of jobs of last resort that if there is no
spare labour, then you will have nobody to do all the non-basic works
and you will have no justification for additional infrastructure
spend.
3. You miss the point. A basic income allows people time and
freedom to be creative if they choose. When the Conservatives in the
early 1990's in the UK restricted social welfare to under 25's, Noel
Gallagher of Oasis predicted that it would destroy working class rock
n roll, and leave the future only to music made by rich kids. He was
proven right, which is why we have to listen to Coldplay every time we
switch on the radio.
4. This ignores the reality that jobs are never spread evenly
across regions. One of the biggest problems in the US labour market is
that the unemployed often just can't afford to move to where the jobs
are available. A guaranteed job scheme organised on local govenment
basis doesn't address this, if anything it can exacerbate the problem.
And the simplest and easiest way to have a minimum wage is to have a
minimum wage.
1) Kelton always talks about a JG being for people "willing and
able to work." If you are not willing I don't really have much
sympathy for you. If you are not able due to psychological factors
or disability, then we can talk about how you get on welfare or the
BIG/UBI. The JG can't work in a vacuum. It can't be the only social
program.
2) Seems unrealistic. You are just searching to find something
wrong. If there is zero public employment, that means private
employment is meeting all labor demands.
3) I have no idea what you are going on about. I'm in a band. I
also have a full-time job. I go see local music acts all the time.
There are a few that play music and don't work because they have
rich parents, but that's the minority. Most artists I know manage
to make art despite working full time. I give zero shits what
corporate rock is these days. If you don't like what's on the radio
turn it off. There are thousands of bands you've never heard of. Go
find them.
4) Again, you are just searching for What-If reasons to crap on
the JG. You try to keep the jobs local. Or you figure out free
transportation. There are these large vehicles called busses which
can transport many people at once.
Yes these are all valid logistical problems to solve, but you
present them like there are no possible solutions. I can come up
with several in less than 5 minutes.
For a more practical first step--how about getting rid of/slashing
regressive and non-federal income tax deductible sales taxes? shifting that
tax burden to where income growth has been.
Democratic Party-run states/cities are the biggest offenders when it
comes to high sales taxes.
universal basic income in the West + de facto open borders won't work.
just making a reasonable hypothesis.
There might be a psychological benefit to a jobs guarantee vs. UBI. There
are a lot of people that would much rather "earn" their income rather than
directly receiving it.
Which of these tools do you posess:
( ) Machete, pick-axe, big old hemp bag
( ) Scattergun, hound, mirrored shades
( ) Short-shorts, bandeau top, knee pads
( ) RealTree camo ACUs, FLIR scope
( ) ephedrine, pseudoephedrine, fast car
A JG would begin to rebuild the trust and cooperation needed to have a
society based on justice instead of might makes right. Human life is based
on obligations- we are all responsible to one another for the social system
to work. The problem is always about how to deal with cheaters and shirkers.
This problem is best solved by peer pressure and shaming- along with a
properly functioning legal system.
I get a kick out of the "make work" argument against a JG. With planned
obsolescence as the foundation of our economic system, it's just a more
sophisticated way of digging holes and filling them in again. Bring on
robotic automation, and the capitalist utopia is reached. Soul crushing,
pointless labor can be sidelined and replaced with an unthinking and
unfeeling machine in order to generate profits. The one problem is people
have no money to buy the cheep products. To solve that dilemma, use the
sovereign governments power to provide spending credits in the form of a
UBI. Capitalism is saved from is own contradictions- the can is kicked
farther down the road.
The obligations we have to one another must be defined before any system
organization can take place. Right now, the elite are trying to have their
cake and eat it too.
I agree with those who see a need for both programs. I think the critique
of UBI here is a good one, that raises many valid points. But I have trouble
with a portion of it. For instance:
by eliminating forced unemployment, it would eradicate systemic
poverty
treats 'poverty' as an absolute when it is a relative. No matter what
programs are in place, there will always be a bottom tier in our
hierarchical society and those who constitute it will always be
'impoverished' compared to those in higher tiers. This is the nature of the
beast. Which is why I prefer to talk about subsistence level income and
degrees above subsistence. The cost of living may not be absolutely fixed
over time, but it seems to me to be more meaningful and stable than the term
'poverty'. On the other hand, in a rent seeking economy, giving people an
income will not lift them out of poverty because rents will simply be
adjusted to meet the rise in resources. So UBI without rent control is
meaningless.
Another point is that swapping forced unemployment for forced employment
seems to me to avoid some core issues surrounding how society provides for
all its members. Proponents of the JG are always careful to stress that no
one is forced to work under the JG. They say things like, "jobs for everyone
who wants one". But this fails to address the element of coercion that
underlies the system. If one has no means to provide for oneself (i.e. we
are no longer a frontier with boundless land that anyone can have for cheap
upon which they may strike out and choose the amount of labor they
contribute to procure the quality of life they prefer-if ever was such the
case), then jobs for "everyone who wants one" is simply disingenuous. There
is a critical "needs" versus "wants" discussion that doesn't generally come
up when discussing JG. It's in there, of course, but it is postponed until
the idea is accepted to the point where setting an actual wage becomes an
issue. But even then, the wage set will bear on the needs versus wants of
the employed, but leaves out those foolish enough to not "want" a job.
Whereas, in discussing UBI, that discussion is front and center (since even
before accepting the proposal people will ask, how much?, and proper reasons
must be given to support a particular amount-which again brings us to
discussing subsistence and degrees above it-the discussion of subsistence or
better is "baked in" to the discussion about UBI in a way that it is not
when discussing the JG).
While UBI interests me as a possible route to a non-"means of
production"-based economy, the problem I see with it is that it could easily
reduce the populace to living to consume. Given enough funds to provide for
the basics of living, but not enough to make any gains within society, or
affect change. It's growth for growth's sake, not as to serve society.
Something is needed to make sure people aren't just provided for, but have
the ability to shape the direction of their society and communities.
Where I work @3/4 of the staff already receives social security and yet
it is not enough seems to me human satisfaction is boundless and providing
a relative minimum paper floor for everyone is just. Yet the way our market
is set up, this paper floor would be gobbled back up by the rentier class
anyway. So unless there is a miraculous change in our economic rent capture
policies, we are screwed
So yes, just describe to people precisely what it is – a 'paper' floor
not something that has firm footing yet acknowledges inequities inherent in
our current currency distribution methods. And of course couple this with a
jobs guarantee. I have met way too many people in my life that 'fall through
the cracks' .
why is no one bemoaning the rabid over-consumption of the complainers who
suck up much more than they will ever need, hoarding and complaining about
people who do not have enough? the real problem is rampant out of control
parasites
But Ferguson should also adknowledge that Livingston has some points.
Why on earth we politically put limits to, for instance, public
earning-spending while do not put any limit to the net amount that one
person can earn, spend and own?
Upward redistribution is what occurs in the neoliberal framework. UBI is
distribution. Bear in mind that even in the best employment conditions, not
everybody can earn a salary. 100% employment is unrealistic.
The people marketing UBI and MMT have hundreds of years of attempted
social engineereing to overcome. I referring to the " why people want what
they want and why do they believe what they believe." Why?
The only suggestion I have is that, since everybody has a different
relationship to the concept of work, the populations involved need to be
smaller. Not necessarily fewer people, but more regions or nation states
that are actually allowed to try their ideas without being attacked by any
existing "empire" or "wanna be empire" via sanctions or militarily.
It is going to take many differerent regions, operating a variety of
economic systems (not the globalized private banking extraction method
pushed down every one's throat whether they like it or not) that people can
gravitate in and out of freely.
People would have the choice to settle in the region that has rules and
regulations that work most for their lives and belief systems (which can
change over time).
Looking at it from the perspective that there can be only one system that
300 million plus people (like the USA) or the world must be under is the
MAIN problem of social engineering. There needs to be space carved out for
these many experiments.
First, congratulations to everyone who managed to read this all the way
through. IMO both this (and the guy he's responding to), seem like someone
making fun of academic writing. Perhaps with the aid of a program that spits
out random long words.
FWIW, when I lived in Japan, they had a HUGE, construction-based
make-work program there, and it was the worst of both worlds: hard physical
labor which even the laborers knew served no purpose, PLUS constant street
obstruction/noise for the people in the neighborhoods of these make-work
projects. Not to mention entire beautiful mountains literally concreted over
in the name of 'jawbs'.
Different thought: I'm not sold on UBI either, but wouldn't it mess up
the prostitution/sex trafficking game, almost as a side effect? Has anyone
heard UBI fans promote it on that basis?
The sound and fury of disagreement is drowning out what both authors
agree on: guaranteed material standards of living and reduced working time.
If that's the true goal, we should say so explicitly and hammer out the
details of the best way to attain it.
Interesting read society has become so corrupt at every level from
personal up through municipal, regional and federal governments that it cant
even identify the problem, let alone a solution
all forms of government and their corresponding programs will fail until
that government is free from the monetary influences of individuals /
corporations and military establishments, whether it be from donations to a
political establishment or kick backs to politicians and legislators or
government spending directed to buddies and cohorts
I don't pretend to understand the arguments at the level to which they
are written, but at the basic level of true governance it must but open and
honest, this would allow the economy to function and be evaluated, and then
at that point we could offer up some ideas on how to enhance areas as needed
or scale back areas that were out of control or not adding value to society
as a whole
We stand at a place that has hundreds of years of built in corruption
into the model, capable so far of funneling money to the top regardless of
the program implemented by the left or the right sides of society
first step is to remove all corruption and influence from governance at
every level until then all the toils toward improvement are pointless as no
person has witnessed a "free market " in a couple hundred years, all
economic policy has been slanted by influence and corruption
we can not fix it until we actually observe it working, and it will never
work until it is free of bias / influence
no idea how we get there . our justice system is the first step in
repairing any society
"... "instead they've had difficulty even getting inflation high enough to hit their inflation target. Maybe the problem is the way the FED is counting dollars." ..."
"... Debt the First 5000 Years ..."
"... looks like ..."
"... "but at some point this must and will end" ..."
"... personal, anecdotal, small-sample, and otherwise qualified observations ..."
"instead they've had difficulty even getting inflation high enough to
hit their inflation target. Maybe the problem is the way the FED is counting
dollars."
Ah, but they did stop deflation. Which was all they really cared about.
Everything else was theater. Bottom line, Federal Reserve is the
counterparty to all the private interests naked shorting the US dollar.
Which always works unless that counterfeiting process starts to go into
reverse. Just like naked shorting in the stock market can go into reverse
and put a big deal of hurt on the naked shorters. But with naked shorting in
the stock market, the party that is doing the counterfeiting of stock
doesn't have a way to prevent the play from going into reverse. In contrast,
the Federal Reserve does, through QE and whatever else they can do. Believe
you me, if things got bad enough, they would have done a true helicopter
drop. Whatever it takes to get their "liquidity pump" working again.
And they got their liquidity pump working again and stopped deflation.
(So hey they were heros, yay! /sarc) And along the way, dollars (either
newly borrowed or already in the economy) ended up in assets. And those
assets keep going up through more inflation. So while they may not have
"levitated the economy", they did levitate the demand for their liquidity
pump. (What's not to love? /sarc)
It just hasn't reached high inflation because main street isn't a player.
Otherwise, if main street was a player too, like they were for the dot com
bubble and housing bubble, well then look out. But everybody on main street
is just trying to survive. As far as the Federal Reserve is concerned that's
a perfect "wall of worry" to provide them all the cover they need to make
sure inflation doesn't get out of hand. To use the words of Adam Smith,
"it's a virtuous cycle". Assets go up, the plebs aren't at the party yet, so
no need to take away the punch bowl.
(And hey look at all the temp jobs that main street has now. Who says the
magic of the Federal Reserve isn't doing good things? /sarc)
Ah yes, "stopping deflation", what a disaster it would be if rent,
food, health care cost less. The horror: people might be able to put a
little away as "savings" and maybe even "invest". Can't have that now can
we.
So we have a system where the Fed controls interest rates (domestic
policy) and Treasury worries about exchange rates (trade and
international). Their objectives align probably 20% of the time.
Meantime "bank underwriting" is a distant memory, just sign the deal, get
your bonus, if/when it goes south Papa (Momma) CB will just smash the
value of the scrip some more
yes djrichard that is a nice synopsis of how this all works but where
does it end? How long can it go on? It is the world's biggest Ponzi
scheme and it almost ended in 2008 when the plebes could no longer take
on the increasing amounts of debt to keep it going. A normal Ponzi scheme
ends when it runs out of fools to fleece but this one is different
because it involves central banks which can step in to keep it all going
once mainstream is tapped out. That's where we are now; they ginned up
massive amounts of base money that was used to prop up asset prices on
behalf of the elites. This whole thing has to be the biggest fraud and
crime in human history but it is so esoteric that most people can't see
it. The masses get buried under inflated costs associated with the asset
bubble, inflation and interest payments while a small sliver at the top
lives in a rentiers paradise.
They have added massive debt to the system since the 2008 debt crisis
and things are now fine? Low interest rates mask the burden but at some
point this must and will end. Once they stripped the gold out of the
system in 1971 they set the groundwork for an explosion of debt. It's a
very scary situation.
However, there has been a lot of unproductive private debt issuance
even so, such as companies issuing debt to buy back stock and student
debt financing overpriced college costs.
This is a good explanation of why private debt, particularly
unproductive household debt, is the danger:
QE is widely misunderstood as printing money when it isn't. It's a
way to lower long term interest rates and spreads (as in lower the
spread of prime mortgages relative to Treasuries).
2. China continues to have a massive debt bubble. And no major
economy has made the transition from being investment and export led
to consumption led without having a major financial crisis.
Are you suggesting that the U.S. monetary system is healthy and
sound?
Completely agree that the creation of unproductive debt is the
real problem in any economy. Michael Hudson has written brilliantly
on that issue. Most debt/money creation should be closely tied to
productive investment.
As for private debt to GDP, I have no basis to comment on
whether it higher or lower than pre-crisis levels without doing a
lot of work. Those types of figures are fraught with complexity
based on source data, assumptions and methodology. Would love to
see those figures by sector, student loan, credit card, auto loan,
mortgage, corporate, municipal, etc. In any case it is unambiguous
that government debt has increased by nearly $10,000,000,000,000.00
since 2008. Does anyone think that is a good thing? And that
excludes retirement and medical costs which dwarf the funded debt.
Federal deficit went up by $1.4 last year, 9/30/16 year-end, after
a 7 year supposed recovery when tax revenues should be peaking.
What's up with that?
The U.S. may be able to borrow in its own currency but because
of its current account deficit it is dependent on foreigners to
play along. How long is that going to last?
Any thoughts on the 1974 deal whereby the Saudis agreed to
secretly support the dollar. What happens to dollar hegemony
without those kinds of deals.
What is going on with Russia right now, why the new cold war?
Russia runs a pipeline through Ukraine and is the leading supplier
of natural gas to western Europe. It's not dollar based. Qatar sits
on the world's largest supplies of natural gas and wants to run
pipeline North through Syria. Asssad said no. U.S. then unleashed a
proxy war to unseat Assad. Qatar is a U.S. client state, like Saudi
Arabia, and they allowed U.S. to build massive air base outside of
Doha. Qatar plays along with U.S. and in return the Al Thani family
remains in power.
I am afraid this is all a bit more complicated and fragile than
meets the eye.
What is your definition of printing money? Is there no such
thing in your mind? Does a central bank ever print money in your
view of the system other than when they ask the U.S. Treasury's
Bureau of Engraving and Printing to create some federal reserve
notes?
I have read two of Randall Wray's books on MMT and Warren
Mossler's Seven Deadly Innocent Frauds. I am fairly well
acquainted with MMT. As for Mossler I wish he had a good
editor because his stuff could read much better. As for
Wray's TWINTOPT ("that which is needed to pay taxes")
definition of money, you can also argue for TWINTOPP ("that
which is needed to purchase petroleum") as a definition of
money. Pricing the world's most important commodity in
"something" is an even more effective of way of causing that
something to be used as money.
As for MMT I like some of the ideas but it seems to suffer
from the same fundamental problems that the current system
does. If the government has a monopoly on producing money, it
is a given that they will overdo it at some point just like
what happens with the current private system where the banks
over did it. You end up with the same rudimentary
questions/problems under MMT or the current type system:
1) what are the rules governing its creation?
2) and who is in charge and gets to decide?
Either system can work if it is intelligently and honesty
run but of course that is asking a lot. Unfortunately men can
not be trusted to run an honest system for any length of time
because creating money is the world's greatest privilege and
it will always be abused at some point; war, greed,
stupidity, it doesn't matter, at some point discipline is
lost. That in summary is the entire history of money.
There's a lot of history behind the MMT conception.
David Graeber, in
Debt the First 5000 Years
describes kings creating money in order to pay the army,
and creating impersonal markets (pp. 226-227) where money
was good in order to feed the army without
a) trundling huge convoys of grain all over the country
all day, every day, or
b) letting the army feed itself, and stripping the country
bare.
The way this had to be done without impersonal markets
is described by
Pierre Loti in Au Maroc
(not sure where to find a
version in English.) Loti was part of a French diplomatic
mission to the depths of Morocco. To feed the mission, the
Sultan sent word in advance to the people near each
nightly stop, ordering them to provide a sufficiently larg
feast. Without the modern features of civilisation, that
was the only way.
One of Gandhi's early campaigns was against a move by
the British governmennt in India to licence all mango
trees. The situation had been that there were feral mango
trees growing all over India, and anyone who was going by
such a tree, and felt like a snack, could pick a mango and
eat it. This scheme provided no role for the government.
The plan was for each tree to be licenced, for a fee, and
to destroy any un-owned, unlicenced tree. Then everybody
would be obliged to pay rupees for their snacks. The
government's control of society through the impersonal
market would be strengthened. Pity that people would get
less to eat. ISTR Gandhi won that one.
I could entertain the doubt that without pre-existing
money and a global impersonal market there would even be
petroleum to buy. Who would drill down to the petroleum,
pump it out of the ground, and ship it halfway around the
world to where you happen to be in the hope that you even
exist, and, if you exist, that you even want petroleum and
have something worthwhile to give in exchange? It takes a
global impersonal market to aggregate personal whims and
accidents into something that we call demand, and find we
can count on in making far-reaching decisions on what to
do. I wonder, could we even have industry without it?
Hmmm
Check out
http://www.monetary.org/lostscienceofmoney.html
History shows abuse of the money supply primarily comes
from two places: 1) true illegal counterfeiting by outside
parties, 2) true legal counterfeiting (ahem borrowing) by
inside parties who are simply shorting the currency when
the economy is publicly biased towards increased private
debt (think Wiemar Republic or Venezuela).
In contrast, Fed Gov fiat (MMT) is not based on a
fractional reserve system. At least not the ones I hear
people talk about. So the magnitude of
debasement/debauchery is a lot less compared to
fractional-based currencies. Plus the monetary base can
always be shrunk by issuing bonds if the will power to tax
is weak.
Thanks for stepping in, Yves. But I have a minor quibble with
that Private Debt to GDP graphic you linked. Because the graph's
Y-origin begins at 195%, the 7.5% reduction since 2008
looks
like
a 500% decrease. Bottom line – private debt to GDP
remains very high and the economy is much weaker than it was in 08.
Unless GDP picks up quickly (less the Ponzi-esque growth in
equities), our financial future does not appear strong.
Is it OK if I hope (against my better judgement) that Trump is
serious about improving U.S. infrastructure through deficit
spending and the loony conservatives in Congress go along?
If this ends, the only way it does so is through deflation. But the
Fed Reserve is always on hand to do "whatever it takes" to prevent
deflation.
If the Federal Reserve loses that fight (and it's hard to think of
a scenario where they could ostensibly lose), then deflation would
take out everybody who is in debt. Which is pretty much everybody,
except people who have no debt and are holding cash. The Fed Gov would
certainly have to step in to provide 3 hots and a cot.
Instead, we have an outcome where the deflation monster is kept at
bay, but everybody is up to their eyeballs in debt (I'm speaking
private debt here. By the way, notice how private debt forgiveness
never enters into the conversation). Except for the elite, they're not
in debt to their eyeballs because the height of their eyeballs can
keep getting higher and higher. The elite know if the wall-of-worry
disappears, forcing the Fed Reserve to raise rates, they'll be caught
with their pants down. But they also know they'll be rescued again
(the ol deflation monster must be defeated once again. We do this for
you little people don't you know). So that's where the economy is
thriving – for the elite.
In aggregate terms the elites hold the other side of all the
debt that was created, that is why they won't tolerate deflation,
everything implodes under such a scenario. The masses are buried
under the debt, while a small minority holds the asset side of it.
Therefore everything will be done to stave off deflation. System is
very fragile, teetering between deflation and potential hyper
inflation. They have threaded a needle so far to keep it stable but
things are not normal. It will be some time before we know how this
resolves itself.
The issue isn't monetary policy, i.e increasing or decreasing the supply
of money, the issue is that the way we've decided to do it is by increasing
and decreasing interests rates. So we end up in this bazzarro world where,
.
------
Stop! I know the answer!
Fed Chief Mariner Eccles explained that long ago – "pushing on a string
won't work"
Keynes explains it in English – This doesn't work when in a "liquidity
trap"
Our current Fed are Monetary_keynesians working in the Mariner Eccles
building.
"If we accept that only the Federal Government, through spending and
taxing, can increase or decrease the supply of dollars"
the vast majority of dollars in the economy are actually created by banks
in the form of deposits generated by making loans. The central bank (Federal
Govt.) seeks to control the level of reserves in the interbank market and
has very limited control over the the supply of money in the economy as a
whole. banks do not lend reserves, which is why there can be reserves
sloshing all around the system without causing inflation. As long as there
are idle resources in the economy the danger of inflation is overblown.
Just follow the money. How does monetary policy influence influence the
average person's finances? They don't have access to the discount window.
Business investment is at an all-time low. Just witness the famously large cash
hoards currently collecting dust in the Fortune 500 and companies like Uber
setting billions of dollars on fire trying to get into new markets instead of
developing new products. Instead they're using cheap debt to buy competitors
and fire all their employees. Small businesses are disappearing and there are
fewer new ones to replace them - nobody has collateral.
Until financial policy starts seriously considering "helicopter money" the
economy is just going to sit there spinning its wheels, going nowhere on the
backs of a vast underclass with no money to spend. Government contracts are and
remain the only way the average person might even catch a glimpse of the world
of finance, a fact that must seem appalling to any financial conservative.
Inflation is hidden in plain sight for many consumers. Just take a trip to
the grocery store, or a home improvement big box, or any number of other
retailers. From
personal, anecdotal, small-sample, and otherwise qualified
observations
, retailers held prices low until the election and then
started to raise them. That will add some pop to their fourth quarter earnings,
while people adjust budgets accordingly.
This is not correct and I hate to tell you but your comments on
this topic are very confused, and worse, you are terribly self
confident about your erroneous beliefs.
A fiat currency issuer can deficit spend without creating debt
instruments. You do not take your dollar bills in a fiat regime to the
Treasury and get them redeemed for something material. The only use
you can make of currency with the Treasury is to extinguish your tax
liabilities.
The Fed can only 'lend' fiat. They don't 'spend' fiat, unless
Congress authorizes the purchase (e.g. Tarp). But note that even
foreign currency purchases of the Fed have to be cleared by Treasury
(which happens behind closed doors and no one notices). So no, the Fed
does not bypass Congress.
And if you mean that Fed offers deposit insurance on deposits
(created via private lending) but that's still an authority given to
it by Congress when FDIC was created. And the FDIC has a 'line of
credit' with the Treasury, not the Fed, so again Congress is not
bypassed. In fact, the credibility of the FDIC only exists because of
that line of credit from the Treasury, since it means they are de
facto linked to the currency issuing entity directly.
The Fed NEVER creates fiat for the private sector. It exchanges
green paper money for bank reserve balances–$ for $ exchange. There is
no cost to the Fed or the govt. Not to mention that the Fed's overall
operations are a cash cow for the federal govt (due to its profits via
interest income on securities owned vs. costs of its liabilities and
salaries, etc.), so it never needs Congressional appropriations. As an
MMT expert said of your BTW "This question in the first place shows
that this guy has no idea how any of this works."
This chart from Citibank shows the eye-popping expansion of central bank
balance sheets, from roughly $3 trillion in the year 2000 to $20 trillion
today.
Evidently the "EM" band in green is dominated by China, which accumulated
over $4 trillion in forex (primarily US Treasuries) through 2013. Now it's
having to sell Treasuries to prop up the yuan exchange rate.
But Haruhiko "Mad Dog" Kuroda at the Bank of Japan is picking up the slack
from China with a ferocious buying binge, as Mario "Whatever It Takes" Draghi
closely pursues him.
Common sense would tell you that expanding central bank assets at many
multiples of economic growth is neither sustainable nor even sensible. Central
banksters are giving ol' John Law a run for the money. With any luck they
should be able to produce an epic calamity, since their bubble blowing is
global rather than confined to one country.
Actually, the Fed is just laundering crap from our TBTFs and supporting
the purchasing power of the dollar:
http://econbrowser.com/wp-content/uploads/2015/12/fed_assets_dec_15.png
The grey is crap being invisibly written down at taxpayers expense (actually
holding a very small percentage of its face value, but embarrassing for
Jamie and Lloyd if admitted in public), the baby blue is keeping the imports
made abroad by our multinationals "affordable" without them having to re-patriate
the cash.
I'm pretty sure "grey" is the "good" MBS. They swore up and down it
was Fannie&Freddie MBS they were buying as part of QE – these are
supposed to be the high quality end of mortgage instruments and I think
it really did turn out that way.
The drek mopped up from Bears and others is called "Maiden", and is
the nearly imperceptible dark blue on this chart. If they properly wrote
them down immediately, then they wouldn't show up on a current chart!
This is why "audit" sounds cool. Then we could have a completely
different chart showing how much they did give away to their buddies.
No doubt they did say that, I guess I've just grown less trusting.
Given the proTBTF tilt of all else that transpired I just can't
believe Timmy and The Fed really took possession of anything it would
have pained Jamie and Lloyd to give up.
"Common sense would tell you that expanding central bank assets at many
multiples of economic growth is neither sustainable nor even sensible.
Central banksters are giving ol' John Law a run for the money. With any luck
they should be able to produce an epic calamity, since their bubble blowing
is global rather than confined to one country."
It's inevitable and will make John Law look like a rank amateur when this
thing comes apart.
Personally, I'm looking forward to what happened next: the Regent
toured France with a detachment Dragoons collecting gold from hoarders at
bayonete point!
Yay! This article and its comments exemplifies why I spend far longer on NC
than on any other site on the Web. Not only had it never before occured to me
that The Wizard of Oz was an allegory of anything – tho' it's obvious even to
the dim-witted like me once pointed out – it helped me understand the concepts
and relationships that underlie 'money'. In short, how a pound note can be, as
it says, "worth one pound".
The author's critique of modern central banking seems dead on, the fallacy of pushing on a string
etc, but he seems to think their response was a mistake because what we really lack is fiscal
stimulus. Pardon me if I am confused but didn't the government just engage in the biggest fiscal
stimulus in the history of the world as evidenced by its massive deficit spending to the tune of ten
trillion dollars. Was that not a fiscal stimulus? What is the author's point? That we need even more
of this! If Mr. Ferguson would clarify that would be great.
I happen to think everything they have done is mistake and that what we need is a debt jubilee
which is what William White, one of the world's foremost monetary theorists and former chief
economist of the BIS also thinks.
No, the bailouts were not fiscal spending. They were done mainly by
special facilities and those loans were paid back. QE is also not fiscal
spending.
The US engaged in only about $800 billion of fiscal spending. China did
the most, IIRC about $2 trillion.
William White was very good in the runup to the crisis in identifying the
housing bubbles but is really clueless about the debt of fiat currency
issuers v. that of non-fiat issuers, like US states and countries in the
Eurozone.
There is a slight upside to the frightful monetary policy we have been
obliged to pursue – by creating military mayhem all over the world we have
attracted savings to the US economy for fear it might be lost any where else.
Even UK has proved unsafe and western media is making the EU look dodgy too.
So regardless of the reality of a dormant national economy the money keeps
coming in.
Don't forget the tax havens either – they invest in New York.
But look at the poem that's repeated in there. It's fairly clear that
Frank Baum had opinions on currency. Now that particular poem is a peon to
Mckinley and "honest money". Which would make one think that Baum was a hard
money advocate, as McKinley and "honest money" was the counter William
Jennings Bryan (WJB) arguing against the "cross of gold". But WJB's campaign
for silver had the same failings as gold, they were both banker's money.
Perhaps Baum saw the disadvantages either way.
In any case, Bill Still provides what I think is the better currency
allegory from Frank Baum's story, in that it's an advocation against both
silver (the silver shoes) and gold (the yellow brick road) and was for
"paper money" issued by the Fed Gov (the emerald city). See
https://www.youtube.com/watch?v=Sboh-_w43W8
. Now this is purely Bill's
interpretation, just like the refutation you're linking to was admitted to
be an interpretation too. I happen to think Bill's allegory works better and
there's strong reason to think that this is where Baum's head was at (given
he was opinionated on currency and an advocate of the farmer's
vulnerabilities to issues related to currencies).
Littlefield himself wrote to The New York Times letters to the editor
section spelling out that his theory had no basis in fact, but that his
original point was "not to label Baum, or to lessen any of his magic, but
rather, as a history teacher at Mount Vernon High School, to invest
turn-of-the-century America with the imagery and wonder I have always found
in his stories."
Biographers report that Baum had been a political activist in the
1890s with a special interest in the money question of gold and silver,
and the illustrator Denslow was a full-time editorial cartoonist for a
major daily newspaper. For the 1901 Broadway production Baum inserted
explicit references to prominent political characters such as President
Theodore Roosevelt .
Littlefield's knowledge of the 1890s was thin, and he made numerous
errors, but since his article was published, scholars in history,[7]
political science[1] and economics[11] have asserted that the images and
characters used by Baum closely resemble political images that were well
known in the 1890s. Quentin Taylor, for example, claimed that many of the
events and characters of the book resemble the actual political
personalities, events and ideas of the 1890s.[10] Dorothy-naïve, young
and simple-represents the American people. She is Everyman, led astray
and seeking the way back home.[10] Moreover, following the road of gold
leads eventually only to the Emerald City, which may symbolize the
fraudulent world of greenback paper money that only pretends to have
value.[10] It is ruled by a scheming politician (the Wizard) who uses
publicity devices and tricks to fool the people (and even the Good
Witches) into believing he is benevolent, wise, and powerful when really
he is a selfish, evil humbug. He sends Dorothy into severe danger hoping
she will rid him of his enemy the Wicked Witch of the West. He is
powerless and, as he admits to Dorothy, "I'm a very bad Wizard."[12]
Historian Quentin Taylor sees additional metaphors, including:
The Scarecrow as a representation of American farmers and their
troubles in the late 19th century
The Tin Man representing the industrial workers, especially those of
American steel industries
The Cowardly Lion as a metaphor for William Jennings Bryan
In it, there is some discussion of who Frank Baum really was. And other
stuff, like how Yip's song, "Brother Can You Spare a Dime," was regarded:
"Roosevelt and the Democratic Party really wanted to tone it down and keep
it off the radio,"
And why the songs stop in the film:
"on their way to the wicked witch, when all the songs stopped, because they
wouldn't let them do anymore. OK? You'll notice then the chase begins, you
see, in the movie.
AMY GOODMAN:
Why wouldn't they let them do anymore?
ERNIE HARBURG:
Because they didn't understand what he was doing, and they wanted a chase
in there."
"... "And even though neoliberals and international banks would have you believe otherwise, a fall in these money movements is entirely a good thing. As Ken Rogoff and Carmen Reinhart found in their study of 800 years of financial crises, high levels of international capital flows are correlated with more frequent and severe financial crises. Similarly, a 2010 Bank of International Settlements study by Claudio Borio and Petit Disyatat ascertained that cross border capital flows were over 60 times trade flows, meaning they had almost nothing to do with them. " ..."
"... I think it is apparent that the entire edifice of finance has been jiggered to benefit, Davos man and NO ONE ELSE. ..."
"... hy shouldn't Davos man want it to continue – the aftermath was set right for the 0.1% remarkably fast in the aftermath of the Great Recession – by HUGE infusions of government money, guarantees, credit, forbearance, etcetera – which for some reason can NEVER be made available to the 90% ..."
"... This is probably the most salient reason Hillary lost, but it can never, ever be proffered as a reason for it would reveal that ALL our problems are due to the rich . ..."
"... I've often wondered how "The Multiplier Effect" of money, [not] circulating and recirculating in our local economies, at the consumer level, is affected by money sent out of the country by "immigrants"? ..."
"... Is this such a small amount as not to be considered part of "cross border capital flows"? How does it affect local economies that are more important to us than what happens on Wall Street? ..."
m'kay so kind of like robbing peter (emerging markets with growth potential) to pay paul (goldman
et.al.) until peter goes broke (asset bubble collapse) so paul can't be paid until he "natural"
growth potential of emerging markets recovers (peters growth potential recovers from the asset
bubble/debt overhang with best performance to those with more flexible currency) so that paying
paul (new grifts, oops financial innovations) can be foisted on them again leading to, in hindsight
only of course, and notably after paul has been paid, another collapse? rinse and repeat .is there
any sense to this postulation?
Why do you use the term 'capital' when referring to credit/lending that is not related to economically
real outputs. The rest of the article tells this story but the lead groups it all as 'capital'
flows.
This is an editorial suggestion really one that does not conflate or mislead when treating
credit creation used for financial asset trading as if it were the same general thing as FDI,
that is, direct investment.
We have seen the financial system react to the crisis by recognizing their own unhinged behavior,
and doing much less of it for good reasons. They know their credit creating behavior was nit coverting
Savings into Investment, they know it was not 'capital' – so editors, let us help our writers
to bring more clarity.
I agree. We need a separate word for 'financial capital'. I am thinking 'ante' or 'stake' or
some similar word from the world of gambling and confidence tricks.
"And even though neoliberals and international banks would have you believe otherwise, a fall
in these money movements is entirely a good thing. As Ken Rogoff and Carmen Reinhart found in
their study of 800 years of financial crises, high levels of international capital flows are correlated
with more frequent and severe financial crises. Similarly, a 2010 Bank of International Settlements
study by Claudio Borio and Petit Disyatat ascertained that cross border capital flows were over
60 times trade flows, meaning they had almost nothing to do with them. "
This is probably something that not one in 10,000 people understand (I don't really either) –
but I think it is apparent that the entire edifice of finance has been jiggered to benefit, Davos
man and NO ONE ELSE. And why shouldn't Davos man want it to continue – the aftermath was set right
for the 0.1% remarkably fast in the aftermath of the Great Recession – by HUGE infusions of government
money, guarantees, credit, forbearance, etcetera – which for some reason can NEVER be made available
to the 90%
This is probably the most salient reason Hillary lost, but it can never, ever be proffered
as a reason for it would reveal that ALL our problems are due to the rich .
I've often wondered how "The Multiplier Effect" of money, [not] circulating and recirculating
in our local economies, at the consumer level, is affected by money sent out of the country by
"immigrants"?
Is this such a small amount as not to be considered part of "cross border capital flows"?
How does it affect local economies that are more important to us than what happens on Wall Street?
Years of low interest rates and quantitative easing have not restored
growth to developed countries, and many observers lately have been calling on central banks to
inject stimulus into economies directly. But do the rewards of "helicopter money" outweigh the
risks?
ZURICH – The world has been on pins and needles since Donald Trump's upset victory over
Hillary Clinton in the United States' presidential election last week. No one – including,
perhaps, the president-elect himself – quite knows what shape the next US administration will
take, or what its policy priorities will be.
Compounding this uncertainty is the fact that, around the world, geopolitical tensions are
rising, with developed economies continuing to experience tepid growth, even after years of
record-low interest rates. For Trump to stimulate enough activity in the US economy to satisfy
his zealous base, he will have to find the right balance between fiscal measures and
monetary-policy tools.
Whether Trump continues the post-1945 US tradition of international leadership, or instead
chooses an "America first" approach, he will not be alone in his quest for growth: Japan and
eurozone countries are also struggling to bring about sustainable recoveries and meet central
banks' inflation targets. Project Syndicate commentators have been at the forefront of the
ongoing debate about what policymakers can do to achieve these goals. In particular, while Trump
and policymakers elsewhere are embracing fiscal activism, how far they are willing or able to go
remains uncertain, raising the question of what more central banks could do to stimulate demand
and boost growth.
Spinning in Circles
The recent shift toward fiscal expansion reflects widespread agreement that policymakers are
running out of stimulus options. Central banks can no longer rely on "forward guidance," such as
half-promises that interest rates will remain low indefinitely. And quantitative easing (QE) is
quickly losing its potency, perhaps because it is inherently more effective as a crisis-response
mechanism than as a long-term fix.
"... ""This analysis raises a host of questions: If the unsecured credit lines that make the payments system function smoothly are liquidity, then are these credit lines also money? Should they be money? If these credit lines that are so important to the operation of the payments system are not money, then what is the point of defining money at all? I am still puzzling over these questions so I only ask them and don't pretend to answer them here."" ..."
"... Sissoko acknowledges the role that sovereign governments play in establishing money systems but I think gives too much credit :) to private bank credit creation. ..."
"... If money grew on trees it would be worth very little (Wray 2004) ..."
"... Money is the result of the struggle between debtors' demand for money and creditors' belief that the state can service its debt, which in turn depends on tax revenues. And it is the need to work for a taxable income that gives it value. (Ingham) ..."
"... Taxes don't finance spending but are necessary for money to have state backed value. They are also an important way for the state to transfer resources whether for bank bailouts, wars, social security, health care or whatever the state deems important. ..."
Carolyn Sissoko has an interesting new paper out,
Financial Stability
, in which she takes on the nature of money problem.
I think her concluding paragraph is interesting
""This analysis raises a host of questions: If the unsecured credit lines that make the payments
system function smoothly are liquidity, then are these credit lines also money? Should they be money?
If these credit lines that are so important to the operation of the payments system are not money, then
what is the point of defining money at all? I am still puzzling over these questions so I only ask them
and don't pretend to answer them here.""
As a derivatives expert she takes on the interesting question of how these complex sources of credit
function, they provide credit but are they really money.
I think Ingham makes a great point relevant to this, "all money is credit but not all credit is money"
Sissoko acknowledges the role that sovereign governments play in establishing money systems but I
think gives too much credit :) to private bank credit creation.
If money grew on trees it would be worth very little (Wray 2004)
Money is the result of the struggle between debtors' demand for money and creditors' belief that
the state can service its debt, which in turn depends on tax revenues. And it is the need to work for
a taxable income that gives it value. (Ingham)
Taxes don't finance spending but are necessary for money to have state backed value. They are also
an important way for the state to transfer resources whether for bank bailouts, wars, social security,
health care or whatever the state deems important.
If money grew on trees it would be worth very little (Wray 2004)
That would depend on the rate of growth and, assuming every citizen had an equal number and quality
of such trees, be an ethical means to create fiat apart from normal deficit spending for the general
welfare.
Of course there are no such trees but equal fiat distributions to all adult citizens could have
the same effect.
You know that money that your bank lent you to
buy your new house? Well, I want to let you in on a little
secret: That wasn't the bank's money they lent you. And it
wasn't some billionaire's money either. It was some of your
own money, along with a little bit of mine and Tom's and
Susie's and everybody else in this country. Can you imagine
that?
It's a fact. It's why Henry Ford supposedly said that "if
people understood our banking and monetary system, I believe
there would be a revolution before tomorrow morning".(1)
When the bank lent you that money it took your promise to
pay them back (a promissory note and title to the house as
collateral) and in exchange it punched some numbers into a
computer, creating your deposit account and thereby creating
the money it lent to you.(2)
But how can that be, you say. How can the bank just invent
money like that? Well they do "just invent money" and they
can do it because our government agrees with them that they
can do it.
But don't they have to pay for that money, you say. No,
they don't. But they do have to be a depository institution (
a place you can keep your money on deposit) and there is some
expense for them to that.
But they are charging me interest on that money, you say.
Yes indeed, they are charging you interest on your own money,
and mine, and Tom's, and Susie's, etc.
But that bank is a private business, and banks make a lot
of profit, why should we pay them to loan us our own money,
you say. Good question.
"But don't they have to pay for that money, you say. No, they
don't. But they do have to be a depository institution ( a
place you can keep your money on deposit) and there is some
expense for them to that."
Again? Take a look at the income
statement of any bank. There is interest expense for them on
those deposits. OK, it is low but then there are those
subsidized services which is why noninterest expenses exceed
noninterest income. Again - no exactly a total expense of 5%
but mortgage rates today are not exactly 6% either.
We all do. But I see you waste no time doing actual financial
economics. If you did, you might realize how to capture
monopoly profits. Look at the average return to equity
compared to what you'd predict from a CAPM model. When I do
this for health insurance companies, their average return is
3 times what they would be from a competitive market. When I
do this for major banks, the average return to equity = the
CAPM prediction. Estimated monopoly profits = 0.
Of course
you have no idea what any of this means as all you know is
word salad.
Banks sell public
money as their product and they extract interest for doing
so. They thus act as a transfer agent of wealth from the real
economy to rentiers.
The return to equity for
banks is about what one would expect from a risk-adjusted
return perspective. Oh yes - the Capital Asset Pricing Model
properly applied would show what utter nonsense this is.
Banks will always exist. Of course proper regulation of
financial institutions can address this problem. But your
word salad has nothing to do with the real issues.
He does but what is the percentage of JPM's total assets? Do
you even know? You might need a microscope to see it. And no
- I am not defending banks. But your word salad is not
getting at the real issues. And yet you persist.
In finance, the capital asset pricing model (CAPM) is a model
used to determine a theoretically appropriate required rate
of return of an asset, to make decisions about adding assets
to a well-diversified portfolio.
Let's do this for a bank. Expected return to assets =
risk-free rate (1%) plus a 1% premium for bearing operational
risk. But then the equity to asset ratio for banks is only
10% so the expected return to equity includes a 10% premium
for bearing both operational risk and leverage risk. As such,
the expected return to equity = 11% for these highly levered
firms. And on average that is their actual return to equity.
For a great application of these thoughts - see that paper by
Sarin and Summers. You may not remember when I put it up
weeks ago but my internet stalker put up a link to it just
yesterday. Of course this was PeterK's childish way of
attacking someone who actually contributes to this blog. I
said he should read it. So should RGC. They might learn
something.
LOL! pgl assumes that banks' investors have a god-given right
to a risk premium of 10%.
Of course, risk premiums are more
in the range 4-5%, far below pgl's banker-coddling
assumption.
"Some economists argue that, although certain markets in
certain time periods may display a considerable equity risk
premium, it is not in fact a generalizable concept. They
argue that too much focus on specific cases – e.g. the U.S.
stock market in the last century – has made a statistical
peculiarity seem like an economic law."
http://www.investopedia.com/terms/e/equityriskpremium.asp#ixzz4OOLOzdqg
As for the economic concept of the time value of money,
whereby savers get rewarded for setting money aside...the
longer the time, the greater the reward, well, central banks
have pretty well destroyed that with negative interest rates.
Time value of money: RIP. Nonetheless investors are still
supposed to reap their extravagant risk premiums!!!
He can't figure out this aggregator thing. He cannot figure
out the investor thing. He certainly has no knowledge of the
secondary market.
He takes tiny little pieces of things,
ignores the rest and then comes to a conclusion. Of course
the conclusion is that MMT makes sense. Everyone knows it
doesn't make sense and cannot work world.
He ignores basic finance. But then so does PeterK as actual
thinking just gets him all angry. Which means you and I are
tagged "liar". This is the intellectual garbage that is
ruining this place.
RGC -> EMichael...
, -1
"Money creation in practice differs from some popular
misconceptions - banks do not act simply as intermediaries,
lending out deposits that savers place with them, and nor do
they 'multiply up' central bank money to create new loans and
deposits."
"... I'm increasingly interested in the metaphors around banking, which seem to still come out of early 19th c invention of engines, all of which used ' fuel ' as a central tenet: 'the money supply fuels the economy'. Economics seems drenched in outdated, antiquated metaphors where ' fuel ' is always and everywhere a good thing, with no polluting externalities, and no downside costs. ..."
"... Fuels don't lie, cheat, or steal - continuing to use fuel as a central metaphor enables banks, economists, and central bankers to put their fingers in their ears and howl "La! La! La! Using metaphors shaped by sail-powered whaling ships hunting for blubber is working just great for us!!" After all, calculus had been invented by the 1820s - so math + moneyAsEngineSpeak = economics. ..."
"... If money were more widely regarded as a social tool: recognized as a tool that requires communication, social networks, and flourishes within civil society, then Haldane's observations would be met with "Doh, you betcha!" ..."
"... Then, also, Bill Black's observations that crime actually does exist, and often looks exceptionally respectable, would be impossible to ignore. ..."
"... I interpreted Brexit as a 'tea leaf' that the banks could no longer be made fine-proof without triggering social unrest. ..."
"... The way that I read this, contemporary economics and finance leads to utter, unmanageable disaster from which there is absolutely no way out. The engine 'melts down', so to speak. I feel as if I have spent the past 8 years watching systems nearly implode, be saved by extraordinary (lunatic) measures, and in the end the systems of thinking that created these problems are precisely the mental pathways that keep people stuck in a labyrinth of dysfunction. ..."
"... It's hard to work out how "1. Implode, not too violently" could give rise to anything other than lethal shortages, especially in urban environments, and how this could lead to anything but "2. blow up, social unrest" anyway. ..."
"... Money is social relations, power relations, if Gold is law then the powerful will grab the gold. If not, they'll grab the money creating buttons in various spreadsheets, unless opposed by all. ..."
"... Maybe there is a way to make the vulnerability that the central banks and banksters and CorpoStates like GE and Cigna and Goldman Sux nd the rest impose on the vast rest of us into a mutual exposure? ..."
"... There is nothing wrong with interest, as long as the rate is reasonable. It is a service charge for someone handing you money now to buy what you want now instead of waiting to save up the money. Interest does not make an economic system unstable. It's the same as a massage or other service you buy. You just need enough income to cover it, and the principal payment of course. ..."
"... "As noted in the article [money is] a concept created by human beings and should be considered a very malleable tool that we can use to do pretty much whatever we as a society decide we want to with it. If we truly wanted to create a more equitable society there is nothing stopping us from doing so except the greed of the few." ..."
"... The Big Lie that the federal government needs tax revenue in order to operate, so we "can't afford" the social benefits that help the non-rich, must be constantly debunked and rejected. ..."
"... The terminology of finance is designed to hide predatory and extractive activities behind a curtain of beneficial-sounding words. These terms are deeply embedded, and serve both to put some friendly makeup on the business, and allow the "consumers" to feel better about their capitulation. The process is akin to the way politicians wrap themselves in the flag while they sell out the citizenry. We know deep down that they are lying, but we prefer the false patriotism because it serves the lies we prefer to tell ourselves. We bitch and moan, but we play our part, because not doing so leads to trouble. It is the way most of us live our lives. ..."
"... Most people go along the big lie because of hope. ..."
"... Money is nutrition, not a snack. It's food and fertilizer. It makes things grow. You have to share it with other life like bacteria and worms: without these organisms in your gut ecology, you get sick (autism, diabetes, obesity, M.S.). Idiots try to convince us these organisms are parasites instead of symbionts just like Monsanto thinks bees are disposable or Donald Trump likes to think of pregnant women as drags on business profits. ..."
"... If you think altruism is for suckers, your Ayn Rand economy collapses because you confuse parasites with symbionts and symbionts with parasites. You can't distinguish between compensation for earned and unearned income. What's a tax and what's theft? Try living without bacteria making butyrate in your gut. Wells Fargo can no more survive without little people like airport janitors to scrub out the TB and Ebola stains than our cells can breathe without mitochondria. Yet who gets their pay driven down in corporate America? ..."
Clive, FWIW, I'm increasingly interested in the metaphors around banking, which seem to still
come out of early 19th c invention of engines, all of which used ' fuel ' as a central tenet:
'the money supply fuels the economy'. Economics seems drenched in outdated, antiquated metaphors
where ' fuel ' is always and everywhere a good thing, with no polluting externalities, and
no downside costs.
Hence, what matters is 'efficiency': it's moneyAsEngineSpeak, so to speak.
Lordy, it's all petrochemical: from a time when chemical and mechanical engineering (and physics)
were in their relative infancies and whaling schooners were sailing out of Nantucket.
Fuels don't lie, cheat, or steal - continuing to use fuel as a central metaphor
enables banks, economists, and central bankers to put their fingers in their ears and howl "La! La!
La! Using metaphors shaped by sail-powered whaling ships hunting for blubber is working just great
for us!!" After all, calculus had been invented by the 1820s - so math + moneyAsEngineSpeak
= economics.
Egads.
In that paradigm, Bill Black is a mere scold, an oddball, a scruffy prophet in the wastelands,
so to speak.
If money were more widely regarded as a social tool: recognized as a tool that requires communication,
social networks, and flourishes within civil society, then Haldane's observations would be met with
"Doh, you betcha!"
Then, also, Bill Black's observations that crime actually does exist, and often looks exceptionally
respectable, would be impossible to ignore.
Timmy Geithner is probably not a fan of: (a) Bill Black or (b) the idea of money as inherently
social. Fuel is an emotionally sterile construct to work within; it enables one to avoid moral
qualms, or any sense of personal responsibility when ' engines blow up', or when they 'run
out of fuel '.
The fact that Haldane's observations and analysis are not more widely embraced suggests that somehow
the business schools, economics departments, and bankers all still use thought processes shaped in
the era of whalers seeking blubber for lanterns and lamps. Also, they probably still receive endowments
from the Kochs, Exxon, and other fuel obsessed interests.
Egads.
Until the metaphors move to biology, with a concomitant recognition that some kinds of ' fuel
' (aka Coke, Fritos, Doritos, donuts) work for short-term energy bursts, but carry extremely
negative longer term costs, I doubt that even the best attempts to muddle through will get us out
of this mess. Without amendment, this system is going to do one of two things: (1) implode (not too
violently) or else (2) blow up (social unrest).
I have no idea what the banker equivalent of 'chard, lettuce, and celery' would be, but some bright
mind ought to be thinking about it. (You distinguish yourself as such a mind; I hope that my metaphor
is not too offensive…)
I interpreted Brexit as a 'tea leaf' that the banks could no longer be made fine-proof without
triggering social unrest. Then I read your comment, esp:
the U.K. government is stuck with its vast holding in RBS. The only way it could ever be rid
of the RBS albatross is for RBS to have some vague hope of (eventually) earning its way back to
being something other than a complete basket case.
Apart from, ironically, the central banks' own ZIRP policy, the biggest threat to this is endless
redress for wrongdoing.
The way that I read this, contemporary economics and finance leads to utter, unmanageable
disaster from which there is absolutely no way out. The engine 'melts down', so to speak. I feel
as if I have spent the past 8 years watching systems nearly implode, be saved by extraordinary (lunatic)
measures, and in the end the systems of thinking that created these problems are precisely the mental
pathways that keep people stuck in a labyrinth of dysfunction.
Banking needs to be completely rethought, using the social sciences, which include the realities
of criminal conduct corroding the system to such a degree that it is threatening to implode. I'm
moving toward being agnostic as to whether this is a good thing, or not. Either way, the present
systems as I've read you describe them do not seem even remotely sustainable.
The metaphor I think applies is that we use money as both medium of exchange and store of value.
While the first is inherently dynamic, the second is static, so a good analogy is that in the
body, the medium is blood, while the store is fat. The trick has been how to store extreme amounts
of notional wealth and that is largely by having the government borrow it back out and spend in
ways which support the private sector, but don't compete with it in the hunt for profits. So are
all those pallets of money going to fund our wars really about war, or is it about keeping that
money flowing in one end and out the other? Consider all those super secure US savings bonds are
mostly just being poured down various rat holes, rather then building a sustainable society.
This probably goes back to Roosevelt, who borrowed a lot of unemployed capital to put a lot
of unemployed workers back to work.
Money is not a commodity to be mined or manufactured, whether gold or bitcoin, but a contract.
Every asset is the other side of an obligation. It allows a large economy to function, but it
also reduces community reciprocity, creating atomized societies.
Like blood, the economy needs very regulated amounts of money, as it functions as a voucher
system and storing lots of excess vouchers eventually causes the system to collapse, when everyone
tries to dump them at once. If government threatened to tax excess out, people would have to find
other ways to store value, like in stronger communities and healthier environments, aka the commons.
Most people save for the same general reasons, housing, healthcare, retirement, etc, which are
ultimately community functions anyway.
Finance as a public utility doesn't have to be subservient to government. Much as government
is analogous to the central nervous system, finance is to the circulatory system and the head
and heart are separate organs.
Government started out as a private business, institutionalized as monarchy, before becoming
a public utility. Now is the time to do the same with finance.
I'm leaning strongly to the idea that money is information . More specifically, it's
information about general claims on national commerce. That gold coin in your hand is a bidding
right . The obligation isn't to any one person, but your possession of it means that there's
one less gold coin's bidding power throughout the rest of the economy.
I'm still sorting out my thoughts on this, but Frederick Soddy, the Technocrats (a short-lived
1920s – 1930s US movement), and the ecological economists (Georgescu-Roegen, Daly, Boulding, etc.)
seem to make more sense to me.
The more I read of traditional / classical / neoclassical / post-Keynesian monetary theory
the more I suspect nobody has much of a clue.
Excellent and original points that make a tremendous amount of sense. Thank you.
One tiny quibble. It's hard to work out how "1. Implode, not too violently" could give
rise to anything other than lethal shortages, especially in urban environments, and how this could
lead to anything but "2. blow up, social unrest" anyway.
US Grant rode in a horse-drawn carriage from his inauguration to a White House lit with coal-gas,
while oil or candles. Medicine, sanitation, and agriculture was hardly different than it was in
Roman times. The railroad and the telegraph represented technological progress.
A little more than 30 years later McKinley rode in an automobile to a White House lit with
electric lamps, that had running water and sewage. Steel framed buildings could rise more the
3-4 stories off the ground. The causes of many diseases were known and somewhat preventable. The
first radio transmission was months away, and the first powered flight was 3 years away. The standard
of living of an average American doubled during that period. And it was all done under the gold
standard.
DGP per capita of the US peaked in 1973, the same time Bretton Woods formally ended. A dollar
today buys what 3 cents could buy when the Fed was formed. Do these FACTS escape the Krugmans
of the world or are they merely inconvenient and in conflict with what seems to be the true nature
of academic economics, to provide pseudo-science cover to political policy?
By all means let's go back to worshipping a dumb, shiny metal rather than, for instance, removing
all priviledges for the banks. And let's replace theft by inflation and deflation with theft by
deflation alone.
And let's confuse correlation with cause since the massive gold and silver strikes during that
period greatly increased the money supply and indeed, in some places, caused huge price inflation.
And let's forget that it is the government's authority to tax that gives value to fiat and give
gold owners a huge bonanza by making fiat needlessly expensive.
Setting aside your implied straw man, that it's a binary choice between unconstrained credit
creation, and "worshipping" gold, would you argue that today's society is better or worse than
that of 1970, just before the final (golden) constraint was broken?
Does the answer to this question answer the question? Money is social relations, power
relations, if Gold is law then the powerful will grab the gold. If not, they'll grab the money
creating buttons in various spreadsheets, unless opposed by all.
Or both. Hitler thought Chartalism (grandfather to MMT) was a great idea, then invaded France
and stole France's sizeable gold horde too! These greedy people want it all!
just before the final (golden) constraint was broken? Tinky
The central bank should not be allowed to create fiat for the private sector (e.g. Open Market
Purchases) AT ALL so no constraint is needed there other than absolute prohibition.
As for the monetary sovereign, price inflation is a restraint wrt fiat creation since the voters
hate it.
Also, please note that the demand for fiat is greatly reduced via other privileges for the
banks. Eliminate those and the demand for fiat shall greatly increase – greatly increasing the
amount of new fiat that can created without significant price inflation. This will be especially
the case when government provided deposit insurance is properly abolished since a huge amount
of new fiat should be required*.
*For the xfer of at least some currently insured deposits to inherently risk-free accounts
at a Postal Checking Service or equivalent.
Sounds good in theory, but how do you imagine that we might get to the point at which central
banks are prohibited from creating credit for the private sector?
How much of that fiat creation gets done via electronic means? Maybe there is a way to
make the vulnerability that the central banks and banksters and CorpoStates like GE and Cigna
and Goldman Sux nd the rest impose on the vast rest of us into a mutual exposure?
I mean, "they" can leverage and disappear and derivatize "capital" and ZIRP and NIRP with impunity,
and steal people's homes and garnish and change contract terms on personal accounts unilaterally.
Is there a turnabout, or are "we" so terrified of "instability" (where no "stability" really
exists, "disruption " and all that, not to act? As well demonstrated in many posts in this very
blog, it's not like the Fortress of FIRE's walls are any stronger than the foundations it is "coded"
on…
@scott 2 – "A dollar today buys what 3 cents could buy when the Fed was formed."
That something is true does not make it relevant; it can also be misleading. The real (domestic)
purchasing power of a dollar is determined by the amount of labor it takes to earn that dollar.
With the gains in labor productivity since 1913, it takes much less labor to earn today's dollar
than it took to earn that 3 cents 103 years ago. Comparing the nominal cost of a loaf of bread
in 1913 with its nominal cost today tells us nothing useful.
Yes isn't it awful when the prices of goods and services go down, I hate it when I have to
spend less money to eat and obtain shelter and all of the other necessaries of life.
Agricultural productivity rises so food costs less; industrial productivity rises so goods
cost less; and these are what is known as "progress". Increasing productivity is what raises our
standard of living.
But ah, there's a fly in the ointment, we have a debt-based money creation system. Problem
1.): Banks can print the principal but they can't print the interest. This leads to
Problem
2.): people borrow either because they think they can grow money faster than the debt service,
or because they are desperate and have no other choice.
Problem 2 (a) is that debt pulls demand from the future to the present, and when enough demand
is pulled forward people will no longer feel they should borrow for future growth because there
is none in sight. This leaves only desperate people borrowing to service existing outstanding
debt and that prophecy fulfills itself.
We are told this is somehow a "steady state" system but that is mathematically and obviously
incorrect. Even with unnatural acts like interest rates below zero (how can time preference be
below zero, and what does that say for the prospects for growth?) the system winds down and needs
to be completely reset.
The percentage of times that debt-based currency systems have failed in the past and gone to
zero = 100…leave it to alchemists economists to insist they can pull it off though.
Like the Soviet Union we now live in an era of centrally-planned price fixing for the most
important price of all in the economy: the price of money.
It's true that in eras where the price of money fluctuated wildly there were also wild fluctutaions
in the economy, booms and busts.
But someone made the statement: "The Fed makes the economy more stable. But I do not think
that word means what you think it does".
So no more busts…and no more booms, either. So put the periods of fastest economic growth and
fastest rises in the standard of living out of your mind, those are history. And given the mathematics
of "unlimited" debt creation, we'll get the bust anyway.
There is nothing wrong with interest, as long as the rate is reasonable. It is a service
charge for someone handing you money now to buy what you want now instead of waiting to save up
the money. Interest does not make an economic system unstable. It's the same as a massage or other
service you buy. You just need enough income to cover it, and the principal payment of course.
Some people seem to have this idea that x amount of money was created to buy a car, but none
was made to pay the interest. This causes the world to end. Not so. Money circulates and we know
that around a trillion or so in circulation seems to be enough to support our $18 T in annual
GDP. What is does mean is to pay off the 5 year car loan, you spent 4 years paying off the car
and another year paying the interest.
A benefit of interest is it may allow people to live past retirement age – but there there
is little economic focus on this phenomena.
There is nothing wrong with interest, as long as the rate is reasonable.
In principle this is true, but it leads to a paradox in an economy in which money is based
on debt. You start your second paragraph with an acknowledgement of this, but then you back down.
In such an economy, money is created when it is loaned - this money is the principal of the loan.
When the money is paid back, the money disappears.
But wait - the debtor must also pay back more than the principal of the loan; he or she must
also pay back the interest. How is the interest created? The same way as the principal, but it
is created by someone else's loan. So in a debt based economy, the amount of money in existence
is less than the total amount of people's debts.
If everyone is thrifty, and pays back their loans promptly, some people will never be able
to get the money to pay their interest. It's a game of musical chairs.
Pretty close, but consider this. The loan got paid back, the "money" disappeared, but the bank
gained it as new loan capacity. The bank makes a new loan. So far I think I'm repeating what you
stated. One minor problem is you say money is less than debt – it will be – debt is the contract
for the entire amount. But not everyone pays it all off at once – we just need the liquidity to
be there so the payor's personal bank account, or the one of their employer, doesn't run dry.
So at this point it's a matter of the banking system and the Fed managing liquidity. But the
size of the Fed balance sheet and reserves steadily increases over the years to account for growth
and any other liquidity needs the banks may have. It's either done directly with banks – buying
treasury bond assets or loans to banks, or they buy Treasuries in the market, the money goes somewhere,
then there is interbank lending to make it go where it's needed. (all in theory, of course. But
the theory seems sound, when uncorrupted.)
You make it sound like a steady state system, but it's not, debt is *always* issued in excess
of people's capacity to pay whether for political, psychological, or other reasons. The Fed knows
this. So they desperately want to reduce the total indebtedness by inflating it away, and this
puts everyone on a giant rat race treadmill, working two jobs trying to outrun the rise in prices.
Given the rise in productivity we're all supposed to be living like the Jetsons by now but Oh
No gatta keep running to stay in one place.
The Fed has forgotten that there is another way to reduce serial overindebtedness and that is
B-A-N-K-R-U-P-T-C-Y. It has the added advantage of being an actual capitalistic endeavor, and
not the inverted hyper-socialism we have today.The Fed keeps putting out brush fires so the dead
wood keeps building up, eventually there is an unholy crowning conflagration that takes the whole
forest with it.
Firstly, I said there is nothing wrong with interest . If you want to shift to "could
something go wrong with principal_plus_interest in a fractional reserve central banking system",
then, why yes! Plenty!
No, the system is by no means steady state – the economy has ups and downs and there are those
occasional "credit crunch" periods where banks get spooked over some such thing and stop lending
completely and then it seems like all the money disappeared. But that's why we have the Fed and
everyone furiously managing liquidity.
Since we're on a terminology thread (and my grandfather was a whaler), the whaling vessels
out of Nantucket tended to be square-rigged - barques, brigs, etc. Schooners were coastal vessels
used by fishermen more often than by whalers, who travelled long distances to launch their hunts.
Great post - I want to puke every time I hear Wall Street referred to as an "economic engine."
More like "social engineering" - of fraud schemes.
A couple of generations ago most people lived on farms. Many would trade grain to pay the miller.
In essence, hard cash was needed for goods at the general store.
Debt was used to finance big projects that were based on hard assets, land, commodities.
Fast forward to today…. banks still favour collateral based on hard assets yet services are
a much bigger part of our economy. I would venture to say that banks lend on soft collateral when
it is fed by sectors that have hard asset collateral or with a government guarantee.
IMO, get government out of everything and watch the economy drop to an economy of sustenance
based on hard asset collateral which will get increasingly constrained with world population going
from 7 to 9B. Exactly what rentiers LOVE!
Debt was used to finance increases in productivity. Unless you have a sweat shop in your basement,
a house is not a productive asset. It's a slowly appreciating consumer of capital, real and financial
(utilities, maintainance, and taxes). In distorted markets like California, it can make a lucky
few a lot of money while turning the area into a feudal system of land owners and serfs.
A side effect of financialization has been to turn the US economy into one that lives, temporarily,
on housing speculation. When people realize that spending $2 million on a bungalow that should
only cost $40K is the TRUE mis-allocation of capital, let's hope they don't realize that all at
once.
A couple generations ago land in many places was still relatively cheap. Asked my father once
how our family of dairy farmers managed to have as much land as we do and was told that my grandfather
often received land as payment. He'd give someone an animal or a side of beef and they'd give
him an acre they owned abutting his property that they weren't using for anything anyway. I've
seen some of the old ledgers found in his attic and as you noted, cash was not just in essence
but in fact used for goods at the general store. The barn itself was built with the help of the
community although I'm not sure how that was paid for but I'd wager that any financing was minimal.
The economy was a few steps above just sustenance but the population was a lot less and there
weren't nearly as many rich people from the city coming in looking for second (or 3rd or 4th)
homes in the country driving up the cost of real estate. Two generations later land is much more
dear to the point where our family likely wouldn't be able to afford to purchase property if they
needed extra acreage.
There are far too many economists who seem to think that money actually does grow on trees
in the sense that it's a naturally occurring resource that human beings can't control – it's all
determined by markets. In that sense I'd describe money not so much as a fuel but as a weapon.
I believe Jon Perkins had a similar description in his Confessions of an Economic Hitman. Weaponized
war is no longer the first option among advanced economies – first they'll try to bleed other
countries dry with economics. It's only when the victims won't cave that the bombs start dropping
now.
But money does not occur naturally and it should not be considered a fuel or a weapon. As noted
in the article it's a concept created by human beings and should be considered a very malleable
tool that we can use to do pretty much whatever we as a society decide we want to with it. If
we truly wanted to create a more equitable society there is nothing stopping us from doing so
except the greed of the few.
@lyman alpha bob – "As noted in the article [money is] a concept created by human beings
and should be considered a very malleable tool that we can use to do pretty much whatever we
as a society decide we want to with it. If we truly wanted to create a more equitable society
there is nothing stopping us from doing so except the greed of the few."
Adding: The Big Lie that the federal government needs tax revenue in order to operate,
so we "can't afford" the social benefits that help the non-rich, must be constantly debunked and
rejected.
Weaponizing money. That's a valuable concept. It reminds me of the end of David E. Martin's
(true-story-called-fiction-to-avoid-lawsuits) book "The Apostles of Power". And this was the reason
he wrote the book, actually–to fend off a major play to steal all the electronically-stored reserves
of the Fed into their own accounts, and destroy the evidence of their actions by triggering a
nuclear explosion of the precise nuclear power station that provided the power to the NYC/NJ computers
that stored the data. By telling enough about the plan in process (only the minor, human-created
fake "earthquake" at the Santa Ana reactor occurred, as the charges had been set before the book
was published; the book predicts the "earthquake"), a nuclear disaster and major financial theft
were averted.
Martin spoke about this, and the other real events described in the book, in a number of radio
interviews he gave in 2012, the year the book was published.
"Here's the [Machine] trick: Design the machine that will produce the result your analysis
indicates occurs routinely in the situation you have studied. Make sure you have included all
the parts – all the social gears, cranks, belts, buttons, and other widgets – and all the specifications
of materials and their qualities necessary to get the desired result."
Well, great! That part of the great discourse has been decoded and unpacked and all that, I
feel much better for the personal increase in awareness of how fokked things are.
Now, how are "we" going to get billions of other humans to the same state of awareness, to
stop talking about "fuel" when talking (using a gazillion other "terms of art" and memes and tropes
that are similarly opaque and whitewash and FUD-laden) about "the economy" and "economics" and
while generating ever more momentum for those same deadly (but profitable for the few) terms,
tropes, memes and shorthands? "Profitable" being one of them, "profit" being part of the disease
process, because after all, for the individual or the firm s/he belongs to, "profit" (ignoring
externalities, of course) is the summum bonum that lets you buy stuff and experiences galore?
Other Juggernaut words, just a very few: "bonus", "healthcare", "entitlement", "MArket", "free
trade," and a personal favorite, "donor" meaning very simply "BRIBER/corrupter" but hey, those
very few squillionaires who own everything including the "political process" are described millions
of times a DAY on the intertubes as "donors," "donors" to political candidates and PACs and "think
tanks" (??another fave). Giving a kidney to a person with terminal kidney failure, "donating"
one's corneas and body parts or those of deeply loved ones suddenly deceased, those are ""donations."
Not Koch or Adelman or Soros or Gates etc. billions to "Foundations" or operas or art museums.
"We," who are Aware, perceive some of this, often argue and debate and cavil over nitty bits
of those perceptions. That is so very effective, isn't it, the few hundreds or thousands of "us"
who participate in or observe the Flow in NCspace, in bringing about any kind of regression to
a mean that is hardly defined or maybe undefinable, a mean that might actually be "kind" and "decent"
and "fair" and "just" (whatever those terms are taken to mean)?
What is to be done about it? "We" ain't either powerful or certain enough to do something like
a "global search and replace" across the entire internet, with a burning of all the books and
papers, and a quarantine of all the GeithnerDimonGreenspanKrugmans and their myriad of citers
and followers and extenders, that carry the infection forward into the label minds of future "policy
makers" who like most humans who (I am assured by others) are wired to seek dominance and pleasure
and reproductive success? And who obviously are the dominant, successful vector and segment of
the "political economy?"
The plagues that Pandora was tricked into loosing on "humanity" have been out there probably
too long to be re-packaged. Nice effort for those who try, try and try again, but that effort
seems to me mostly pissing into the wind…
TINA. Sadly it's true, we appear somewhat stuck in this mode of what's working. I personally
appreciate the credit union / co-op model of accomplishing financial intermediation but that is
also a continuation of what we have.
Biggest problem in the US, no one competing with the FED.
"some of the recent coinages, like "sharing economy" are downright Orwellian". Yes, but that
phrase can be and is easily replaced in casual conversation with "the sharecropper economy".
(Be prepared to deliver a short explanation what a sharecropper is to the youg 'uns.)
Another valid word out of the past is "the man," as in the giver of overpriced credit to the
sharecropper who often ended up with zero profits and thus was kept in perpetual debt. Central
bankers?
Everybody talks about "thought leaders" but no one ever talks about "thought followers," much
less actually claims to be one. But without "thought followers" how can you have "thought leaders"?
I'm suspicious….
And anyway, wouldn't "thought leader" be applicable to anybody whose thinking ends up being
followed by others, for good or ill? Wouldn't Charles Manson be a "thought leader"? He certainly
was for the Manson Family….just a thought…
I always thought the exhortation to be thought leaders was a ruse for encouraging people to
speak up and try to act as thought leaders. That way those who worked us could identify the taller
daisies and thereby identify which flowers to top.
Seems like some combination of Frederick Soddy and Michael Hudson is called for here. Soddy
is apparently a tough slog even for otherwise intelligent people. So at the risk of over-simplification
here is my attempt to convey his ideas about money and wealth:
Money is not wealth. It is a claim on wealth, i.e. debt.
Wealth. Soddy provides both a practical and a more abstract definition of (the ingredients
of) wealth:
"But economics, in a national sense, is concerned with wealth as what is produced by human
beings to maintain their lives.
Discovery, Natural Energy and Diligence, the Three Ingredients of Wealth
For Discovery, think research and development (R&D) and of course education so R&D is even
possible. For Natural Energy, think, for most of the Industrial Revolution (IR), fossil fuels.
(Pretty obviously we need to do something different if we want to keep the machine the IR built
functioning, sustainably producing the wealth which sustains our civilization.)
One of my favorite passages from Soddy's "Wealth, Virtual Wealth and Debt" is:
"As Ruskin said, a logical definition of wealth is absolutely needed for the basis of economics
if it is to be a science."
But without a science-based definition of wealth, i.e. continuing to use profit and money as
a measure of 'productivity', just 'printing' more money (even Hudson's MMT) will solve nothing.
Put these observations together and you get an idea what should 'back' money – wealth not gold
or as Hudson puts it "Debts that can't be repaid (and) won't be."
Hudson's 'clean slate' provides the other part of the solution. As Hudson notes, the 'miracle
of compound interest' is not sustainable – particularly when the West's 'financial engineers'
are busy cranking out money (as debt) at rates well in excess of going interest rates. Just continuing
to use profit and money as a measure of 'productivity', 'printing' more money (even Hudson's MMT)
will solve nothing. Probably by the middle of the 20th century, the West had 'enough' wealth its
people could begin to find other purposes in life than creating ever more of it (to make ever
more money, i.e. acquire ever more debt to be paid by someone – the unborn?). Again from Soddy
/ Ruskin – real "Wealth rots." That's what's happening to the West's 'culture' as its ruling classes
mindlessly attempt to acquire ever more money.
It isn't just the 1% who are going to have to take their lumps, to stop playing games with
the world's future so they can, as candidate Trump put it, 'run up a bigger score' with money
for which they have no immediate need. It is those of us in the 99% who do not possess the skills
and aptitudes required for the genuine creation of wealth, wealth the world needs and can sustainably
afford. Those numbers are going to grow as the Industrial Revolution succeeds, with human labor
and rote intelligence replaced more and more by machines powered by "natural energy". But, even
if we can't find our niche, I take it as a given that we are all born with a right to life.
Wealth is hard to define because what we view as wealth might be a money pit that guarantees
our decline…
For example, instead of injecting money directly in the faculty of medicine, a university might
have decided to fund a football team to attract the capital and end up building a stadium… Instead
of just funding the faculty.
All these activities related to the sports team contribute to GDP. The bankers might have been
productive and efficient in raising capital, the coach might be productive and make a winning
team, the builders of the stadium might have been very productive building a fine structure but
all these activities sucked up resources and energy that could have been used by other sectors
to better serve the future of the country. Maybe these activities are totally unsustainable. They
might appear as wealth currently but will lead to poverty over time.
Since ou basic needs have been met, we have been investing in a forever greater number of non-essential
resource intensive activities which show how disconnected we have become from the earth supporting
us.
The terminology of finance is designed to hide predatory and extractive activities behind
a curtain of beneficial-sounding words. These terms are deeply embedded, and serve both to put
some friendly makeup on the business, and allow the "consumers" to feel better about their capitulation.
The process is akin to the way politicians wrap themselves in the flag while they sell out the
citizenry. We know deep down that they are lying, but we prefer the false patriotism because it
serves the lies we prefer to tell ourselves. We bitch and moan, but we play our part, because
not doing so leads to trouble. It is the way most of us live our lives.
One of the biggest problems people face in discussing matters financial, is that the very terminology
of the system undercuts the critiques. Just as criticizing the wars invokes in some the specter
of failing to support the troops and the specter of criticizing America, criticizing Wall Street's
predatory aspects invokes in many the specter of criticizing institutions we have been led to
believe represent the essence of American freedom. Doing so makes you at least a malcontent or
troublemaker, and maybe even some sort of subversive pinko. Either way, you're rocking a boat
many do not want rocked.
Using analogies and metaphors to discuss such matters can outflank the loaded-terminology question
to a significant degree. You can cut through a lot of the fog of jargon by describing the activities
in other terms. (E.g., Dave's "sharecropping" for "sharing economy.")
We are in an era in which the financial world is being downsized and consolidated, the giant
speculative bubble which dominated most of our lives is being deflated and wound down before our
eyes. There is still speculative activity, to be sure, but there is also a rise in the use of
rentier income. This downsizing process involves shifting losses wherever possible down the food
chain, including to institutions which previously were integral parts of the system. Insiders
are finding themselves outsiders, jettisoned by other insiders.
This reminds me of the situation of a pack of wolves, grown large in an era of plentiful food,
but now finding that food supply dwindling. The pack must shrink to survive, the excess members
culled in often brutal ways. The strongest eat the most, the rest are left with the scraps, or
nothing at all. The financial system is similar, a pack in which the herd is being culled. Individual
institutions, even important ones like Barings or Lehman, are ephemeral. They come and they go,
just like individual wolves in the pack. But the pack lives on, and so does the financial system.
To the wolves, the pecking order, who lives and who dies, is very important. But for the creatures
the pack eats, such concerns are irrelevant.
Either way, you're rocking a boat many do not want rocked.
Perhaps. Or perhaps the alternatives to our ruling narratives and power mechanisms have been
ruthlessly dismantled and extinguished. For example, I would love to join a union. But I live
in a right-to-work state.
I would love to have representation at my workplace and have some degree of bargaining power.
I guess there's always the complaint box. Or the "freedom" to hit the bricks.
Luckily, I went to school when it was affordable, so I don't have student loan debt. I rent,
and although rents continue to rise every year, I don't have a mortgage hanging over my head.
My younger colleagues are saddled with outrageous student loan debt that they will never likely
repay. Unfortunately many/most of them bought into the housing market. How likely are they to
even entertain the idea of speaking truth to power?
I'm past 50, and you know what that means to my prospects of finding another job. Young and
old, we just keep our mouths shut and do what we're told.
The US represents 5% of world population but consumes a much larger share of world energy and
resources. The 99% are concerned about fairness but if they truly cared, they'd understand that
the global economy needs to shrink their share of resources to 5%. And the leveling is getting
stronger by the day. Most people go along the big lie because of hope.
Question about your numbers - I think our share of resources needs to shrink but I'm not sure
5% is the right number. Are some of the resources in that 5% dedicated to our Industry? Is our
industry productive? and who gets the stuff? It may be we need to shrink our use of resources
to 4%. And what about the who uses how much of what resources? How do you count the resources
used to support our car, bus, and truck industries while deliberately stifling mass transit. I
only make these quibbles to avoid your logic of proportions. Clearly we must take/steal less from
the rest of the world and share what we have. I believe there is enough to go around - once a
few (quite a few) problems here and there are taken care of.
I'm not sure how much hope continues to hold up the big lie. I think the supports for the big
lie need a lot of maintenance to keep it from falling. Maybe we can simply stop using that road.
I don't know what the number is but from my vantage point , it looks like the western work
is heading for a world of pain. Americans want America to be great again but it's based on materialism.
To be great again would mean a different kind of greatness where the economy is based on a
reduction of it share of resources.
But the population is still very far away from the fact that its way of life depends on an
unfair distribution of world resources which will probably lead to a big world struggle meaning
a focus on the military.
This is not what I want by what I see in the horizon.
There's a reason money and fuel are in the same sentence. It's because the a nation's power
depends on energy.
It might seem trite, but if an American is patriotic, he or she will try to reduce the nation's
energy use by using energy efficiently. Whether it's transportation, home heating, home cooling,
or nighttime illumination, one should use the energy efficiently. Aside from the immorality of
using so much more than many other people in the world, it's a way to reduce pollution and to
avoid sending money to the Wahhabi nut jobs in Saudi Arabia. Plus, energy efficiency saves money!
Our country has the capacity to help the world get through the crises of Global Warming and
the end of oil. Our country has responsibility as one of the guilty parties - one of the most
most guilty in taking more than our share and sharing less than we are able or should share. The
meaning of riches is best enjoyed through the sharing of those riches. In ancient times - at least
in some places - that was the privilege and obligation of the rich.
I would feel deep shame for our country if it is to be remembered in the future for what it
has done so far.
Great comment, ROTL! Accords very well with my understanding of the power of metaphors, to
bring into being the world stage on which we strut our stuff.
Many here at NC often comment on the quasi-religious nature of economics. I'm always struck
by the conflation of the organic/natural world with mechanics. Wrongly conceiving of market forces
as natural forces and so on. I think you've struck a blow against this wrong-headed mythos at
its weakest point. If the metaphors that bring into being this world of pain we're living in themselves
are discredited, the whole edifice could come crashing down in no time.
If anyone's interested in a little exercise, trying paying attention to the metaphors one uses
for organic systems, and society at large. Even though I'm aware of their inappropriateness, it's
hard not to think in mechanistic terms. And not just mechanistic, but weaponized, at that. You
can't even listen to a baseball game without hearing metaphors of war all the damn time. Then
there are "Twitter wars" and "Facebook wars" ad nauseaum.
Money is nutrition, not a snack. It's food and fertilizer. It makes things grow. You have
to share it with other life like bacteria and worms: without these organisms in your gut ecology,
you get sick (autism, diabetes, obesity, M.S.). Idiots try to convince us these organisms are
parasites instead of symbionts just like Monsanto thinks bees are disposable or Donald Trump likes
to think of pregnant women as drags on business profits.
Where does he propose business find future workers if not in wombs? From where will his future
customers come?
Perhaps in sharing economy of future America, companies will have to share their dwindling
customers and make do with less?
If you think altruism is for suckers, your Ayn Rand economy collapses because you confuse
parasites with symbionts and symbionts with parasites. You can't distinguish between compensation
for earned and unearned income. What's a tax and what's theft? Try living without bacteria making
butyrate in your gut. Wells Fargo can no more survive without little people like airport janitors
to scrub out the TB and Ebola stains than our cells can breathe without mitochondria. Yet who
gets their pay driven down in corporate America?
Money weaves a supporting web of trust, a mutual network of obligations and payments – and
what happens biologically when that web inside us is broken and friends become enemies and we
treat enemies as friends? Is fraud any different than autoimmunity or cancer?
Well, I was gobsmacked to see this show up when I finally logged on to the Internet today.
Many heartfelt thanks to all who commented so thoughtfully and insightfully; and also to the remarkable
NC crew (Yves, Lambert, Jerri-Lynn, the IT folks), as well of course to Clive.
I think that we are all rooting for the time when Haldane's insights are met with 'Doh', and
when we celebrate Bill Black as a Nobel in Economics ;-)
Peter K. :
September 27, 2016 at 06:45 AM DeLong on helicopter money: "The swelling wave of argument and
discussion around "helicopter money" has two origins:
First, as Harvard's Robert Barro says: there has been no recovery since 2010.
The unemployment rate here in the U.S. has come down, yes. But the unemployment rate has come
down primarily because people who were unemployed have given up and dropped out of the labor force.
Shrinkage in the share of people unemployed has been a distinctly secondary factor. Moreover, the
small increase in the share of people with jobs has been neutralized, as far as its effects on how
prosperous we are, by much slower productivity growth since 2010 than America had previously seen,
had good reason to anticipate, and deserves.
The only bright spot is a relative one: things in other rich countries are even worse.
..."
I thought Krugman and Furman were bragging about Obama's tenure.
"Now note that back in 1936 [John Maynard Keynes had disagreed][]:
"The State will have to exercise a guiding influence... partly by fixing the rate of interest,
and partly, perhaps, in other ways.... It seems unlikely that the influence of banking policy on
the rate of interest will be sufficient by itself.... I conceive, therefore, that a somewhat comprehensive
socialisation of investment will prove the only means of securing an approximation to full employment;
though this need not exclude all manner of compromises and of devices by which public authority will
co-operate with private initiative..."
By the 1980s, however, for Keynes himself the long run had come, and he was dead. The Great Moderation
of the business cycle from 1984-2007 was a rich enough pudding to be proof, for the rough consensus
of mainstream economists at least, that Keynes had been wrong and Friedman had been right.
But in the aftermath of 2007 it became very clear that they-or, rather, we, for I am certainly
one of the mainstream economists in the roughly consensus-were very, tragically, dismally and grossly
wrong."
DeLong sounds very much left rather than center-left. His reasons for supporting Hillary over
Sanders eludes me.
Hillary's $275 billion over 5 years is substantially too small as center-leftist Krugman put it.
Now we face a choice:
Do we accept economic performance that all of our predecessors would have characterized as grossly
subpar-having assigned the Federal Reserve and other independent central banks a mission and then
kept from them the policy tools they need to successfully accomplish it?
Do we return the task of managing the business cycle to the political branches of government-so
that they don't just occasionally joggle the elbows of the technocratic professionals but actually
take on a co-leading or a leading role?
Or do we extend the Federal Reserve's toolkit in a structured way to give it the tools it needs?
Helicopter money is an attempt to choose door number (3). Our intellectual adversaries mostly
seek to choose door number (1)-and then to tell us that the "cold douche", as Schumpeter put it,
of unemployment will in the long run turn out to be good medicine, for some reason or other. And
our intellectual adversaries mostly seek to argue that in reality there is no door number (3)-that
attempts to go through it will rob central banks of their independence and wind up with us going
through door number (2), which we know ends badly..."
------------
Some commenters believe more fiscal policy via Congress is politically more realistic than helicopter
money.
I don't know, maybe they're right. I do know Hillary's proposals are too small. And her aversion
to government debt and deficit is wrong given the economic context and market demand for safe assets.
"Moreover, the small increase in the share of people with jobs has been neutralized, as far as
its effects on how prosperous we are, by much slower productivity growth since 2010 than America
had previously seen, had good reason to anticipate, and deserves."
?????? The rate of (measured) productivity growth is not all that important. What has happened
to real median income.
And why are quoting from Robert Barro who is basically a freshwater economist. Couldn't you
find somebody sensible?
Barro wants us to believe we have been at full employment all along. Of course that would mean
any increase in aggregate demand would only cause inflation. Of course many of us think Barro
lost it years ago.
These little distinctions are alas lost on PeterK.
[1] Do we accept economic performance that all of our predecessors would have characterized
as grossly subpar-having assigned the Federal Reserve and other independent central banks a mission
and then kept from them the policy tools they need to successfully accomplish it?
[2] Do we return the task of managing the business cycle to the political branches of government-so
that they don't just occasionally joggle the elbows of the technocratic professionals but actually
take on a co-leading or a leading role?
[3] Or do we extend the Federal Reserve's toolkit in a structured way to give it the tools
it needs?
Helicopter money is an attempt to choose door number (3). Our intellectual adversaries mostly
seek to choose door number (1)-and then to tell us that the "cold douche", as Schumpeter put it,
of unemployment will in the long run turn out to be good medicine, for some reason or other. And
our intellectual adversaries mostly seek to argue that in reality there is no door number (3)-that
attempts to go through it will rob central banks of their independence and wind up with us going
through door number (2), which we know ends badly...""
---------------------
Conservatives want 1 and 2 ends badly, so 3 is the only choice.
"... Minsky famously quipped that everyone can create new money; the problem is to get it accepted as such by others. ..."
"... But even money-proper is not the same for everyone. Central banks create the money in which banks pay each other, while private banks create money for households and firms. Money is hierarchical , and moneyness is a question of immediate convertibility without loss of value (at par exchange, on demand). ..."
"... To convert shadow money into settlement money in case of default, repo lenders sell collateral. An intricate collateral valuation regime, consisting of haircuts, mark-to-market, and margin calls, maintains collateral's exchange rate into (central) bank money. ..."
"... What makes repos money – at par exchange between "cash" and collateral – is what makes finance more fragile in a Minskyan sense. ..."
"... Liquid markets become more fragile, he argued, by giving investors the "illusion" that they can exit before prices turn against them. This is a crucial insight for crises of shadow money. ..."
"... Criminality and corruption is embedded at the top of the financial food chain, by law. ..."
"... Motion seconded: Government sanctioned counterfeiting. ..."
"... …and does anyone remember the triumph of the desk slaves of the Crimson Permanent Assurance? Monty Python understood something about political economies and how one might achieve more fairness in outcomes… https://vimeo.com/111458975 ..."
"... Shadow money sounds to me like fictional capital by another name. And contractual based deposits sounds like counterfeiting. With the distinction that the man with counterfeit printing press robs the train, while the man who runs the Wall St Investment bank repo trading desk robs the whole railroad. ..."
"... Therefore, Money becomes a victim of the ontological argument for God by St Anselm. If God does not exist, an all powerful, all knowing, all present infinitely great in all categories of Supreme Being could not be written or spoken about, lacking the quality of existence. The fact that we CAN speak about an Omnipotent Supreme Deity means that one in fact exists, due to existence is part and parcel of Omnipotence. But of course, because we can talk or write about something, does not make it real. ..."
"... It can become socially acceptable as in the case of shadow money, but it is fictional capital, a shadow of the real thing. Time to get out of the cave of finance with its shadows dancing from the light of the fires and walk eyes wide open in the bright light of sunshine! ..."
"... Money is actually the easiest thing to write about, because it's formless energy. It's not that the phenomenon is shadow money, it's shadow assets. ..."
"... You have to be able to separate in your mind the ideas of 1) Quantity and 2) Form. That's why economics is a mental disorder, because it doesn't separate quantity and form. If you can't or don't, then yes, it's diabolically hard to write about because you're writing about two different things simultaneously without realizing it. Money is a quantity that is infinite and continuous, but form is an idea that is discontinuous and finite. People do what the forms tell them to do. The money is just like electricity that powers the animation of the forms. Repo is a form it's not money. It's existence results in a certain ordering of social relations, that's also a form. But money is just the energy that makes the forms potent. ..."
"... I guess that's why they used to call it "political economy" before the mental disorder fully usurped the power of perception and reasoning. ..."
"... Marx failed to acknowledge that supposedly hard-headed Capitalism is actually all about living beyond your means and mortgaging the future. ..."
"... It was designed from the Fuggars' and the Medici's to be about debt and fractional reserves and interest. A system based on a finite supply of money is going to grow not much faster, at best, than the money available allows. ..."
"... Capitalism allows explosive growth by supplying explosive amounts of credit. All this shadow banking activity is designed to get around reserve requirements; nothing else I can see calls all this complexity into existence. The banks always need more, because lending is how they make their money, so they want an infinite amount to lend in order to drive their profits towards the infinite. ..."
"... This article I think defines shadow money alright as starting where bank deposits leave off but as the above comments suggest seems to miss some key points. I think a major problem with the article is seeing central banks as separate from the state rather than seeing the central bank along with the Treasury as the state itself. ..."
"... The article gets Treasury debt wrong by seeing it as the central bank funding the state rather than as actually coming from the state. This leads to wrong policy choices such as this state money being used to bail out useless financial transactions and asset appreciation rather than the public purpose. I think crazyman has it right. We left behind the power of perception and reasoning by not realizing the importance of political economy . ..."
"... This is reminscent of Gramsci's idea that the state and civil society are to be distinguished only for purposes of exposition. ..."
By Daniela Gabor, associate professor in economics at the University of the West of England,
Bristol, and Jakob Vestergaard, senior researcher at the Danish Institute for International Studies.
Originally published at the Institute for New Economic Thinking
website
Struggles over shadow money today echo 19th century struggles over bank deposits.
Money, James Buchan once
noted , "is diabolically hard to write about." It has been described as a promise to pay, a social
relation,
frozen
desire , memory, and fiction. Less daunted, Hyman Minsky was interested by promises of unknown
and changing
properties
. "Shadow" promises would have
fascinated him. Indeed, Perry Mehrling, Zoltan
Pozsar , and
others argue that in shadow banking, money begins where bank deposits end. Their insights are
the starting point for the first paper of our Institute for New Economic Thinking
project on shadow money. The footprint of shadow money, we argue,* extends well beyond opaque
shadow banking, reaching into government bond markets and regulated banks. It radically changes central
banking and the state's relationship to money-issuing institutions.
Minsky famously quipped that everyone can create new money; the problem is to get it accepted
as such by others.
General acceptability relies on the strength of promises to exchange for proper money, money
that settles debts. Banks' special role in money creation, Victoria Chick
reminds us, was sealed
by states' commitment that bank deposits would convert into state money (cash) at par. This social
contract of convertibility materialized in bank regulation, lender of last resort, and deposit guarantees.
But even money-proper is not the same for everyone. Central banks create the money in which
banks pay each other, while private banks create money for households and firms. Money is
hierarchical , and moneyness is a question of immediate convertibility without loss of value
(at par exchange, on demand).
Using a money hierarchy lens, we define shadow money as repurchase agreements (repos), promises
to pay backed by tradable collateral. It is the presence of collateral that confers shadow money
its distinctiveness. Our approach advances the debate in several ways.
First, it allows us to establish a clear picture of modern money hierarchies. Repos are nearest
to money-proper, stronger in their moneyness claims than other short-term shadow
liabilities . Repos rose in money hierarchies as finance sidestepped the state, developing its
own convertibility rules over the past 20 years. To convert shadow money into settlement money
in case of default, repo lenders sell collateral. An intricate collateral valuation regime, consisting
of haircuts, mark-to-market, and margin calls, maintains collateral's exchange rate into (central)
bank money.
Second, we put banks at the center of shadow-money creation. The growing shadow-money literature,
however original in its insights, downplays banks' activities in the shadows because its empirical
terrain is U.S. shadow banking with its institutional peculiarities. There, hedge funds issue shadow
money to institutional cash pools via the balance sheet of securities dealers. In
Europe or
China , it's also banks issuing shadow money to other banks to fund capital market activities.
LCH Clearnet SA, a pure shadow bank, offers a glimpse into this world. Like a bank, it backs money
issuance with central bank (Banque de France) money. Unlike a bank, LCH Clearnet only issues shadow
money.
Third, we explore the critical role of the state beyond simple guarantor of convertibility. Like
bank money, shadow money relies on sovereign structures of authority and credit worthiness. Shadow
money is mostly issued against government bond collateral, because liquid securities make repo convertibility
easier and cheaper. The legal right to re-use (re-hypothecate) collateral allows various (shadow)
banks to issue shadow money against the same government bond, which becomes akin to a
base asset with "velocity." Limits to velocity place demands on the state to issue debt, not
because it needs cash but because shadow money issuers need collateral.
With finance ministries unresponsive to such demands, we note two points in the historical development
of shadow money in the early 2000s. In the United States, persuasive lobbying exploited concerns
that U.S. Treasury debt would fall to dangerously
low levels
to relax regulation on repos collateralized with asset and mortgage-backed
securities
. In Europe, the ECB used the mechanics of monetary policy implementation to the same end. When
it lent reserves to banks via repos, the ECB used its collateral valuation practices to generate
base-asset privileges for "periphery" government bonds, treating these as
perfect substitutes for German
government bonds, with the
explicit
intention of powering market liquidity.
Fourth, we introduce fundamental uncertainty in modern money creation. What makes repos money
– at par exchange between "cash" and collateral – is what makes finance more fragile in a
Minskyan sense. Knightian uncertainty bites harder and faster because convertibility depends
on collateral-market liquidity.
The collateral valuation regime that makes repos increasingly acceptable ties securities-market
liquidity into appetite for leverage. Here, Keynes' concerns with the social benefits of private
liquidity become relevant. Keynes voiced strong doubts about the idea of "the more liquidity the
better" in stock markets (concerns now routinely
voiced by central banks for securities markets). Liquid markets become more fragile, he argued,
by giving investors the "illusion" that they can exit before prices turn against them. This is a
crucial insight for crises of shadow money.
A promise backed by tradable collateral remains acceptable as long as lenders trust that collateral
can be converted into settlement money at the agreed exchange rate. The need for liquidity may become
systemic once collateral falls in market value, as repo issuers must provide additional collateral
or cash to maintain at par. If forced to sell assets, collateral prices sink lower, creating a liquidity
spiral
. Converting shadow money is akin to climbing a ladder that is gradually sinking: The faster
one climbs, the more it sinks.
Note that sovereign collateral does not always stop the sinking, outside the liquid world of U.S.
Treasuries. Rather, states can be dragged down with their shadow-money issuing institutions. As Bank
of England
showed , when LCH Clearnet tightened the terms on which it would hold shadow money backed with
Irish and Portuguese sovereign collateral, it made the sovereign debt crisis worse. Europe had its
crisis
of shadow money, less visible than the Lehman Brothers demise, but no less painful. "Whatever
it takes" was a
promise
to save the "shadow" euro with a credible commitment to support sovereign collateral values.
Shadow money also constrains the macroeconomic policy options available to the state. That's because
what makes shadow liabilities money also greatly complicates its stabilization: it requires a radical
re-think of many powerful ideas about money and central banking. The first point, persuasively made
by Perry
Mehrling , and more recently by
Bank of England , is that central banks need a (well-designed) framework to backstop markets
, not only institutions . Collateralized debt relationships can withstand a systemic need
for liquidity if holders of shadow money are confident that collateral values will not drop sharply,
forcing margin calls and fire sales. Yet such overt interventions raise
serious moral hazard issues.
Less well understood is that central banks need to rethink lender of last resort. Their collateral
framework can perversely destabilize shadow money. Central banks cannot mitigate convertibility
risk for shadow money
when they use the same fragile convertibility practices. Rather, central banks should lend unsecured
or
without seeking to preserve collateral parity.
We suggest that the state, as base-asset issuer, becomes a de facto shadow central bank.
Its fiscal policy stance and debt management matter for the pace of (shadow) credit expansion and
for financial stability. Yet, unlike the central bank, the state has no means to stabilize shadow
money or protect itself from its fragility. It has to rely on its central bank, caught in turn between
independence and shadow money (in)stability, which may require direct interventions in government
bond markets.
The bigger task that follows from our analysis, is to define the social contract between the three
key institutions involved in shadow money: the state as base collateral issuer, the central bank,
and private finance. In the new
FSB
or Basel III provisions, we
are witnessing a struggle over shadow money with many echoes from the long struggle over bank money.
The more radical options, such as disentangling sovereign collateral from shadow money, were never
contemplated in regulatory circles. Even a partial disentanglement has proven
difficult
because states depend on repo markets to support
liquidity in government bond markets. Our next step, then, will be to map how the crisis has
altered the contours of the state's relation to the shadow money supply, comparing the cases of the
U.S., the Eurozone, and China.
Financial anarchy is my interpretation of shadow banking.
. . . The legal right to re-use (re-hypothecate) collateral allows various (shadow) banks
to issue shadow money against the same government bond , which becomes akin to a base asset
with "velocity." Limits to velocity place demands on the state to issue debt, not because it
needs cash but because shadow money issuers need collateral .
---- The bigger task that follows from our analysis, is to define the social contract between the
three key institutions involved in shadow money: the state as base collateral issuer, the central
bank, and private finance .
Who does shadow banking serve? It is so far from capitalism, it should be illegal.
Bernie Sanders: The business of Wall Street is fraud and greed.
Well…yes and no. There is real "need" for some shadow banking services. However, the idea of
having Central Banks (issuers of money, or whatever) loaning based on … nothing?
Less well understood is that central banks need to rethink lender of last resort. Their
collateral framework can perversely destabilize shadow money. Central banks cannot mitigate
convertibility risk for shadow money when they use the same fragile convertibility practices.
Rather, central banks should lend unsecured or without seeking to preserve collateral parity.
"Europe had its crisis of shadow money, less visible than the Lehman Brothers demise, but
no less painful. "Whatever it takes" was a promise to save the "shadow" euro with a credible
commitment to support sovereign collateral values."
Yes, but Lehman was not a taxing authority (although to be fair, Ireland et.al. were not money-issuing
sources).
I am having a hard time understanding all of this–but as far as I can tell, the authors are
basically suggesting that sovereign governments should be backing up the shadow banking system.
However, I have not seen them suggest any reason for it except that the entire house of cards
could come falling down. Boo hoo for the banksters–tell them to do things out of the "shadows".
Why is there a need for 'shadow money' in the first place?
Afaik, banks create money when they loan and central banks(especially the Fed) issues the most
secure assets, their securities, which are used as collateral.
Thanks Yves for sharing Gabor…what a Mess! towards the end of 2012 the US shadow banking was
said to be around
67 Trillion …did something get baked-in? 2014 the IMF has a much smaller 'account'…(Japan
being the worst laughing stock). the gaps are no small detail:
The IMF's latest Global Financial Stability Report analyzes the growth in shadow banking in
recent years in both advanced and emerging market economies and the risks involved.
According to the report, shadow banking amounts to between 15 and 25 trillion dollars in the
United States, between 13.5 and 22.5 trillion in the euro area, and between 2.5 and 6 trillion
in Japan-depending on the measure- and around 7 trillion in emerging markets. In emerging markets,
its growth is outpacing that of the traditional banking system.
https://www.imf.org/external/pubs/ft/survey/so/2014/pol100114a.htm
That sure seems a Rx for destabilizing the world currencies to precipitate a collapse. Track
and publicize the visits of Congressmen and Senators to the BIS and COL to start. Why are they
making these visits under cover? Who are they meeting with? Are they being prepared as to what
to expect a deliberate world currency crash? . Our political elite are so beholden to the bankers
to allow for the theft of the wealth of nations for unattainable expanding growth and skimming
of millions. Is it possible in regard the corporate banks to have the strings attached on the
use of shadow money at time of chartering or in the case of the do over at time of bankruptcy?.
How is this done? I'd also like to know a good proposal for the private investment boutique banks.
Have any bills at state and federal levels been proposed and if not, why not? What would the main
sections of such a bill look like. Thanks.
A derivative promise made by a Wall Street prostitute, ultimately contingent upon the ability
to liquidate the very users of the instrument, with currency debasement, and war to restock.
Paying people to buy stuff from others being paid to buy stuff, with the full faith and credit
of dependent seniors in a collapsing actuarial ponzi, with nothing more than made for TV mercenaries,
isn't likely to end well.
Craps, the bank moves to the next suckers, with nothing more than the promise of an exotic
vacation, billed to someone else.
– Limits to velocity place demands on the state to issue debt, not because it needs cash but
because shadow money issuers need collateral.
There's a dirty linchpin. Even if the diabolical multiplier from cnchal's quote were removed,
and the dollar was hard-pinned to a pound of silver to pay the sheriff with, infinite debt issuance
can step in to the feed the hungry beast.
Promises to pay kept mercenaries in line during the city-states. If you didn't win you didn't
get paid. Unless you turned around and took your employers gold instead. Which is a bit like capturing
the central banks.
Still, debt can be put to good uses. Infrastructure, maybe. Basic necessities and health. 'When
the people are strong, the nation is strong.' Instead, the gearing seem like the machine in Princess
Bride, sucking time from peoples lives.
Ask any highway patrolman, the faster the speed limit, the worse the accidents.
On the famed autobahns of Europe, the no speed limit means that when an accident occurs, the
results are likely to be catastrophic.
And I really love the observation that central banks need a mechanism to backstop the market.
Reminds me of the main problem with the famous Vincent Black Shadow motorcycle, it could attain
speeds close to 200 mph, but brake designs at the time didn't work at those speeds, so as Hunter
S. Thompson remarked;
"If you rode the Black Shadow at top speed for any length of time, you would almost certainly
die."
Wall $treet wants to go fast, the faster the better, but they haven't got any brakes, and worse
than that, we're all along for the ride whether we like it or not.
Oh, says Red Molly to James, "That's a fine motorbike
A girl could feel special on any such like"
Says James to Red Molly, "My hat's off to you
It's a Vincent Black Lightning, 1952"
[James gets shot in a robbery]
When she came to the hospital, there wasn't much left
He was running out of road, he was running out of breath
But he smiled to see her cry
And said I'll give you my Vincent to ride
Oh, he reached for her hand then he slipped her the keys
He said, "I've got no further use for these
I see angels on Ariels, in leather and chrome
Swooping down from heaven to carry me home"
And he gave her one last kiss and died
And he gave her his Vincent to ride
It was sorta like that when Bernanke handed J-Yel the keys to his QE penny farthing bike.
The Bernanke and J-Yel witnessed the header that Greenspan took on that bike, and decided to
leave it standing against the wall. When you consider the fact that neither of them could reach
the pedals, let alone mount the thing and ride, that was probably a good idea.
When did the central banks' framework to backstop markets morph into an organized effort to
push the value of repo collateral relentlessly upward forever?…
What about increasing the relentless decline in the Velocity of Money by gradually increasing
interest rates? Yes, that might be a catalyst to trigger a "liquidity spiral". So what? We now
have moral hazard in spades and at some point will have to cross the Rubicon, whether willingly
or not.
i am reading one of the
links from the post titled "Regulating money creation after the crisis", and it's even worse
than government approved fraud. I am only part way through it, but here is a gem.
On page 10
. . . Instead, OLA was designed to preserve the value of the assets of failed financial
firms until they are liquidated, a worthy aim, but a very different one. At the same time,
the Dodd-Frank Act has imposed significant new limitations on the government's freestanding
panic-fighting tools . These limitations, absent future congressional action, would render
next to impossible the kind of aggressive government rescue operation that was staged
during the recent crisis.
Criminality and corruption is embedded at the top of the financial food chain, by law.
Before we complicate the issue, it is fairly obvious no one understands conventional money
and it is one of the best kept secrets on the planet.
Learn how normal money works and how its mismanagement has led to many of today's problems.
Banks create money out of nothing to allow you to buy things with loans and mortgages (fractional
reserve banking).
After years of lobbying the reserve required is often as good as nothing. Mortgages can be
obtained with the reserve contained in the fee.
After the financial crisis there were found to be £1.25 in reserves for every £100 issued on
credit in the UK.
Having no reserve shouldn't be a problem with prudent lending.
Creating money out of nothing is the service they really provide to let you spend your own
future income now.
They charge interest to cover their costs, for the risk involved and the service they provide.
Your repayments in the future, pay back the money they created out of nothing.
The asset bought covers them if you default, they will repossess it and sell it to recover
the rest of the debt unpaid.
At the end all is back to square one.
The bank has received the interest for its service.
You have paid for the asset you have bought plus the interest to the bank for its service of
letting you use your own money from the future.
Today's massive debt load is all money borrowed from the future for things already bought.
It can also go wrong another way, when banks lend into asset bubbles that collapse very quickly.
The repossessed asset doesn't cover the outstanding debt and money gets destroyed on the banks
balance sheets.
When banks lend in large amounts, on margin, into stock markets, the bust shreds their balance
sheets (1929).
When banks lend in large amounts on mortgages into housing markets, the bust shreds their balance
sheets (2008).
If banks don't lend prudently you are in trouble.
Then they developed securitisation …… oh dear (no need to lend prudently now).
Housing booms and busts around the world …… oh dear.
All that money borrowed from the future and already spent …… oh dear.
This is so interesting. It seems to be approaching the subject that Wray speculated about a
while back – that we should give central banks fiscal responsibility. Because otherwise a sovereign
state has no control over its sovereign money? It seems to me that money itself becomes a rehypothecated
asset by virtue of being invested over and over again – if it is well allocated and under good
fiscal control all is well. If not we get the Great Recession.
So let the state become the defacto shadow central bank so it had direct control of its own
money. Instead of hanging on to the old gold standard mindset of top down management, why not
think of people, not collateral, as the root of the system – the grass roots. How much money does
a system – a sovereign country – need per person. And then establish a sovereign central bank
to deal directly, bringing the shadows into the sunlight of fiscal control.
…and does anyone remember the triumph of the desk slaves of the Crimson Permanent Assurance?
Monty Python understood something about political economies and how one might achieve more fairness
in outcomes… https://vimeo.com/111458975
Moneyness, like doggitas, you just can't scratch behind its ears. If shadow money is distinguished
by its relationship to collateral, as opposed to money issued by the state, with the entire human
enterprise of civilization as its basis, it still seems to me that at the top of the money hierarchy
is fiat money, the real money by the real social order empowered by the social forms of power
that sustain human life in all of its aspects, not just the financial conveniences. Shadow
money sounds to me like fictional capital by another name. And contractual based deposits sounds
like counterfeiting. With the distinction that the man with counterfeit printing press robs the
train, while the man who runs the Wall St Investment bank repo trading desk robs the whole railroad.
Am I right or Am I right. What a bunch of Losers!!!
And if there is any doubt about the fictional quality of $Trillions and $ Trillions of dollars,
physicists can not find anything naturally occurring in the universe beyond billions and billions.
Money, simply a numbered record, a counting or cardinal number, transforms into money in name
only, MINO, when it refers to fictional amount that can only appear contractually as words, and
do not count how much economic activity or output has been produced.
Therefore, Money becomes a victim of the ontological argument for God by St Anselm. If
God does not exist, an all powerful, all knowing, all present infinitely great in all categories
of Supreme Being could not be written or spoken about, lacking the quality of existence. The fact
that we CAN speak about an Omnipotent Supreme Deity means that one in fact exists, due to existence
is part and parcel of Omnipotence. But of course, because we can talk or write about something,
does not make it real.
It can become socially acceptable as in the case of shadow money, but it is fictional capital,
a shadow of the real thing. Time to get out of the cave of finance with its shadows dancing from
the light of the fires and walk eyes wide open in the bright light of sunshine!
I don't know about this one. It seems to me to be some pretty queasy thinking. It kind of wanders
around in circles of confusion. "my existence led by confusion boats, mutiny from stern to bow".
That's pretty funny somebody would say that money is diabolically hard to write about. That's
pretty funny.
Money is actually the easiest thing to write about, because it's formless energy. It's
not that the phenomenon is shadow money, it's shadow assets.
You have to be able to separate in your mind the ideas of 1) Quantity and 2) Form. That's
why economics is a mental disorder, because it doesn't separate quantity and form. If you can't
or don't, then yes, it's diabolically hard to write about because you're writing about two different
things simultaneously without realizing it. Money is a quantity that is infinite and continuous,
but form is an idea that is discontinuous and finite. People do what the forms tell them to do.
The money is just like electricity that powers the animation of the forms. Repo is a form it's
not money. It's existence results in a certain ordering of social relations, that's also a form.
But money is just the energy that makes the forms potent.
The primary challenge is to come up with an ordered way of thinking about the forms themselves.
That's frankly not easy. The ideal would be to understand them in the manner in which Euclid understood
geometrical ideas. If you can get the vision, then you can see all the possibilities for structure
and ordered relationships. there's really no triangle in reality and there's no point and there's
no line and there's no plane. They just made them up to approximate physical reality. Then they
thought to themselves "Holy shit! These ideas interrelated in an astounding range of symmetries
and causations." Then they became a lens or a framework through which physical reality was interpreted.
But they didn't confuse the idea of "number" with the idea of "triangle" or "circle".
Certainly in math the algebraic interpretation doesn't rely completely on the geometrical interpretation.
But if there is no geometrical interpretation and it's only algebra, then so much is missing,
so much is lost. I guess that's why they used to call it "political economy" before the mental
disorder fully usurped the power of perception and reasoning.
Certainly in math the algebraic interpretation doesn't rely completely on the geometrical
interpretation. But if there is no geometrical interpretation and it's only algebra, then so
much is missing, so much is lost.
With that firmly in mind, I think it's necessary to mention the fact that the " study
" of "economics" relies on calculus, wherein we are introduced to the notion of change over
time, volume, motion, acceleration, rates of change, vectors, etc.
Algebra and geometry are, as you point out, obvious abstractions, but once you add volume motion,
and rates of change, the models become very seductive, and it's easy to see how one can be convinced
that they are approaching an understanding of 'reality'.
The trouble is of course, that the egg-heads busy trying to describe economic "reality" with
calculus, are, for the most part in the employ of savages who will forever cling to a simple arithmetic
where their only interest is in "having it all".
Genius employed to make excuses for demented indifference.
'Central banks should lend unsecured … we suggest that the state, as base-asset issuer,
becomes a de facto shadow central bank.' - Daniela "Zsa Zsa" Gabor
This statement desperately needs Walter Bagehot's qualifications: "to solvent institutions"
and "at a penalty rate."
Otherwise, we're just talking about another squalid round of "TARP for Jamie," as we peasants
reach for our pitchforks.
It should however be pointed out that the idea of shadow banking is not remotely new. The
concept was presaged well over a century ago by Walter Bagehot, the legendary English banker,
essayist, and theorist. In 1873, Bagehot wrote Lombard Street: A Description of the Money Market,
his canonical work on the money market and central banking. In it, he observed that the great
London banks were accompanied by a parallel set of financial firms, known as "bill brokers," which
in many ways resembled modern-day securities dealers. Like today's dealers, these bill-brokers
financed themselves with borrowings that, Bagehot informs us, were "repayable at demand, or at
very short notice."
Formally speaking these firms were not banks but to Bagehot they might as well be. "The London
bill brokers," he observes, "do much the same [as banks]. Indeed, they are only a special sort
of bankers who allow daily interest on deposits, and who for most of their money give security
[i.e., collateral]. But we have no concern now with these differences of detail." At times, Bagehot
is careful to note that the short-term obligations of bill-brokers were not technically deposits;
he observes that the maturing of these liabilities "is not indeed a direct withdrawal of money
on deposit," although "its principal effect is identical."
Other times, however, Bagehot dispenses even with this distinction: "It was also most natural
that the bill-brokers should become, more or less, bankers too, and should receive money on deposit
without giving any security for it." Here we have an unambiguous identification of the shadow
banking phenomenon about 140 years ago .
I would posit that there are two types of money
A – money of the 0.001% – if they walk into a casino, real estate transaction, or any asset for
that matter they can NOMINALLY lose money – in fact the 0.001% NEVER lose any of THEIR money,
they just lose your money. All winnings, of anybody doing anything anywhere, belong to them.
B – money of everybody else – this money nominally is yours to do with as you see fit, but it
ALL belongs to the 0.001%. The collateral that backs it up is everything you earn and own and
when necessary your, and your family's, internal organs…
"The nation [England] was not a penny poorer by the bursting of these soap bubbles of nominal
money capital. All these securities actually represent nothing but accumulated claims, legal titles
to future production. Their money or capital value either does not represent capital at all …
or is determined independently of the real capital value they represent."
– Marx
Banking Capital's Component Parts
Capital: Volume Three
James Levy , April 17, 2016 at 6:07 am
Marx failed to acknowledge that supposedly hard-headed Capitalism is actually all about
living beyond your means and mortgaging the future.
It was designed from the Fuggars' and the Medici's to be about debt and fractional reserves
and interest. A system based on a finite supply of money is going to grow not much faster, at
best, than the money available allows.
Capitalism allows explosive growth by supplying explosive amounts of credit. All this shadow
banking activity is designed to get around reserve requirements; nothing else I can see calls
all this complexity into existence. The banks always need more, because lending is how they make
their money, so they want an infinite amount to lend in order to drive their profits towards the
infinite.
A sovereign can create its own currency, but theoretically couldn't it create any currency?
Couldn't Greece for example click a few key boards put some ones and zeros in and say, "oh our
account with $1,000,000 US is actually $10,000,000,000 US?
This article I think defines shadow money alright as starting where bank deposits leave
off but as the above comments suggest seems to miss some key points. I think a major problem with
the article is seeing central banks as separate from the state rather than seeing the central
bank along with the Treasury as the state itself.
The article gets Treasury debt wrong by seeing it as the central bank funding the state
rather than as actually coming from the state. This leads to wrong policy choices such as this
state money being used to bail out useless financial transactions and asset appreciation rather
than the public purpose. I think crazyman has it right. We left behind the power of perception
and reasoning by not realizing the importance of political economy.
Some issues with the piece and questions for the authors (and fellow NCers):
I really wish such analyses would use the more-precise term "credit-money" in reference to
money creation by banks, to distinguish it from government money creation, which similarly may
have repayment requirements attached (bonds), but need not be so. The "need not be so" may occur
via outright fiat emission, but more commonly appears in form of a public debt stock which continually
increases with time, at least in nominal terms.
The legal right to re-use (re-hypothecate) collateral allows various (shadow) banks to
issue shadow money against the same government bond, which becomes akin to a base asset with
"velocity."
Fine, but what about that other crucial element of modern bank credit-money creation, leverage?
Are there any practical limits on shadow banks' issuance of multiple units of shadow money against
the same government-bond money unit? If so, how are they enforced (if at all)? Note also the key
concept of "implied leverage" inherent in such schemes, where the leverage ratio may fluctuate
drastically with the mark-to-market valuation of the collateral. Banks play endless games with
"fictional reserves"; it would be naive to imagine that non-bank shadow lenders don't do similarly
with their alleged collateral.
The first point, persuasively made by Perry Mehrling, and more recently by Bank of England,
is that central banks need a (well-designed) framework to backstop markets, not only institutions.
Erm, markets are the *only* thing the government should be committed to ensuring functioning
of - we have overwhelming evidences from multiple boom-bust-crisis episodes over the last 3 decades
of the toxic results of governments backstopping hyperleveraged fraud-riddled institutions and
the crooks running same.
Resurgence of voodoo science is typical during crisis periods. "Deficits does not matter" voodoo
does not work in a world were there are strong economic competitors to the USA and where euro and
Yuan exists. The idea of deficit spending which
Michelle
Jamrisko discusses actually came from Keynesian economics, not from MMT.
Notable quotes:
"... Bridgewater's Ray Dalio, head of the world's biggest hedge fund, and Janus Capital's Bill Gross say policy makers are cornered and will have to resort to bigger deficits. ..."
"... "I have no problem with deficit spending," said Aneta Markowska, chief U.S. economist at Societe Generale in New York. "But this idea of the government printing money -- unlimited amounts of money -- and running unlimited, infinite deficits, that could become unhinged pretty quickly." ..."
"... Many more agree that it's precisely when households are cutting back that governments should do the opposite, to prevent a slump in demand. ..."
"... Most economists don't expect an imminent U.S. recession. But financial-market turmoil and America's political upheaval have added to a sense that nobody has figured out a cure for the economy's malaise. ..."
In an American election season
that's turned into a bonfire of the orthodoxies, one taboo survives pretty much intact: Budget deficits
are dangerous. A school of dissident economists wants to toss that one onto the flames, too.
It's a propitious time to make the case, and not just in the U.S. Whether it's negative interest
rates, or
Calls for governments to take over the relief effort are
growing louder. Plenty of economists have joined in, and so have top money managers. Bridgewater's
Ray Dalio, head of the world's biggest hedge fund, and Janus Capital's Bill Gross say policy makers
are
cornered and will have to resort to bigger deficits.
"There's an acknowledgment, even in the investor community, that monetary policy is kind of running
out of ammo," said Thomas Costerg, economist at Standard Chartered Bank in New York. "The focus is
now shifting to fiscal policy."
Currency Monopoly
That's where it should have been all along, according to Modern Money Theory. The 20-something-year-old
doctrine, on the fringes of economic thought, is getting a hearing with an unconventional take on
government spending in nations with their own currency.
Such countries, the MMTers argue, face no risk of fiscal crisis. They may owe debts in, say, dollars
or yen -- but they're also the monopoly creators of dollars or yen, so can always meet their obligations.
For the same reason, they don't need to finance spending by collecting taxes, or even selling bonds.
The long-run implication of that approach has many economists worried.
"I have no problem with deficit spending," said Aneta Markowska, chief U.S. economist at Societe
Generale in New York. "But this idea of the government printing money -- unlimited amounts of money
-- and running unlimited, infinite deficits, that could become unhinged pretty quickly."
To which MMT replies: No one's saying there are no limits. Real resources can be a constraint
-- how much labor is available to build that road? Taxes are an essential tool, to ensure demand
for the currency and cool the economy if it overheats. But the MMTers argue there's plenty of room
to spend without triggering inflation.
The U.S. did dramatically loosen the purse strings after the 2008 crisis, posting a deficit of
more than 10 percent of gross domestic product the next year. That's since been trimmed to 2.6 percent
of GDP, or $439 billion, last year.
... ... ...
Tighten Belts?
Those who push back sometimes argue that money-printing puts countries on a path that eventually
leads, in a worst-case scenario, to Zimbabwe -- where money-printing debased the currency so badly
that all the zeros could barely fit on banknotes. Or
Venezuela, whose spending spree helped push inflation to 180 percent last year. Japan's a more
mixed picture: years of deficits haven't scared off borrowers or unleashed inflation, but haven't
produced much growth, either.
There's also a peculiarly American enthusiasm for balanced budgets, according to Jim Savage, a
political science professor at the University of Virginia. He's traced it to the earliest days of
the U.S., rooted in a "longstanding fear of centralized political power, going back to England."
Wray says there are episodes in American history when a different understanding prevailed. During
World War II, he says, U.S. authorities learned a lesson that's since been forgotten -- that "we've
always got unemployed resources, including labor, and so we can put them to work."
Savage says Americans have historically tended to conflate household and government debts. That
category error is alive and well.
"Small businesses and families are tightening their belts," President Barack Obama said in 2010
as he announced a pay freeze for government workers. "Their government should, too."
It's not just MMT economists who winced at the comment. Many more agree that it's precisely when
households are cutting back that governments should do the opposite, to prevent a slump in demand.
That argument doesn't carry much sway in Congress, though. That's one reason the Fed has had to
shoulder so much of the burden of keeping the recovery alive, Societe Generale's Markowska says.
"When it comes to deciding on monetary easing, it's a handful of people in the room," she said.
"It's going to take more pain to build that political consensus around the fiscal stimulus."
Wray says he'd expected attitudes to start shifting after the last downturn, just as the Great
Depression gave rise to Keynesian economics and the New Deal, but "it really didn't change anything,
as far as the policy makers go."
"I think it did change things as far as the population goes," he said, citing the anti-establishment
campaigns of Sanders and Republican Donald Trump. It might take another crash to change minds, Wray
says.
'Strange Period'
Most economists don't expect an imminent U.S. recession. But financial-market turmoil and America's
political upheaval have added to a sense that nobody has figured out a cure for the economy's malaise.
Bill Hoagland, a Republican who's senior vice president of the Bipartisan Policy Center, has helped
shape U.S. fiscal policy over four decades at the Congressional Budget Office and Senate Budget Committee.
He says a farm upbringing in Indiana helped him understand why "it's engrained in a number of
Americans outside the Beltway that you equate your expenditures with your revenue." He also acknowledges
that government deficits are different, and could be larger now to support demand, so long as there's
balance in the longer term.
Most of all, Hoagland says he sees profound change under way. The "catastrophic event" of the
2008 crash may be reshaping American politics in a way that's only happened a handful of times before.
And economic orthodoxy has taken a hit too.
"We're going through a very strange period where all economic theories are being tested," he said.
"... By Perry Mehrling, a professor of economics at Barnard College. Originally published at his website . ..."
"... Yes, the money creation process has been a big lie for a long time. In any case the Bank of England came clean a couple of years ago and admitted that standard story of money creation was false. They even acknowledge that it is not properly explained in most money and banking textbooks, which is a staggering admission. ..."
"... Paul Krugman wrote a column a couple of months ago where he claimed that banks take in savings from depositors and lend them out to borrowers which tells you either: 1) he doesnt know how banking works or 2) he is part of the conspiracy to keep the public in the dark. ..."
"... The truth right from the mouth of the worldss oldest central bank. http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf ..."
"... Yeah, I saw that. It is amazing that a supposedly foremost Princeton Nobel winning economist apparently doesnt understand where money comes from… ..."
"... There is evidence that Krugman seems to have great difficulty admitting he was wrong. ..."
"... And what he writes makes me think he doesnt know how banking works. I find it difficult to believe he is part of any conspiracy. But I may be wrong. ..."
"... My take is that the fractional reserve and intermediation models are just ways of obfuscating the way banking actually works and the credit creation model is the accurate one. I have some advice for anyone who is struggling with the concepts which is as follows: always merge all the banks in the banking system into one bank in your mind. Assuming multiple banks as the author above does is irrelevant to the analysis and only serves to add confusion. ..."
"... I enjoyed the article very much. And it does seem to me that money creation is made to seem very, very, complex. Now maybe Im just too stupid, but it always strikes me that when people simply describe something, they either really dont know, or they are trying to bamboozle you… ..."
By Perry Mehrling, a professor of economics at Barnard College. Originally published
at
his website .
In his recent paper, "A Lost Century
in Economics: Three Theories of banking and the conclusive evidence" , Richard Werner argues
that the old "credit creation theory" of money is true (empirically "accurate"), while both the newer
"fractional reserve theory" and the presently dominant "debt intermediation theory" are false. For
him, this matters mainly because the false theories are guiding current bank regulation and development
policy, leading down a blind alley.
But it matters also simply because we need correct understanding of how the economy actually works,
"we" meaning not just economists but also the general public. "Today, the vast majority of the public
is not aware that the money supply is created by banks, that banks do not lend money, and that each
bank creates new money."
Why is the public ignorant of the truth? Much of Werner's paper is devoted to an account of how
the correct theory was pushed out of the conversation, first in the 1930s by the fractional reserve
theory, and then after WWII by the debt intermediation theory. One culprit was a shift toward deductive
and away from inductive methods. Another culprit, he suggests, was the self-interested "information
management" by central banks, i.e. direct suppression of truth in their own publications. And in
this suppression, he further suggests, Keynesian academics were at the very least complicit: "attempts
were made to obfuscate, as if authors were at times wilfully trying to confuse their audience and
lead them away from the important insight that each individual bank creates new money when it extends
credit."
In this history, Werner gives special attention to Keynes himself since Keynes seems to have held
each of the three theories in succession throughout his life. Keynes' own intellectual trajectory
thus foreshadows the subsequent evolution of monetary thought, and so probably is partly responsible
for leading successive generations astray. Just so, one apparent legacy of Keynes is that the Bank
of England is currently holding all three theories at the same time! "Since each theory implies very
different approaches to banking policy, monetary policy and bank regulation, the Bank of England's
credibility is at stake." BoE credibility is thus a third reason that all of this matters.
But is it really true, as Werner claims, that these three theories are "mutually exclusive"?
He is at considerable pains to show that they are mutually exclusive, by using a succession of
stylized balance sheet examples. The credit creation theory says that banks make loans by creating
deposits, essentially expanding their balance sheets on both sides by the same amount. (The borrower
of course also expands his own balance sheet, the loan being his liability and the deposits being
his asset. In my own "money view", I call this a swap of IOUs.) In this way, money (bank deposits)
is created that was not there before.
By contrast, the debt intermediation view says that banks make loans by lending reserves that
they are already holding, essentially swapping one asset for another, these reserves having previously
been obtained by someone's deposit. The balance sheet expands when the deposit is made, not when
the loan is made. Banks merely intermediate between savers and borrowers, and do not create money.
In between these two views, the fractional reserve view says that individual banks make loans
by lending reserves, but that the banking system as a whole can and does create money, up to a multiple
of reserve holdings. The banking system does create money, but only after and as a consequence of
the central bank increasing reserves–this is the famous "money multiplier".
So the difference between the theories seems clear, and it also seems like that difference should
be testable empirically simply by watching actual bank balance sheets and seeing what happens when
a loan is made. Does the balance sheet expand or does it not? With the cooperation of an actual bank,
Werner books a dummy loan and finds that the balance sheet of the bank does in fact expand. This
he takes to be scientific proof that the credit creation theory is correct and the others are false.
Not so fast. Let's look a bit closer.
Let me begin by admitting my sympathy for Werner (as I have already hinted by mentioning my own
"money view" as a version of the credit creation view). In fact, Werner's heroes–H.D. McLeod and
Joseph Schumpeter–are my own heroes as well, and I suspect that graduate school exposure to these
authors sent him off on his own intellectual journey just as it did me. Even more, thirty years after
that initial exposure, I find Werner's (co-authored) money and banking textbook
"Where Does Money
Come From?" one of the best introductions to the subject. Last fall I assigned Chapters 2 and
4 in the first two weeks of "Economics of Money and Banking" which I teach at Barnard College, Columbia
University. I'm sympathetic.
But I don't think these three theories are quite as mutually exclusive as he makes them out to
be.
Let us suppose, with Werner, that Citibank makes a mortgage loan to me of $200,000, simply by
swapping IOUs. I then transfer my new asset (the new Citibank deposit) to you, and you transfer your
house to me. As my payment clears, you have a new deposit in your own bank (let's say Chase, to make
it interesting), Citibank has a "due to" at the clearinghouse, and Chase has a "due from". Again,
to make it interesting, let's suppose that Citibank has no reserves, so it enters the interbank market
to borrow some, from Chase. At the end of the day, what we see is that the Citibank balance sheet
is still expanded, so is Chase's, and so is mine. Only your balance sheet stays the same size, since
you have swapped one asset (your house) for another (money). That's the payments perspective.
What about the funding perspective? If we follow the balance sheets through, it is clear that
your money holding is the ultimate source of funds for my borrowing. (You lend to Chase, which lends
to Citi, which lends to me.) In this sense, we can think of both Chase and Citibank as intermediaries,
channeling funds from one place in the economy to another. But, in this example, there is no saving
and there is no investment. The sale of the house adds nothing to GDP, it is just a transfer of ownership.
The expansion of the banking system has facilitated that transfer of ownership by creating a liability
(the deposit) that you apparently prefer to your house, at the same time acquiring an equivalent
asset of its own (the loan). Citibank collects the spread between the mortgage rate and the interbank
rate; Chase collects the spread between the interbank rate and the deposit rate.
But all of that is only what happens right at the moment of payment. What happens afterwards depends
on the further adjustment of all of these balance sheets. One way this could all work out is that
Citibank packages my mortgage with others to create a mortgage backed security, and that you spend
your Chase deposit to acquire a mortgage backed security (perhaps indirectly through a mutual fund
that stands in the middle). In this scenario, the newly created money is newly destroyed, the balance
sheets of both Citi and Chase contract back to their original size, and the end result is that you
are funding my loan directly. But again, no saving and no investment, just a change in your asset
allocation, away from money toward fixed income investment.
Obviously this final scenario is a limiting case on one side. The limiting case on the other side
is that you (or whoever you transfer your money to) are willing to hold the newly created money balances
as an asset, so you continue to fund my loan indirectly. Now when Citibank securitizes and sells,
it is able to repay its interbank liability to Chase, and for simplicity let's say that Chase uses
that payment to acquire a different money market asset. One way this could all work out is that a
shadow bank–money market funding of capital market lending–acquires the security and uses it as collateral
for wholesale money market borrowing from Chase. Again, no saving and no investment, but the new
money stays in circulation and is not destroyed.
These are the limiting cases, and obviously anything in between is also possible, depending on
the portfolio decisions of Citibank, Chase, and you. But in all the cases, the debt intermediation
view of banking is perfectly consistent with the credit creation view of banking. One focuses on
the ultimate funding, while the other focuses on the initial payment.
That said, I have to agree with Werner that the credit creation process is all too commonly left
out of the story–most modern courses never even mention the payments system–and it is a real (and
important) question how this came to be so. It is a further real (and important) question why the
intellectual memory of how the process actually works was left to marginalized sections of academia–Werner
mentions specifically the Austrians and post-Keynesians. I'm not so sure that it was a central bank
plot, though I do think that the shift in academic fashion toward studying equilibrium of a system
of simultaneous equations played a role in obscuring the kind of dynamic balance sheet interactions
that are the essence of the story.
What I would emphasize however is not the negative but the positive. The fact of the matter is
that today the credit creation view is out of the shadows, and no longer the exclusive property
of the marginalized . In evidence of this, I would direct your attention to the two Bank
of England papers that Werner himself cites:
here and
here . But I would add to that also the most recent report coming out of the Group of 30
"Fundamentals
of Central Banking, Lessons from the Crisis" . On page 3 you will find the following:
"In a barter economy, there can rarely be investment without prior saving. However, in a world
where a private bank's liabilities are widely accepted as a medium of exchange, banks can and do
create both credit and money. They do this by making loans, or purchasing some other asset, and simply
writing up both sides of their balance sheet."
That's the truth that Werner wants central banks to admit, and now it appears that they have admitted
it. The next question is what difference it makes, and that's a question for next time. Already it
should be clear that progress toward answering that question will require us to be more careful about
issues of payment versus funding.
P.S. BTW, the title of this post [at Merhling's site, which is "Great and mighty things which
thou knowest not" [?]] is taken from Jeremiah 33:3 which Werner references in a footnote to his title:
"should grains of wisdom be found in this article, the author wishes to attribute them to the source
of all wisdom." Werner is apparently listening to powers higher than just McLeod and Schumpeter!
I think another aspect that should be considered is the preservation of surplus money through
government debt.
For example, Volcker is credited with curing inflation through higher interest rates, but that
slowed the economy as well and so reduced the need for money. It wasn't until Reagan had increased
the deficit to 200 billion in 82 that inflation seemed to come under control enough that they
could lower rates.
Now one way to create higher rates is for the Fed to sell debt it bought to create the money
in the first place. So what is the difference between the Fed selling debt it is holding and the
Treasury issuing fresh debt, other than the Fed destroys its money and the Treasury spends it
on public works, thus Keynsian pump priming.
So who buys this debt, but those wealthy enough to have surplus money. Which suggests that
if there is a surplus of money in the system, causing inflation, the easiest place to remove it
is from those with a surplus of money.
Now money really does function as an enormous, glorified voucher system and what is more destructive
of such a system, than enormous amounts of surplus vouchers?
So given that those with lots of such excess vouchers consequently have leverage over the rest
of the system, what way to better preserve this wealth, than to have the public borrow it back
and pay interest, even if much of what it gets spent on doesn't produce sufficient income to pay
that interest, if not actually lost?
Eventually though even the public can't afford to keep this up, so what is the alternative?
Now most people save for predictable reasons, from raising children, housing, healthcare, to
retirement and funerals. So what if the government, i.e., the public, were to threaten to tax
excess money back out of the system, rather than just borrow it? Necessarily people would quickly
find means to invest into these future needs directly, rather than trying to save up notational
value. The problem is that we don't know exactly what we will need for what, which would mean
we would have to invest into community and public projects, rather than save for our own specific
needs.
While this might seem onerous, consider that we currently live in a highly atomized society,
that is largely mediated by that failing financial mechanism. So if we had to start functioning
as a more holistic group, with more organic interactions and public spaces and commons, people
might have to come out of their shells a little more and deal with lots of other social and personal
issues, which might not be a bad thing.
Basically we treat money as both medium of exchange and store of value, but these are different
functions, as a medium is dynamic and a store is static. For instance, in the body, blood is the
medium and fat is the store. Try storing fat in the arteries and you get clogged arteries, poor
circulation and high blood pressure to compensate, which is analogous to our financial issues,
with a clogged banking system, poor circulation to the rest of the economy and quantitive easing
to compensate.
While the brain might need more blood than the feet, it does neither any good for the feet
to rot and die from lack of circulation, nor does it do the brain any good to have excess blood.
Similarly we need a stronger social structure and a leaner, more efficient economic medium, in
which the excess is stored as the muscle of a stronger society and a healthier environment, rather
than just treating them as stores of wealth to be monetized and siphoned away.
Yes, the money creation process has been a big lie for a long time. In any case the Bank of England came clean a couple of years ago and admitted that standard
story of money creation was false. They even acknowledge that it is not properly explained in
most money and banking textbooks, which is a staggering admission.
Paul Krugman wrote a column a couple of months ago where he claimed that banks take in savings
from depositors and lend them out to borrowers which tells you either: 1) he doesn't' know how
banking works or 2) he is part of the conspiracy to keep the public in the dark.
In the mainstream world money is just a "veil" that obscures your view of how the divine markets
work. They deliberately leave it out because it just confuses things…
No wonder no one in that world saw the GFC coming, they still all claim whocuddaknowed?
There is evidence that Krugman seems to have great difficulty admitting he was wrong. He even
contends that using IS-LM is a good too for introducing students to the macroeconomy, even when
they must unlearn it when they delve deeper in to the workings of the macroeconomy, and this is
after Hicks himself rejected it as being an inaccurate depiction of the macroeconomy later in
his life. I can't say what Krugman is thinking, but then I don't have to. I can go just by what
he writes. And what he writes makes me think he doesn't know how banking works. I find it difficult
to believe he is part of any conspiracy. But I may be wrong.
Yes it's hard to believe that Krugman might not know how money/banking works but he is a very
ideological guy. I happen to be sympathetic to many of his ideological views but any one who is
intensely ideological is rarely a critical and independent minded thinker. Ideology is way of
simplifying complex things and making your self more comfortable, and doesn't lead to knowledge.
I am no expert on money and banking but I have read ten books on the subject over the last four
years and numerous papers. I am pretty sure I understand it now. I think this guy Werner is right.
It seems probable that there was an orchestrated campaign to obfuscate how banking and money creation
work and one can imagine why that might have happened. Banking is quite literally a pyramid scheme
under even the most conservative circumstances! Such a system can work and makes sense if it is
prudently managed, regulated and limited in scope.
My take is that the fractional reserve and intermediation models are just ways of obfuscating
the way banking actually works and the credit creation model is the accurate one. I have some
advice for anyone who is struggling with the concepts which is as follows: always merge all the
banks in the banking system into one bank in your mind. Assuming multiple banks as the author
above does is irrelevant to the analysis and only serves to add confusion.
I enjoyed the article very much. And it does seem to me that money creation is made to seem
very, very, complex. Now maybe I'm just too stupid, but it always strikes me that when people
simply describe something, they either really don't know, or they are trying to bamboozle you…
I think the article would have been more enlightening though if the example had been for a
house that was TO BE BUILT.
Using that as an example, it seems to me that money is LOANED into existence – the person who
wants the home loan has a good reputation, but the whole point of the loan is that they don't
have nearly enough money to buy the house.
The carpenters and other workers don't get paid until they have done work (they loan their
work to their employer), i.e., produced a house (or some portion of it). The money in the loan
becomes real because a house that didn't exist now exists. There is more stuff in the world, and
there is more money. And I think it explains something important – not any loan is useful. A house
worth 100K that is sold for 1000K but than is foreclosed upon – somebody has to take a real loss
– either the person who got the home loan, and to the extent that they can't pay the loan back,
a builder or the bank takes the loss (if the foreclosed value is less than the original loan value)
So, is that correct?
Again, thanks for the article and I am looking forward to the next one!
Pick any year post WWII (because the data is readily accessible).
Compare the levels of federal spending and credit expansion.
Federal spending created more money every year except for the years 1998 thru 2007, where it
was about even, and for 2006 and 2007 credit expansion was some 50% higher.
Then we got the mother of all credit crises.
Over that post WWII period federal spending created ~$78T while credit created ~$46T.
The common refrain is that federal taxes subtract from federal spending so it ends up being
less.
Except in what universe do income taxes accrue only against income resulting from federal spending?
It's nonsense and should be derided as such. It's an accounting convenience that does not reflect
what is actually happening.
It may make sense for National Accounting (and to keep banksters in the drivers seat) but it
makes zero sense in a rational analysis of a real-world system. That is the only way banks could
be touted as the source of most of our money.
Despite an otherwise sound argument this article perpetuates the myth.
The banksters apparently have a hold on everyone, including the so-called 'good guys'.
Some justification based on the level of bank reserves or some other convoluted argument in
5,4,3,2,1 …
Very interesting and I'm looking forward to your next installment.
I'm especially interested in the transfer of reserves from Chase to Citi and as you further
point out 'Chase possibly using its reserves to acquire a different money market asset. One way
this could all work out is that a shadow bank–money market funding of capital market lending–acquires
the security and uses it as collateral for wholesale money market borrowing from Chase.'
This seems to be a transmission mechanism for asset appreciation as Eric Tymoigne is getting
into is his excellent series:
"post 7 will start the private-bank posts) on monetary policy and the QE -asset price channel
will be explained. But here is a short answer:
No bank's don't use cash to buy assets. If they deal with non-bank agents they just credit bank
accounts, if banks deal with a fed account holder they debit their reserve balances to make payments.
The link works through interest rate, arbitrage, search for yield, and the fact that QE reduces
the quantity of securities available in the market."
"the issue is how they would transfer the funds to make the purchase? They could buy securities
if they find a fed account holder willing to sell them securities: Treasury is one, GSE is another
one. Non-financial institutions no."
All they do is talk about how the parts of the machine move - which is itself an amazing problem
of conceptual collinearity - but not the phenomenon of the machine itself.
More and more you just say "Why not go to Youtube and check out a Rhianna video, rather than
read another one of these essays."
Eventually maybe they'll get it. But when they study economics their whole adult life - and
nothing else - it makes it hard. It's not like they're dumb or that they lack mental ability.
In fact, they're all intelligent individuals who are quite capable in most areas of thinking.
It's just that the conceptual language they need to use in order to perceive the phenomenon itself
is a language they do not know. And so they look at reality and they try to make sense of it using
the language they do know, and because words themselves and the ideas in the words catalyze perception,
their limited language is not fully adequate, and they don't see or know that. What can you do?
Everybody has to see it for themselves.
At any rate, you'd think by now it wouldn't be so hard. But most people aren't interested in
this sort of thing so progress is really slow. Most people just go right to Youtube.
Adenosine triphosphate. The example several years ago in the comments, by a biologist, that
it would be an extinction event for a colony of amoeba if a few of them decided to short amoeba
futures and just hoard all the adenosine triphosphate – the one chemical every amoeba must have
to transfer energy. Wish it had been an analogy to symbolic ADP which had usurped the real stuff
and was being hoarded to make sure it maintained its value.
You assured me susan was a bona ride adjunct professor of theosophical studies at the University
of Magonia. I want, nay, I demand my tuition fee, which apparently I had to pay in advance because
otherwise 42 other Chinese applicants would be in line for my place, back.
Dunno why they have all these theories. It's simple. The Fed lowers interest rates, the mark
to market value of bank assets go up, which greatly improves cap ratios, then banks don't need
liabilities anymore. They just can make endogenous money and give it out to borrowers' banks.(it's
all done electronically and fast so no one notices) All the Big Guy econ types know that.
All the rest of it is just details banks go thru just for show. Plus they can securitize and
sell any assets they think may drop in value. They're smart people.
Now, the other thing all the Big Guy econ dudes always say is once us little folk figure it
out, something wonderful is supposed to happen. Maybe I missed it, but what thing is that???
Let us suppose, with Werner, that Citibank makes a mortgage loan to me of $200,000, simply
by swapping IOUs. I then transfer my new asset (the new Citibank deposit) to you, and you transfer
your house to me. As my payment clears, you have a new deposit in your own bank (let's say Chase,
to make it interesting), Citibank has a "due to" at the clearinghouse, and Chase has a "due from".
Again, to make it interesting, let's suppose that Citibank has no reserves, so it enters the interbank
market to borrow some, from Chase. At the end of the day, what we see is that the Citibank balance
sheet is still expanded, so is Chase's, and so is mine. Only your balance sheet stays the same
size, since you have swapped one asset (your house) for another (money). That's the payments perspective.
Is the house owned free and clear? If not, the exchange eliminates that original liability/asset
on someone else's balance sheet so everything is now at a net zero as far as new money circulating
in the economy. Banks did not create anything new. They only exchanged one Asset/Liability
for another Asset/Liability. Even if the house was paid off 20 years ago, there is no new money
created from this transaction. The only way "new money" is created would be through interest
paid on Treasuries, and direct deficit spending by federal government.
As the commenters on the post at Prof. Mehrling's site have observed, his argument is logically
flawed. He concludes: "But in all the cases, the debt intermediation view of banking is perfectly
consistent with the credit creation view of banking."
The intermediation view of banking "says that banks make loans by lending reserves that they
are already holding," as he explains at the beginning of his piece. In his example, the deposit
that is created by the banking system funds the loan. Of course, in both case intermediation takes
place but the nature of the intermediation is not comparable.
In the first case, banks have no special status in the economy. After all any of us who has
a balance of $100 can lend out that balance of $100. In the second case, the only reason the bank
can make the loan is because of a social norm in which the public trusts the banking system and
is willing to keep its money in banks. This fact has always been a fundamental component of the
credit creation theory of money - it is founded on the public's trust in the banking system. This
trust allows banks to expand the money supply - at the potential expense of the public.
While I have great respect for Prof. Mehrling, it is far from clear that he has a good understanding
of the credit creation view of money.
When I looked into the data about 5 years ago, it appeared that only a few large banks were
actually operating on a credit-creation basis. Most banks (meaning your local, independent banks
and credit unions) appeared to be operating on an intermediation model. Deposits are always the
cheapest way to fund a loan, and for small banks, that looks like pretty much the only way they
do it – iirc, loans were 60-80% of deposits in most banks. However, at JPM, BofA, etc, their loans
were well over 100% of their deposits…like waaaay over. So it looked to me like just a few big
players were driving endogenous money creation, while most banks actually were doing, essentially,
what fractional-reserve theory says they do.
That's my understanding, but I don't claim to be an expert.
Banks no longer keep their loans on balance sheet, so a simple static analysis of their balance
sheet doesn't tell us much about how much credit creation they are doing. To study the degree
to which banks create money you have to look at the role they play in the shadow banking system
as well.
Too some degree… my concerns about the shadow sector vastly out weigh the traditional sector
e.g. has the traditional sector become [increasingly] just a front house op to generate velocity
for the shadow sector, and the latter just needs a – store of – when the economy gets a black
eye.
Therein lies the rub e.g. some fixate on one component of a veritable galaxy of operational
scope, so at this juncture on can surmise that new universes of credit are created and inserted
into the multiverse to survive on their own [inhabitants luck of the draw]. Maybe theoretical
physics would be a better methodology of describing credit activity's at this juncture than thermodynamics,
ideology, or socio-economic-political optics…
There's a confusion here. Suppose a bank with reserves R and corresponding deposits X, in addition
to other balance-sheet items, has
R X.
at the top of its balance sheet. It makes loan L, which creates new deposit D to obtain balance
sheet
L D *
R X.
The borrower/deposit-holder transfers her deposit to another bank, so the original bank's balance
sheet drops down to
L X,
while the new bank gains this on its balance sheet:
R D.
So the sequence is (1) create new deposit D and (2) transfer the deposit to the new bank. This
is the money-creation model in action. It is correct.
When we imagine that reserves are being loaned instead, we are actually skipping the balance
sheet marked * above. Comparing the balance sheet before and after the skipped one, we come to
believe that reserves have been turned into a loan. This is incorrect. The newly created deposit
is simply in a different bank. To see what is really going on, we have to consider the loan and
transfer separately.
Can anyone tell me where that $100 came from? Or the $200,000 to buy that archetypical house?
We got lots of "blind philosophers feeling their part of the elephant and pronouncing its essence"
but where does "wealth" originate, as opposed to money and "assets?"
"In the first case, banks have no special status in the economy. After all any of us who has
a balance of $100 can lend out that balance of $100"
yes you can lend it out, but the bank is 1) at the top of collectors line 2) has backing from
the FDIC. When you loan 100$ to someone, you dont have that money anymore. When you lend 100$
to the bank, you still have that money, and about 10 other people have it as well.
I'm sure it must be obvious to brighter and more subtle folks than me, but where does that
$100 that's referenced here come from?
I have an antique wood-bodied block plane (the woodworking kind) made by my great-grandfather
( except for the perfect cast iron blade and two nails). He used tools he made or bought to carve
the body and chisel out the throat and make the wedge. I was offered $100 for it recently. Where
does the wealth or value that my ancestor's plane, now mine by inheritance and survival, come
from? Or all the other $100s that make up " the economy" that the MorgulBankers are conjuring
derivatives out of?
. . .I was offered $100 for it recently. Where does the wealth or value that my ancestor's
plane, now mine by inheritance and survival, come from?
From your ancestor's labor in creating the plane and an ongoing demand from people interested
in acquiring the plane.
Where the $100 offer comes from is the perceived value of the plane compared to other planes
on offer, such as for example the Chinese made crap in Home Depot.
Since it sounds like you didn't sell it for $100, you value it at a higher price. Wondrous
market eh.
What is truly amazing about this is that in year 2016 there is still massive confusion and
ambiguity about how money and banking work. How can that be? Bizarre!
A. Easily: "the false theories are guiding current bank regulation and development policy,
leading down a blind alley." If correct understanding would lead to a correct regulation, then
those whose interests would no be served by correct regulation will obfuscate correct understanding.
Baby yoga for kids living in the forest, who never go outside alone; the highest real mortality
rate in the US; and the prototype for Family Law feeding Obamacare in the big city – does it get
any dumber than that?
The psychologists are just smart enough to get the majority killed. The markets are an exercise
in control, a game, and nothing more, until Little Johnny jumps off Science Building and shorts
the insanity all together. Did you see that last impulse, transferring wealth to the Soros clan,
now demanding another bailout?
The assumption of emotion-based decisions, lest one be a robot, is ludicrous, but that is the
basis of empire marketing. The majority short-circuits itself, with the false assumptions presented
by empire media broad band, the frequency it chooses to occupy, to mirror itself, and obsessive-compulsive
behavior begets itself. The brain stem is a geared Archimedes Screw.
Because the body is grounded to earth, the dc side of the brain is self-obsessed, and LSD offsets
the signal into the noise of the clutch, is no reason to hand your life over to a psychologist
printing money. Because the predicitive subconscious exists in a feedback loop with adaptation
doesn't mean that everyone is sick, stuck on an empire frequency, and mentally ill if they don't
seek diagnosis. Money is not reality, except for those who choose it.
Wall Street sells mortgages with increasing duration, Madison Avenue produces crap for compliance
at increasing cost, and the majority indentures future generations with bonds, until they can't.
Global finance simply liquidates natural resources and moves, in planetary rotation. Relative
to unincorporated farming, the land is largely fallow, but the participants have TV, cardboard
and gadgets, dependent upon empire for a battery.
Net, populations vacillate between denial and depression, with growing impulses of anger, in
a market for psychologists who see others as a reflection of themselves. Married people raising
independent children cannot afford to be quite so stupid. And without such children, the economy
can only implode, reflecting the psychologists' own self-obsession.
Do you remember that story about the natives not seeing Christopher's ship, until the shaman
pointed it out, when the natives were slaughtered by war, disease and poverty?
Females can breed on equal rights for a thousand years, with males providing the technology,
but they will just end up a thousand years behind the curve. Women are bred to think in linear
time, and men to think in frequency, because that is what children need. One is the counterweight
and the other is the cab.
The majority, focused on self, rides the counterweight to floors on one side, all dead ends,
and is jealous of children exiting on the other side. The choice at the crossroad is always the
same, investment or consumption. The majority is not experiencing falling living standards and
increasing income inequality because some banker provided the money, an excuse, for multicultural
unicorn dreaming.
Retired people generally prefer a Fred and Wilma economy, city kids generally prefer a rat
race, and once separated for the purpose, the police are generally dispatched to slice and dice
families into sausage to feed the former, by authorities always pleading ignorance, majority vote.
Once you see those cops, promoting gang awareness, it's time to go. At empire cycle begin, you
have plenty of time; now you have none.
When I began writing this, I had no idea where the focus would be, but I do have a pattern
database and a linear time translator, such as it is. My wife can tell you the weather 25 years,
3 months and 10 days ago. Choose a wife that enjoys living in the moment, and a husband that enjoys
an independent frequency, compliments capable of trust in an untrustworthy world.
My mind is a steel trap, my wife's is Disneyland, and we live in the feminist capital of the
world, as you might suspect with an ac mind. Your perspective is your own, if you choose to have
one, and we all go through phases, climbing and descending the ladder of consciousness. I am simply
sharing, after decades of listening and saying not a damn word, in the empire, on the eve of WWIII.
From the perspective of legacy, which has no clue what is in those libraries, the Internet
was designed to extend linear thinking, to nowhere. From the perspective of labor, the Internet
was designed to demonstrate the fallacy of limiting yourself to linear thinking. Contrary to popular
mythology, choice is not about the color of your tennis shoes made in China.
If it's not anonymous cash, it cannot store value, because independent children are reared
beyond empire's grasp, the physical manifestation of intellectual self-obsession, which Sweden
is now learning, way to late, a slave to Germany, and Austria in particular. Knowing what needs
to be done and doing it are two different things. The psychologists in New Hampshire produce drug
addiction, their solution is drug rehab, and Iowa is supposed to be nuts.
You didn't think Keynes sprang from nothing did you?
Thanks. The wife likes to keep track of water. She's like a human testing machine. Best water
I had was up at bay of fungi, big moose. That document on Ford's car made of hemp and plastic
was pretty cool, before he was told he would be making cars out of steel, finance.
Always thought I would end up in Australia, but like the doctor thing, the critters have to
destroy everything they touch.
"Contradictions, of which money is merely the palpable manifestation, are then to
be transcended by means of all kinds of artificial monetary
manipulations. It is no less clear that many revolutionary
operations with money can be carried out, in so far as an attack on
it appears only to rectify it while leaving everything else
unchanged. We then beat the sack on the donkey's back, while
aiming at the donkey. But so long as the donkey does not feel the
blows, one actually beats only the sack, not the donkey;
contrariwise, if he does feel the blows, we are beating him and not
the sack."
At the end of the day, what ultimately needs to be impacted is not the pieces of paper.
All we can ever do with those is hand people claims against future production.
And when the theory of "managing" an economy stops at the control of aggregate numbers as its
only allowable tool to influence the process, it can never accomplish the objective of avoiding
major crises.
"... The US empire is one of Multi-National corporations and International Trade Deals. ..."
"... Im intrigued by that assertion, especially if this comes from a more libertarian perspective and an author who actually mentions NATO. Of course corporate welfare in various forms is a key part of what is happening, but the core issue is a literal military empire, not some vague commercial facsimile of one. ..."
"... The direct imperial threats include economic warfare, as displayed by the IMF and ECB. As demonstrated in Greece, Ukraine, and before Greece Ireland. ..."
"... By 1978, US inflation had risen to 9% while inflation in the rest of the world slowed dramatically by comparison. Both the Carter administration and the Fed did everything in their power to control dollar devaluation, but it was clear by this time that without the assistance from foreign governments the dollar would not be able to survive . … Over the course of the next six years the dollar experienced a meteoric rise in value. ..."
The US empire is one of Multi-National corporations and International Trade Deals.
I'm intrigued by that assertion, especially if this comes from a more libertarian perspective
and an author who actually mentions NATO. Of course corporate welfare in various forms is a key
part of what is happening, but the core issue is a literal military empire, not some vague commercial
facsimile of one.
One of the most successful Big Lies in our domestic political discourse
is to blame convenient corporate villains instead of the public officials who are responsible
for decision-making and implementation.
This isn't the 1980s anymore. The global financial system (post Bretton Woods) collapsed somewhere
there in the 1990s. Today, things are held together by direct imperial threats, not corporate
board rooms.
It is not dollar hegemony that rules the world, but the global financial system which
gives the dollar its place of privilege.
Syllogism? What came first the chicken or the egg?
Where to begin – one could suggest the author read Chapter 1 of Wray's MMT and rewrite considering
sector balances and fiat currencies, and present the different line of argument which would arise.
"By 1978, US inflation had risen to 9% while inflation in the rest of the world slowed
dramatically by comparison. Both the Carter administration and the Fed did everything in their
power to control dollar devaluation, but it was clear by this time that without the assistance
from foreign governments
the dollar would not be able to survive
." … "Over the
course of the next six years the dollar experienced a meteoric rise in value."
Maybe not central to the main argument but I found this claim (in bold) implausible.
"... L. Summers claims the fed faces asymmetric risks, because failure of a too-loose policy can more easily be corrected than failure of a too-tight policy ..."
Why? What the Fed did today was raise the Fed funds rate. The Fed funds rate is the rate at which
banks lend their excess reserves to one another in the interbank lending market. Interbank lending
is at an all-time low because banks are already holding such a staggering quantity of excess reserves
that they have very little need to borrow any of them from anybody else. Many banks could increase
their lending 5 or 10 fold without acquiring a single additional dollar of reserves.
The prevailing effective Fed funds rate was at a historically unprecedented 0.12% rate that
was only half of the historically unprecedented target rate of 0.25%. Now that the target rate
has gone up to 0.50%, the Fed funds rate will still be *far* lower than it was at any time between
1954 and 2009.
So the Fed has slightly increased the rock bottom price in a market few people are availing
themselves of because of gross excess supply in that market for something they don't need to obtain.
It increased that rock bottom price to a slightly higher rock bottom price. And yet there are
people who are concerned this is going to make money too "tight".
The number and convoluted complexity of the tall stories the neo-monetarist and New Keynesian
quacks have had to tell to sell people on this patently absurd confusion and hysteria is breathtaking.
Now those people are all quite sad, because their 5 year experiment in string pushing and do-nothingism
is coming to an end, and they weren't able to prove their conservative theory that the nation's
economic goals can be achieved with central bank rate twiddling and verbal exercises in expectations
management.
Ben Groves -> Dan Kervick...
Milton Friedman was a very very very bad man.
am -> am
The early BBC take on the move. I think we will see currency movements against the dollar and
matching interest rate moves, especially in the developing world. If they do proceed to normalisation
over the next several quarters then this instability will continue world wide over the next several
quarters. Its effect on the US and the world economy will be depressive although probably not
recessive. That will show it should have been avoided. Apologies for the crystal ball. http://www.bbc.com/news/business-35117405
JF said...
What happens with the FED's book of assets? At the end of the press release they indicated
that they will continue to roll-over their book of assets as the bonds mature - " it anticipates
doing so until normalization of the level of the federal funds rate is well under way."
That is a significant alteration in their policy - it ties the redemption of the maturing book
of assets to increasing interest rates - targeting something they call normalization.
So does this mean that interest rates have to come up to 3% or so before they will stop the roll-over?
spencer said...
Maybe the interesting thing is that almost all of them expect 2.0%, or maybe a bit higher,
real GDP growth over the next two years. That is about the same as it has been. Does this imply
that they expect higher rates to have little of no impact?
pgl -> spencer...
Some suggest potential real GDP is growing at only 2%. Let's say that is correct. The GDP gap
is over 3%. So are they saying they want this gap to continue? If so - a bad decision.
don said...
L. Summers claims the fed faces asymmetric risks, because failure of a too-loose policy
can more easily be corrected than failure of a too-tight policy. Not sure I see this. For
example, I would expect a reverse course by the fed now to quickly bring dollar weakening and
exuberance in equity markets...
"... Full employment is important for long-term reduction of inequality. Periods of high unemployment not only do damage to workers who lose their jobs and see their skills atrophy, but also cause those who keep their jobs to experience weaker wage growth. This is especially hard on those with lower incomes, who see larger cuts in working hours during periods of high unemployment. ..."
"... The elites like Feldman seem to be fine with golden parachutes for the wealthy but want to give the poor a lottery in place of a pension. Social Security is insurance that provides a safety net. Replacing SS with investments that allow people to fall through the cracks is not a good idea. ..."
Full employment is important for long-term reduction of inequality. Periods of high
unemployment not only do damage to workers who lose their jobs and see their skills atrophy, but
also cause those who keep their jobs to experience weaker wage growth. This is especially hard
on those with lower incomes, who see larger cuts in working hours during periods of high unemployment.
...As it looks like the economy will be weak, and interest rates low, for the foreseeable future,
this is a problem that won't go away on its own. And as she concludes, "excessive emphasis on
low and stable inflation at the expense of a strong labor market is unwarranted. Privileging low
inflation over maximum employment means that more people are likely to experience unemployment,
underemployment, or stagnant wages."
bakho -> pgl...
Our wealthy elites like cheap labor. High unemployment leads to cheap labor.
The newly employed are not likely to take up a collection to hire an outgoing Fed member. A banker
might be willing to hire at a premium.
BenIsNotYoda -> pgl...
The Fed can not reduce inequality. This should be done with fiscal action - taxes, min wage
hikes etc. To push Fed to consider inequality is pure mission creep and delusional. They will
create more problems trying. What is next on the list? Cancer?
pgl -> BenIsNotYoda...
I'm not against fiscal stimulus but that is not decided by the FED. Congress is run by gold
bug idiots. So the point that the FED should not be run by gold bug idiots stands...
BenIsNotYoda -> pgl...
The rule should be - do not do stupid things. And by absolving congress and pushing the Fed
to do things they can not, you are part of the problem.
Peter K. -> BenIsNotYoda...
"The Fed can not reduce inequality."
Why not?
"This should be done with fiscal action - taxes, min wage hikes etc."
Why not all of the above?
"To push Fed to consider inequality is pure mission creep and delusional."
Why?
"They will create more problems trying."
Not true.
"What is next on the list? Cancer?""
reductio ad absurdum
William -> Peter K....
A Reductio is not actually a fallacy, it's an acceptable form of refutation.
His actual fallacy was a Slippery Slope.
That being said, I agree with pgl. Just because the person behind the steering wheel is trying
to drive you into a ditch doesn't mean the person controlling the pedals can't hit the breaks.
(Though our current situation is more like the person behind the wheel is refusing to steer, and
is instead spending their time drilling holes in the gas tank to keep us from going anywhere.)
Sanjait -> William...
His fallacy was in the original claim that the Fed can't do anything to reduce inequality.
It's an especially obtuse claim at this moment in time.
Syaloch -> BenIsNotYoda...
Binder: "Privileging low inflation over maximum employment means that more people are likely
to experience unemployment, underemployment, or stagnant wages."
Sure sounds to me like the Fed can reduce inequality.
Or do you think unemployment, underemployment, and stagnant wages have no impact on inequality?
RGC -> RGC...
Pushing on a string
From Wikipedia, the free encyclopedia
Pushing on a string is a figure of speech for influence that is more effective in moving things
in one direction than another – you can pull, but not push.
If something is connected to someone by a string, they can move it toward themselves by pulling
on the string, but they cannot move it away from themselves by pushing on the string. It is often
used in the context of economic policy, specifically the view that "Monetary policy [is] asymmetric;
it being easier to stop an expansion than to end a severe contraction
According to Roger G. Sandilans[1] and John Harold Wood[2] the phrase was introduced by Congressman
T. Alan Goldsborough in 1935, supporting Federal Reserve chairman Marriner Eccles in Congressional
hearings on the Banking Act of 1935:
Governor Eccles: Under present circumstances, there is very little, if any, that can be done.
Congressman Goldsborough: You mean you cannot push on a string.
Governor Eccles: That is a very good way to put it, one cannot push on a string. We are in the
depths of a depression and... beyond creating an easy money situation through reduction of discount
rates, there is very little, if anything, that the reserve organization can do to bring about
recovery.[2]
The phrase is, however, often attributed to John Maynard Keynes: "As Keynes pointed out, it's
like pushing on a string...",[3] "This is what Keynes meant by the phrase 'Pushing on a string.'"
The biggest factor increasing inequality is not high unemployment right now. It is sky high
asset prices that is raising the net worth and income of the top 1% or 0.1%. Piketty documented
this as well - asset prices and inequality cycles are highly correlated.
So what is Fed to do? They caused it in the first place.
Letting the economy run hot so wages go up - this way will take forever to reduce inequality
to any appreciable degree.
Cascatore Хачатурян -> BenIsNotYoda..
"
Fed can not reduce inequality. This should be done with
"
~~BenIsNotYoda~
Do FG have 4 trillion $$$$ of assets still on their balance sheet? What happens when they auction
these off into the free market? All asset prices drop? By supply/price/demand? As asset prices
drop what happens to buying power of 1% jokers? Drops?
As buying power of 1% dudes drops they are able to buy less thus to some extent they cease to
price 99% out of the market. Do you see the mechanism involved?
When the benBernank pushed onto the top of the stack first high rates then middle rates then low
rates then small balance sheet as he expanded sheet with *twist*, you are thinking that the graniteJanet
will pop balance sheet off the top of the stack first later pop 0% rates off top of the stack
as we come out of the inner loop then revert to the parent process. This is subtle but important.
The graniteJanet used an offset on the stack pointer to dip into the middle of the stack to access
higher rate first, bypassing the 4 trillion balance sheet. Do you see how all this fits together?
You now have 64 micro-seconds to crunch the numbers.
Good
luck
!
JohnH -> pgl...
As usual, pgl opposes any ideas that carry of whiff of criticism of the Fed and its ineffective,
redistributive monetary policy. He must be responsible for PR for the Fed...
In fact the criticisms are spot on--its focus is more on higher inflation than on legally mandated
maximum employment, it refuses to enforce regulations, and it is rife with cronyism, as Bernie's
audit of the Fed revealed years ago.
Stiglitz advocates reform, noting that "The real problem is that money does not go to where it
should go, as we see for example in the United States. The money does not flow into the real economy,
because the transmission mechanism is broken...Access for small and medium enterprises to credit
is too expensive. That's why it is so important that the transmission mechanism work." And of
course, consumer credit rates barely budged since the Fed cut rates to zero, so ordinary people
don't see the benefit, except for affluent mortgage holders.
Of course, all of this is anathema to Fedbots like pgl, who insist that everything is hunky dory...if
only the Fed would feed free money to his cronies forever, it would be heaven on earth.
Instead of taking any criticism of the Fed off the table, as pgl and his coterie fervently desire,
it's long past time for a thorough debate about the Fed, its failed policies, and ways to extensively
reform it.
bakho said...
Noah Corrects Feldman's funny numbers on entitlements and wealth inequality and comes to the
opposite conclusion. The elites like Feldman seem to be fine with golden parachutes for the
wealthy but want to give the poor a lottery in place of a pension. Social Security is insurance
that provides a safety net. Replacing SS with investments that allow people to fall through the
cracks is not a good idea.
"... Higher unemployment reduced workers' bargaining power and lowered demand in the economy. This slowed inflation. In fact, the skipping from Gerald Ford to Paul Volcker, misrepresents the actual course of inflation over this period. Inflation did in fact come down. After peaking at 10.4 percent in 1974, it fell back to 5.5 percent in 1976 before it started to rise again. The main factor bringing inflation down was a steep recession in 1974-1975, so the method for bringing inflation under control was not quite as difficult to figure out as the piece implies. ..."
"... In sum, the inflation in the 1970s was nowhere near as debilitating as this piece implies. It was not in the least mysterious and would likely have come down even without the magic of Paul Volcker. The Volcker recession destroyed the lives of millions of workers and their children. It is very much an open question as to whether a more rapid reduction in the rate of inflation was worth this pain. ..."
Thoughts on NPR's Discussion of the Weimar 70s: Deflating Inflation Myths
National Public Radio had a piece * on the horrible inflation of the 1970s and how the country
was rescued by the herioics of Paul Volcker who was Federal Reserve chair at the time. The piece
raises several points that could use a bit more context and leaves out some important information.
First and most importantly, the piece implies a world that did not exist. It begins with a
discussion of a speech by President Gerald Ford in 1974. It told listeners:
"Inflation was the silent thief, and every year it got worse. Inflation got worse. It went
from 10 percent to 11 percent to 12 percent. It wasn't clear exactly why and no one could agree
on a simple way to fix it."
Neither part of this story is especially true. Inflation was hardly silent. It was widely reported,
so people did know about it. Nor was it obviously a thief. Many, perhaps most, wage contracts
were indexed to inflation, which meant that wages rose more or less in step with prices. While
this was not true for everyone, a substantial segment of the population was able to insulate itself
from the effects of inflation. This is one of the factors that made it harder to contain inflation.
It is also not true that no one knew how to fix it. Higher unemployment reduced workers'
bargaining power and lowered demand in the economy. This slowed inflation. In fact, the skipping
from Gerald Ford to Paul Volcker, misrepresents the actual course of inflation over this period.
Inflation did in fact come down. After peaking at 10.4 percent in 1974, it fell back to 5.5 percent
in 1976 before it started to rise again. The main factor bringing inflation down was a steep recession
in 1974-1975, so the method for bringing inflation under control was not quite as difficult to
figure out as the piece implies.
Then we get this account of the period from New York University economist Bill Silber:
"SILBER: It sort of took over your life. You had to worry about buying things before they went
up in price. Every time you turned around you'd say, well, I mean, I better buy it now rather
than later and of course that's the process, which makes the inflation accelerate because everybody
starts thinking that way. Just buy something because you know if you buy it now you're better
off than if you wait.
"KESTENBAUM: Do you remember that happening with you? Did you buy anything for that reason?
"SILBER: I think I bought a house.
"KESTENBAUM: People buying houses just because they think they'll be more expensive the next
year - that is not good...."
Perhaps inflation took over Mr. Silber's life, but this is not likely true for many other people.
House price inflation peaked at 16.3 percent in the year from February of 1978 to February of
1979. This is not good, but there are two points worth noting. First, it was already on its way
down by the time our hero, Paul Volcker, enters the stage in the fall of 1979. On a year over
year basis the rate of house price inflation was down to 14.8 percent and if we annualize the
rate for the immediate three months before Volcker took the job it was down to 11.8 percent.
The other point is that we have seen comparable rates of house price increases more recently.
For example, in the year from August 2004 to August 2005 house prices rose by 14.5 percent. Did
it take over your life?
The other point worth noting here is that most prices were not rising anywhere near this fast.
For example car prices were rising at a 7.5 percent annual rate when Volcker took the job. This
meant that if you were considering buying a car for $20,000 (in today's dollars) and waited a
month, it would cost you $150 more. Clothes were rising at less than a 4.0 percent rate. This
meant that it would cost you $1.30 if you put off buying that $400 suit for a month. Waiting a
month on a $20 shirt would cost you 7 cents. This was not Weimar Germany where inflation was reaching
the point people could not do ordinary business.
In addition to the misrepresentations, there is an extremely important part of the story left
out of the discussion in this piece. Oil prices quadrupled in the early 1970s as OPEC first flexed
its muscle as a cartel. They quadrupled again in the late 1970s as the Iranian revolution took
the country's production, then the world's second largest exporter, off the market. At the time
the economy was both more dependent on oil and less flexible than it is today.
These price increases played a huge role in driving up inflation as there was no easy way for
the economy to deal with this jolt. The impact of the oil price rises was widely known and discussed
at the time so there is nothing mysterious in this story. Oil prices plunged in the 1980s as increased
supply and reduced demand, both due to the recession and conservation efforts, put downward pressure
on prices. Lower oil prices would have dampened inflation with or without Paul Volcker's magic.
The other important piece of the inflation puzzle left out off this discussion is that official
consumer price index seriously overstated the rate of inflation at the time, with the gap approaching
2 full percentage points in 1978 and 1979. This mattered both because many contracts were legally
tied to the rate of inflation and also because many workers would likely have seen the official
CPI as setting a target for wage increases. This overstatement disappeared in the 1980s, first
because the factors driving it went into reverse, and second because the Bureau of Labor Statistics
changed its methodology. This also had nothing to do with Paul Volcker's magic.
In sum, the inflation in the 1970s was nowhere near as debilitating as this piece implies.
It was not in the least mysterious and would likely have come down even without the magic of Paul
Volcker. The Volcker recession destroyed the lives of millions of workers and their children.
It is very much an open question as to whether a more rapid reduction in the rate of inflation
was worth this pain.
it wasn't just the collusion of the oil producing nations that played a role in the rising
oil prices of the 1970's. The American oil companies were part of that collusion as well. Tankers
full of oil stayed parked off the cost and prices went up every 15th and 30th of the month like
clockwork. That from an industry insider, my father.
Those factors were not controlled by opec nations or market forces other than collusion
For the oil company he worked for the price increases during the 79 crisis would come in on
the 15th and the 30th of each month during the period when the oil prices were increasing
this was not what normally happened
he found it fishy
Dan Kervick ->anne...
"Many, perhaps most, wage contracts were indexed to inflation, which meant that wages
rose more or less in step with prices."
This is a good piece by Dean Baker. I was only in high school in the mid-seventies, but I was
an undergrad from 77-81, and was taking a bunch of economics courses at the time when inflation
was a big issue. And Baker's telling more closely resembles the way I remember it going down.
The main economic theme I remember being in the air at the time was the idea of the "wage-price
spiral". the analogy was with the arms race. Basically everyone had come to have high inflation
expectations, and the high expectations were self-fulfilling. Producers continually raised their
prices both to keep up with actual increases in the prices they paid for their own supplies and
labor, and to be ahead of the curve on the increases they expected to occur in the near future.
Workers negotiated hefty COLAs into their contracts to keep up with the anticipated price rises,
which caused their employers to raise their prices, which caused labor to demand higher wages,
etc. - and on and on it went.
I also remember the economics professors emphasizing very strongly the difference between inflation
and changes in the "cost of living" - basically consumer prices. This is a distinction that seems
frequently lost in many contemporary discussions. It is possible to have high persistent inflation
without any change in the cost of living whatsoever. Similarly, if there is a change in the relative
prices of labor and consumer goods, then the cost of living could go up or down, even if there
is no general inflation.
The reason the high inflation of the period was considered "bad" was that inflation at that high
a level tends to be very jerky and somewhat unpredictable, and the size of the prediction uncertainty
potentially very significant. Since contracts of all kinds have inflation expectations priced
into them, then the inability to accurately anticipate nominal changes added an extra element
of risk to ordinary business dealing.
The picture many people now have is that Volcker "broke the back" of inflation. But the way I
remember it, the decline in inflation rates was a much more complex process having to do with
(i) trends in the decline in union membership and labor bargaining power, (ii) unions being convinced
to back off COLA demands, or replace them with other demands - especially in industries that were
under heavy international competitive pressure, (iii) subsiding of the impact of the OPEC supply
shocks. Volcker's attempt to re-set inflation expectations via shock treatment was only one of
several factors.
pgl ->Dan Kervick...
"The reason the high inflation of the period was considered "bad" was that inflation at that
high a level tends to be very jerky and somewhat unpredictable"
One of the reasons it was "jerky" had to do with really dumb periods of monetary restraint as
in those stupid Ford WIN buttons. And yes Volcker killed off inflation but creating a massive
and prolonged output gap. No magic - the kind of economic waste a model by James Tobin predicted.
I was taking a class from Tobin back then and he loathed the Volcker regime.
Peter K. ->Peter K....
Steve Randy Waldman is an interesting and articulate blogger. I liked his take:
How much sake did Noah Smith drink when he wrote this about Japan:
"Sustained higher inflation would represent a net transfer of resources from the old to the
young. That would increase optimism, and hopefully raise the fertility rate, helping with demographic
stabilization."
Optimism leading to more fertility - OK!
RC AKA Darryl, Ron said in reply to pgl...
"...Any of these solutions for raising inflation -- electronic money, "escape velocity,"
Neo-Fisherism -- would represent a dramatic departure from standard monetary policy. The latter
two would also require a deep rethink of everything we know about macroeconomics..."
[Wouldn't a fiscal expansion backed by printing debt-free money create the inflation that they
want? Why doesn't the Japanese government just print money to buy free sake for all of its married
young people and solve both the inflation problem and the fertility rate problem at the same time?
(joke)]
pgl said in reply to RC AKA Darryl, Ron...
Fiscal stimulus is the right solution to secular stagnation.
But whenever we suggest this - JohnH freaks out over the debt/GDP ratio. And yet he also says
he is the only one for fiscal stimulus. Go figure.
likbez said in reply to pgl...
"Fiscal stimulus is the right solution to secular stagnation. "
Much depends on the price of the energy. There is a hypothesis that when EROEI crosses a certain
threshold stagnation inevitably follows.
I think if the current drop of energy prices was engineered by Obama administration, we need
radically rethink the statue of this "change we can believe in" President.
DrDick said in reply to pgl...
"That would increase optimism, and hopefully raise the fertility rate, helping with demographic
stabilization"
This of course completely ignores the historical evidence that greater prosperity and economic
security actually *lowers* the fertility rate. Indeed, the low birthrates in Japan, most of Europe,
and white Americans (all generally below replacement rate) are a direct result of that.
RC AKA Darryl, Ron said in reply to DrDick...
We have actually had both. Off the top of my pointed little head the WWII post-war baby boom
lasted through to the late fifties. That was more than just horny GIs returning home from war.
It was a period of widespread prosperity that lifted all boats.
Now of course subsequently man invented more user friendly birth control than had in the immediate
(WWII) post-war period, but we also urbanized the previously more rural black population and then
we created poor family economic support with single-parent eligibility requirements. Children
added, but dads subtracted from (total) income (including transfer payments) for poor families.
More affluent families took advantage of birth control to increase their per capita wealth by
keeping kiddy capita low.
That said then you are most probably quite correct about Japan. Japan's Gini coefficient is
lower than the US but still higher than most of Europe. It seems like the more inequality that
wealthy people have then the more inequality that wealthy people want. Increased prosperity can
grow families when that prosperity is widespread and shared rather than narrowly distributed under
stiff competition and hoarded.
Pharaoh's Joseph said in reply to Anonymous...
"now that credit spreads are back down to normal why should the Fed NOT raise rates?
"
~~Anonymous~
Is Our Most Important Export, Deflation?
How much framing lumber do we export? What is PM, profit margin on lumber? PM on aircraft?
PM on B Movies? Which of our exports offers us our highest PM? That's it!
Highest PM is on our GTF. Using slight of hand, fed governors put ink onto paper to generate
enough GTF, global Triffin fiat to foreign-exchange for Chinese Checkers, Canadian Checker Cabs,
Korean Sports Cars, and Germanic VW Factories for Chattanooga.
ooga ooga!
Do you see how works? Brilliant foreigners exchange their counterfeit trash for our authentic
cash. And we let them get away with it. Why?
We can afford to act lenient to them because of our 99% profit margin on GTF.
We must be careful, however, to print up less supply of GTF, less than demand. Smaller print
job drives the buying-power-denominated-price of $$$$ up thus packing more deflation wallop into
each dollar we print. More deflation you print, more popular our product becomes. When our product
popularity increases then we get to play the game again.
And again! We are no longer saw mill mules, aircraft designers, and porno actresses. We
have become the Bankers of World !
run75441 said in reply to Pharaoh's Joseph...
Profit without Labor
ilsm said in reply to run75441...
The idolatry of US capitalism profit from exploiting labor and collecting rents assured
by the gumint that is paid only by labor.
"... Their low information voters like the idea of big bad gobinment agencies doing bad stuff to all of us and being responsible for whatever. The narratives always Trump reality. ..."
"... It all makes sense when the good of the few Trumps [means plundering of] the rest is considered a public good. When avarice meets reality it attacks with diverting ad hominem [e.g. brainwashed socialists, etc.] and ever worse logic fallacies. ..."
"... So you call it a successful policy...based on what? Stock prices are up? The wealthy have grabbed most of the income gains? ..."
"... [Net reductions in monthly mortgage expenses obtained from refinancing at low rates, consumer credit discounts for all variable rate interest lines of credit, short term small business cash flow balancing operating loans at prime rate. The wealthy got a little leverage trading done but only those that sold off stocks have made money from high stock prices. Those still holding shares may have nothing to gain except for losses.] ..."
"... A little?!? Take a look at the chart: Capital's share of national income. It has really taken off--well above the trend line of the last 40 years--since ZIRP and QE. ..."
"... But anyone with much experience in long term asset markets, such as the stock market or housing market, ought to realize that it is low inflation which tends to boost valuations for long term assets. The current very low inflation expectations are one of the main drivers behind high current US stock market valuations (using measures such as total market cap to GDP). ..."
"... As Krugman points out Murkan politics is dysfunctional, the GOP playing the Nazi role [from Weimar's demise]. ..."
Their low information voters like the idea of big bad gobinment agencies doing bad stuff
to all of us and being responsible for whatever. The narratives always Trump reality.
ilsm said in reply to DeDude...
It all makes sense when the good of the few Trumps [means plundering of] the rest is considered
a public good.
When avarice meets reality it attacks with diverting ad hominem [e.g. brainwashed socialists,
etc.] and ever worse logic fallacies.
Like Lacker's screed on inflation, actually selling deflation.
JohnH said in reply to ilsm...
So you call it a successful policy...based on what? Stock prices are up? The wealthy have grabbed
most of the income gains?
RC AKA Darryl, Ron said in reply to JohnH...
"...based on what?..."
[Net reductions in monthly mortgage expenses obtained from refinancing at low rates, consumer
credit discounts for all variable rate interest lines of credit, short term small business cash
flow balancing operating loans at prime rate.
The wealthy got a little leverage trading done but only those that sold off stocks have made money
from high stock prices. Those still holding shares may have nothing to gain except for losses.]
JohnH said in reply to RC AKA Darryl, Ron...
The wealthy got a little leverage...
A little?!? Take a look at the chart: Capital's share of national income. It has really taken
off--well above the trend line of the last 40 years--since ZIRP and QE.
No, Fed policy didn't cause increased inequality but it exacerbated it.
Now, please explain how "Net reductions in monthly mortgage expenses obtained from refinancing
at low rates"...blah...blah translated into higher real median income per household, etc. You
know, common measure of economic performance.
acerimusdux said...
Another right wing myth worth addressing is the idea that low interest rates cause asset bubbles.
But anyone with much experience in long term asset markets, such as the stock market or housing
market, ought to realize that it is low inflation which tends to boost valuations for long term
assets. The current very low inflation expectations are one of the main drivers behind high current
US stock market valuations (using measures such as total market cap to GDP).
Looser money, because it encourages more inflation, should be expected to limit bubbles. Too tight
monetary policy should be expected to cause them.
Right wing economics seems to be primarily based on first either ignoring or not understanding
the importance of natural rates, and so blaming the Fed any time nominal rates seem low (or even
moderate), and then on blaming anything else in the economy that seems to be wrong at them moment
on those "low" rates (without any regard to logic, reason, or consistency).
Sad to see that even some Fed board members seem to be ignoring the importance of inflation in
determing monetary policy. There is no sign at all yet of even meeting the inflation target in
the CPI, PCE, or ECI, while the PPI continues to show deflation. Meanwhile market based measures
(such as the breakeven rates) show expectations that continue to fall, with the Fed not expected
by markets to meet it's target even within a decade. And some are still talking about hiking in
December?
Ben Groves said in reply to acerimusdux...
It is hard to have inflation when commodity deflation is lowering inputs and we are having
a nasty price war between Brick/Mortar and e-Commerce. That sounds like a large CPI decline (which
means real retail sales are better than usual) that started in the 3rd quarter may accelerate
in the 4th quarter. I am seeing prices of some foods, the lowest in 10 years. Milk is down to
15 year lows at some of my regions stores.
I don't think central banks though, think that is a bad thing. They only care about wage growth
and their own trimmed inflation figures that factor in wage growth. So the Fed/Republicans are
on the same page. Anything more is dialectics.
ilsm said...
As Krugman points out Murkan politics is dysfunctional, the GOP playing the Nazi role [from
Weimar's demise].
"...Real median weekly earnings have grown 8.6% since 1985. Nonfarm output per hour is up 79% over
that time. Yet the instant that there is even a glimmer of hope that labor might get an upper hand,
the Federal Reserve looks to hold the line on wage growth. It still appears that the Fed's top priority
is making sure the cards remain stacked against wage and salary earners." . ".When you recruit from the banksters, as the Fed does, you have to expect that their interests
align with the kleptocratic rentiers." . "...Notice that the labor share of business income has declined by 10.6% since 2000, while real
after-tax corporate profits have increased by 143.5%."
Some argue there must be excessive slack in labor markets if wage rates are not accelerating.
But real wages are tied to productivity growth, and productivity growth has been slow for several
years now. Wage growth in real terms has at least kept pace with productivity increases over
that time period, which is perfectly consistent with an economy from which labor market slack
has largely dissipated.
Real wage growth is consistent with productivity, thus there is no excess slack in the labor
market. If you think this is some crazy hawk-talk, think again.
Fed Chair Janet Yellen in July:
The growth rate of output per hour worked in the business sector has averaged about 1‑1/4 percent
per year since the recession began in late 2007 and has been essentially flat over the past
year. In contrast, annual productivity gains averaged 2-3/4 percent over the decade preceding
the Great Recession. I mentioned earlier the sluggish pace of wage gains in recent years, and
while I do think that this is evidence of some persisting labor market slack, it also may reflect,
at least in part, fairly weak productivity growth.
For more than three decades, the pace of productivity growth has exceed that of real compensation:
Another view from real median weekly earnings:
Real median weekly earnings have grown 8.6% since 1985. Nonfarm output per hour is up 79% over
that time. Yet the instant that there is even a glimmer of hope that labor might get an upper
hand, the Federal Reserve looks to hold the line on wage growth. It still appears that the Fed's
top priority is making sure the cards remain stacked against wage and salary earners.
"But real wages are tied to productivity growth, and productivity growth has been slow for
several years now."
Productivity by definition is output per worker. So when a recession lowers output, it lowers
measured productivity. So much for this garbage circular "reasoning".
Oh and the canard that JohnH does a lot - look at only what has happened of late:
"Wage growth in real terms has at least kept pace with productivity increases over that time
period, which is perfectly consistent with an economy from which labor market slack has largely
dissipated."
Tim Duy has already exposed this fallacy by looking at this over a longer period of time.
pgl -> Paine ...
Dude - this is a whole literature on this. Recessions do lower output by more than it lowers
employment but this is not exactly because firms are nice. Recessions are bad news for everyone.
Wages do not keep up with what is even limited inflation - again firms are not exactly nice. So
recessions sort of screw firms but unbelievably screw workers. Eventually the economy gets back
to full employment but workers never fully recovery.
This is why recessions are bad for everyone in the short fun but especially bad for workers
short-run and long-run.
Which brings me to why I did not go after Yellen. It seems she and hubbie Akerlof have written
some of the best papers on this topic.
Paine - stop being an arrogant lazy ass and actually check up on this literature.
Now if your point is that the FED borg (I coined this term) is about to take over Yellen's
mind, I fear this too. It seems to have taken over Stan Fischer's mind and he used to be brilliant.
ilsm -> Paine ...
The fed hawks are like pentagon version hawks since 1946.....
we cannot have any more pearl harbors
or inflation......
DrDick :
DrDick :
When you recruit from the banksters, as the Fed does, you have to expect that their interests
align with the kleptocratic rentiers.
mrrunangun :
Domestic US wage rates have been flat. In the graph, the lines cross between 1975 and 1985.
During those years, international competition increased in the tradable goods sector, IMO due
to the recovery of Japanese and European industrial economies from the destruction suffered in
WWII. The divergence between the curves expands more rapidly as more free trade agreements come
on line in the 90s (e.g. NAFTA in 1992 and PNTR for China in 1999).
It may be that intensifying competition in the tradable goods sector has slowed wage gains
in the US by a supply and demand imbalance for labor. The increasing wage premium to education
over the past 40 years and the capture of the domestic political system, and thus capture of the
government, by the very rich, has made it impossible for the political system to make adjustments
to the change in international competition that would benefit the unskilled or semiskilled worker.
Mike Sparrow -> mrrunangun...
The trade agreements are vastly overrated in terms of competition and instead, they are what
help surge productivity. The US began to have offshoring in the 1950's, especially after the Korean
war era boom. Companies began to bail as the US had developed a consumer base. This is very typical
of capitalism. It happened in Europe in the 19th century because of the same reason.
Keeping a strong consumer base and industrial base would liquidate capitalist positions and
turn the economy into laborism.
Mike Sparrow :
I would argue productivity is too high, still. Real productivity really zoomed from the mid-90's
and really never came back down. The late 00's recession made it worse.
Persistently high productivity causes real wages to struggle to keep up. I think many hobbyists
have it backwards with wages including myself. Yes, real wages rose rapidly between 1997-2000,
but that was only because productivity surged. The long run problem of that was wage stagnation
due to the previous high productivity, which has been there since the 80's. Real wage acceleration
coupled with correcting productivity is a good sign and the Fed doesn't like it because they want
high productivity all the time.
The Rage -> Peter K....
I think what he is trying to say, reading through his posts: technology is driving down the
need for labor investment and the information/computer/plastic/whatever you want to call it revolution
really drove that point home to the end.
So productivity is high, creating profits from reduced pace of hiring and keeping pipelines
of credit open for future output. However, productivity is slowing lately and real wages have
accelerated implicating that near term output will be higher than while future output will be
lower. Yeah, that part is a bit confusing, but the drift is that productivity/real wages need
to track together closer or you get problems. When they come unglued, the offender, this case
productivity, needs to come down for wages to catch up. Real wages were to high before 1980 and
productivity should run a bit higher than wages. So by 1995, the problems that helped spur the
great inflation had ebbed, but a new problem started: rapid productivity growth.
I read this in 2009 believe it or not in a article. Their belief was if productivity stayed
high and growing, the economy would be in permanent recession. They believed to maintain stability,
productivity had to decline for the next decade. Mercy, I wish I could remember where I read that
from. 6+ years leaves a large gap. I do think the chart shows the "panic" over slowed productivity
is pure noise. Between 95-00 it when "boom boom". Notice the pre-95 trend and the post-95 trend.
To the productivity must decline squad, a decline in productivity will help real wages rise boosting
real incomes and reducing nominal debt, creating a more stable economy.
Dickeylee :
We are still in a slave labor economy. The whole world is looking for the next labor market
to enslave. Nike in Vietnam, Apple in China, and China looks poised to take over Africa.
If you can't get your slaves shipped to you, go to your slaves!
pgl -> Dickeylee...
China looks poised to take over Africa? I guess the Chinese capitalists hate paying $3 an hour
and so will pay Africans less. If you check - multinationals are in Africa and they are mainly
US and European based companies. It seems we beat the Chinese to this.
ilsm -> pgl...
Pentagon deploying to keep the peace in Africa for the job creators........
Lafayette -> pgl...
PITY AFRICA
The plight of Africa is that it has been plundered by both Europe and America over the past
two centuries. By America principally for cheap labor brought over on slave-ships.
Do not overlook the fact that damn few African countries can seem to develop a leadership that
does not plunder its country's assets for their own personal profit.
This plague of profiteering has existed since time immemorial and China is just the newest
entrant to the game ...
DrDick -> pgl...
China has been making significant inroads there for over a decade and are currently the largest
single player there.
Your comment actually has some merit in two senses. China has recognized that its habit of
investing in government bonds of other nations (e.g. US) is giving them a lower return than what
foreign direct investment offers. And Africa is attracting a lot of foreign direct investment.
I went searching for who the big players are and this gave an interesting list:
But it shows the BRIC nations (C for China) has been doing FDI in Africa for a while.
If multinationals are going global, maybe the labor movement should do the same. Workers of
the world unite!
Julio :
Rasputin explained why the Fed must raise rates before the next recession, so it can lower
them later:
"Certainly our Savior and Holy Fathers have denounced sin, since it is the work of the Evil
One.
But how can you drive out evil except by sincere repentance?
And how can you sincerely repent if you have not sinned?"
"...Friedman and Schwartz were wrong about the cause and the cure of the Great Depression. Those
who learned monetarism as the "new truth" are having a difficult time unlearning it. We need re-education
courses for older economists and a new curriculum for younger ones." . "...I don't have the neo-classical faith in the "natural" healing powers of the economy as some
people do. Seems more likely that the economy would settle in to a lower equilibrium given enough
fiscal austerity." . "...But what if the FED is a rational captain of corporate capitalism.
Better then the opportunistic demagogues in the congress.
But still dedicated to wage stag " . "..."if wage increases for the business sector as a whole lag behind productivity increases deflation
occurs"..."
The summary "Deflation and money" by Hiroshi Yoshikawa, Hideaki Aoyama, Yoshi Fujiwara, and Hiroshi
Iyetomiof says:
Deflation and money,
Vox EU: Deflation is a threat to the macroeconomy. Japan had suffered from deflation for more
than a decade, and now, Europe is facing it. To combat deflation under the zero interest bound,
the Bank of Japan and the European Central Bank have resorted to quantitative easing, or increasing
the money supply. This column explores its effectiveness, through the application of novel methods
to distinguish signals from noises.
The conclusion:
...all in all, the results we obtained have confirmed that aggregate prices significantly change,
either upward or downward, as the level of real output changes. The correlation between aggregate
prices and money, on the other hand, is not significant. The major factors affecting aggregate
prices other than the level of real economic activity are the exchange rate and the prices of
raw materials represented by the price of oil. Japan suffered from deflation for more than a decade
beginning at the end of the last century. More recently, Europe faces a threat of deflation. Our
analysis suggests that it is difficult to combat deflation only by expanding the money supply
bakho said in reply to pgl...
Monetary policy weak is at the ZLB. Fiscal and regulatory can have much stronger effects and
complete swamp monetary like a tidal wave to a ripple.
Exchange rates and other economic shocks have more effect than monetary policy at the ZLB.
Friedman and Schwartz were wrong about the cause and the cure of the Great Depression. Those
who learned monetarism as the "new truth" are having a difficult time unlearning it. We need re-education
courses for older economists and a new curriculum for younger ones.
bakho said in reply to pgl...
Efficiency standards backed by a carbon tax would be much more effective that a carbon tax
alone.
Efficiency standards work for electric appliances and prevent a races to the bottom.
pgl said in reply to bakho...
True. It seems Carly and Jeb! do not want to regulate but rather to encourage innovation by
giving subsidies to rich people. Not only is this Republican reverse Robin Hoodism on steroids
- it will not has as much effect as a tax combined with regulations.
Simply put - conservatives should not be listened to as their agenda is not economic efficiency
but rather making the Koch Brothers ever richer.
Peter K. said...
As a thought experiment I would wonder what bakho's re-education course would look like.
There is this paper, but could it be it says the same thing as those graphs which show the
large increases in the monetary base would just sit there with at the Zero Lower Bound because
of the liquidity trap?
The inflationistas were wrong that all of that monetary policy would cause runaway inflation.
But considering what needed to be done to move long-term interest rates, was it really large
enough?
David Beckworth's blogpost in today's links suggests the Fed did what they wanted to do.
And maybe part of that was to offset the unprecedented fiscal austerity we say after Obama's
stimulus ran out. (And that stimulus was pretty much canceled out by 50 little Hoovers.)
If monetary policy supposedly didn't move prices, I found it surprising that austerity didn't
give us deflation as it did in Europe.
Maybe fiscal policy works better and more directly but if it is blocked or even reversed with
austerity, monetary policy shouldn't be ruled because it is supposedly ineffective.
Maybe Friedman and Schwartz's maximalist claims aren't true, but that doesn't mean one should
flip to the opposite extreme.
Bernanke says in a speech that Tobin suggested that the Fed could have mitigated the Great
Depression by lowering long-term rates.
Peter K. said in reply to Peter K....
"What is the total number of months during the Ford, Carter, Reagan and Bush I administrations,
plus the first term of Clinton, when the unemployment rate was lower than today?"
"The inflationistas were wrong that all of that monetary policy would cause runaway inflation."
When confronted they always say that once the economy normalized, all of those reserves will
go rushing out into the economy causing inflation.
But the Fed says it will use Interest on Excess Reserves to manage that outflow.
Peter K. said in reply to Peter K....
"If monetary policy supposedly didn't move prices, I found it surprising that austerity didn't
give us deflation as it did in Europe."
I don't have the neo-classical faith in the "natural" healing powers of the economy as some
people do. Seems more likely that the economy would settle in to a lower equilibrium given enough
fiscal austerity.
Paine said in reply to Peter K....
Very agreeably presented
But what if the FED is a rational captain of corporate capitalism.
Better then the opportunistic demagogues in the congress.
But still dedicated to wage stag
Deflation? Uupps, price theory, too, is wrong
Comment on 'Deflation and Money'
The current economic situation is a clear refutation
of both commonplace employment and quantity theory. The
core of the unemployment/deflation problem is that the
price mechanism does not work as standard economics
claims.
Roughly, the formula says that the consumer price
index declines if (i) the average expenditure ratio
falls, (ii) the wage rate falls, (iii) the productivity
increases, and (iv) the employment in the investment
good industry shrinks relative to the employment in the
consumption goods industry. The formula follows from
(2014, Sec. 5).
The crucial message is that the wage rate is the
numéraire of the price system. If at all, the quantity
of money plays an indirect role via the expenditure
ratio and the employment relation of the investment
good and the consumption good industry.
The rule of thumb says: if wage increases for the
business sector as a whole lag behind productivity
increases deflation occurs (the rest of the formula
kept constant).
For the rectification of the naive quantity theory
see (2011) (I)/(II).
Real per capita Gross Domestic Product for United States and Japan, 2010-2014
(Indexed to 2010)
[ These last 5 years real per capita GDP has increased by 5.6% in the United States and 3.6%
in Japan. ]
Peter K. said in reply to spencer...
Good point. This is why I am skeptical when I read people claim that Japan's extraordinary
monetary policy has had no effect.
And even if Japan has done more than before courtesy of Abe and Yoda Kuroda, they also mitigate
it with contractionary policy like by raising consumption taxes.
"...Much of Macro is still operating under the Friedman myth of Monetary policy domination. Monetary
policy can have strong effects, but at other time Fiscal and Regulatory Policy are much stronger and
needed for the best economic outcomes. . A problem with the US Fed is limited powers to set monetary and regulatory policy and it can be
totally uncoordinated from fiscal and regulatory policy that are under control of Congress and the Executive.
In the mid 1990s, the Fed and Clinton administration were using the same playbook and cajoled a reluctant
Congress. Do the Fed an Executive even try to coordinate policy now? This Congress is the anti-Fed and
operates on a playbook from the gamma quadrant. Total lack of policy coordination " . "...1) Real asset prices have gone up a lot as a result of QE. Now they are headed down as QE
is done with no real hope of another round.
2) Nominal and Real GDP are on the way up.
3) Inflation will be the last to respond. Waiting for inflation to show up is a mistake.
4) That still does not tell us the timing of getting off the zero bound. As I have said before, the
Fed has let asset prices go up too much (much has been said including Shiller's recent analysis).
The stock prices are now coming down. The fact that Netflix (which has zero exposure to China) is down
25% should give pause to anyone who believes parts of the market are not in a bubble. Add to that crashing
commodity prices and growth overseas in important economies. I think the Fed needs to wait and see how
it shakes out. It = asset prices, commodity prices, EM growth and finally, how all this impacts US growth."
[Actually Carmen Reinhart deserves a better pitchman here than the little comment pgl posted
above. Carmen presents a expressly well written and concise picture. Since it is international
then the same focus on core CPI that we get for domestic inflation is not referenced nor implied.
She includes commodities in the inflation. The full text following the short excerpt given by
pgl is below:]
...
Most of the other half are not doing badly, either. In the period following the oil shocks of
the 1970s until the early 1980s, almost two-thirds of the countries recorded inflation rates above
10%. According to the latest data, which runs through July or August for most countries, there
are "only" 14 cases of high inflation (the red line in the figure). Venezuela (which has not published
official inflation statistics this year) and Argentina (which has not released reliable inflation
data for several years) figure prominently in this group. Iran, Russia, Syria, Ukraine, and a
handful of African countries comprise the rest.
The share of countries recording outright deflation in consumer prices (the green line) is
higher in 2015 than that of countries experiencing double-digit inflation (7% of the total). Whatever
nasty surprises may lurk in the future, the global inflation environment is the tamest since the
early 1960s.
Indeed, the risk for the world economy is actually tilted toward deflation for the 23 advanced
economies in the sample, even eight years after the onset of the global financial crisis. For
this group, the median inflation rate is 0.2% – the lowest since 1933. The only advanced economy
with an inflation rate above 2% is Iceland (where the latest 12-month reading is 2.2%).
While we do not know what might have happened were policies different, one can easily imagine
that, absent quantitative easing in the United States, Europe, and Japan, those economies would
have been mired in a deflationary post-crisis landscape akin to that of the 1930s. Early in that
terrible decade, deflation became a reality for nearly all countries and for all of the advanced
economies. In the last two years, at least six of the advanced economies – and as many as eight
– have been coping with deflation.
Falling prices mean a rise in the real value of existing debts and an increase in the debt-service
burden, owing to higher real interest rates. As a result, defaults, bankruptcies, and economic
decline become more likely, putting further downward pressures on prices.
Irving Fisher's prescient warning in 1933 about such a debt-deflation spiral resonates strongly
today, given that public and private debt levels are at or near historic highs in many countries.
Especially instructive is the 2.2% price decline in Greece for the 12 months ending in July –
the most severe example of ongoing deflation in the advanced countries and counterproductive to
an orderly solution to the country's problems.
Median inflation rates for emerging-market and developing economies, which were in double digits
through the mid-1990s, are now around 2.5% and falling. The sharp declines in oil and commodity
prices during the latest supercycle have helped mitigate inflationary pressures, while the generalized
slowdown in economic activity in the emerging world may have contributed as well.
But it is too early to conclude that inflation is a problem of the past, because other external
factors are working in the opposite direction. As Rodrigo Vergara, Governor of the Central Bank
of Chile, observed in his prepared remarks at Jackson Hole, large currency depreciations in many
emerging markets (most notably some oil and commodity producers) since the spring of 2013 have
been associated with a rise in inflationary pressures in the face of wider output gaps.
The analysis presented by Gita Gopinath, which establishes a connection between the price pass-through
to prices from exchange-rate changes and the currency in which trade is invoiced, speaks plainly
to this issue. Given that most emerging-market countries' trade is conducted in dollars, currency
depreciation should push up import prices almost one for one.
At the end of the day, the US Federal Reserve will base its interest-rate decisions primarily
on domestic considerations. While there is more than the usual degree of uncertainty regarding
the magnitude of America's output gap since the financial crisis, there is comparatively less
ambiguity now that domestic inflation is subdued. The rest of the world shares that benign inflation
environment.
As the Fed prepares for its September meeting, its policymakers would do well not to ignore
what was overlooked in Jackson Hole: the need to place domestic trends in global and historical
context. For now, such a perspective favors policy gradualism.
Friday, September 04, 2015 at 02:44 AM
bakho said in reply to RC AKA Darryl, Ron...
Here conclusion was weak with a vague take home message.
Much of Macro is still operating
under the Friedman myth of Monetary policy domination.
Monetary policy can have strong effects, but at other time Fiscal and Regulatory Policy are
much stronger and needed for the best economic outcomes.
A problem with the US Fed is limited powers to set monetary and regulatory policy and it can be
totally uncoordinated from fiscal and regulatory policy that are under control of Congress and
the Executive. In the mid 1990s, the Fed and Clinton administration were using the same playbook
and cajoled a reluctant Congress. Do the Fed an Executive even try to coordinate policy now? This
Congress is the anti-Fed and operates on a playbook from the gamma quadrant. Total lack of policy
coordination
pgl said in reply to bakho...
My take was that she was advocating more aggressive aggregate demand stimulus in general. And
you are right - we need the fiscal side to step up to the plate.
Story in NYC as how bad just
the subway stops are. The rails suck as well and we need to expand the system. But at the rate
this is going this decaying stops which are very dangerous will not be fixed until 2065. Why?
Lack of funding is the stated reason. No one in this stupid nation can say - well provide more
funding? We are ruled by idiots.
RC AKA Darryl, Ron said in reply to bakho...
[Well, yeah but that would have diverged a long way from her topic:]
"Inflation – its causes
and its connection to monetary policy and financial crises – was the theme of this year's international
conference of central bankers and academics in Jackson Hole, Wyoming. But, while policymakers'
desire to be prepared for potential future risks to price stability is understandable, they did
not place these concerns in the context of recent inflation developments at the global level –
or within historical perspective..."
[She stuck with just inflation and monetary policy because that is what she chose to write
about at this time. However, Carmen is the other intellectual half of Rogoff of the debt limit
for economic growth flameout. So, we should not depend upon her for fiscal policy recommendations.
That even someone this popular with the establishment Republican elite can understand monetary
policy is notable in contrast to the inflationistas.
Peter K. said in reply to RC AKA Darryl, Ron...
Yes she did the 90 percent government debt cutoff with Rogoff that Krugman attacked.
Also the
vaguely righwing blogger from the St. Louis Fed, Andolfatto or something, recently had link where
they said inflation wasn't a problem and the Fed shouldn't raise rates until inflation is apparent.
Peter K. said in reply to bakho...
"In the mid 1990s, the Fed and Clinton administration were using the same playbook and cajoled
a reluctant Congress. "
I thought Clinton cut the deficit and the tech stock bubble helped balance
the budget so they had surpluses. Some people say those surpluses were a problem because of a
lack of safe assets. That drove money to seek safe returns in mortgage backed securities for instance.
Peter K. said in reply to Peter K....
Maybe he didn't cut the deficit - I think Dean Baker argues that - but at the beginning of his
Presidency, Clinton dropped his middle class spending bill in a deal with Greenspan who said he'd
keep interest rates low in return.
Peter K. said in reply to bakho...
"This Congress is the anti-Fed and operates on a playbook from the gamma quadrant."
haha yes.
The Fed regularly complained about fiscal "headwinds."
Chart
1 is key to understanding the rough timing. In the US and UK, we are a little past the dashed
vertical line (impact phase). UK has had a little more success importing inflation.
1) Real asset prices have gone up a lot as a result of QE. Now they are headed down as
QE is done with no real hope of another round.
2) Nominal and Real GDP are on the way up.
3) Inflation will be the last to respond. Waiting for inflation to show up is a mistake.
4) That still does not tell us the timing of getting off the zero bound. As I have said before,
the Fed has let asset prices go up too much (much has been said including Shiller's recent analysis).
The stock prices are now coming down. The fact that Netflix (which has zero exposure to China)
is down 25% should give pause to anyone who believes parts of the market are not in a bubble.
Add to that crashing commodity prices and growth overseas in important economies. I think the
Fed needs to wait and see how it shakes out. It = asset prices, commodity prices, EM growth and
finally, how all this impacts US growth.
David Beckworth has a good post pointing out that the Fed has been signaling all along that the
big expansion in the monetary base is a temporary measure, to be withdrawn when the economy improves.
And he argues that this vitiates the effectiveness of quantitative easing, citing many others with
the same view. My only small peeve is that you might not realize from his list that I made this point
sixteen years ago, which I think lets me claim dibs. ...
So, just for the record, here's the little
wonkish paper (pdf) I wrote back in 1998, the one that
alerted me to the danger of falling into a liquidity trap...
Is the Fed in a Trap?: I Really Cannot See It... - Brad DeLong
------------
That is now three times I hear the fear that it is 12003 all over again. So I checked the data.
In this chart we see the key variables line up for 1993, same velocity, same deficit, same price
deflator. It looks a lot like the situation when Brad was at treasury, you know, that time when Brad
and Larry were cutting the budget, just before the economy took off.
And, one other thing, we have the same economic threat that Brad left in California, the Flounder
threat; the Old Boat Anchor.
"I wrote about this back in 2011, explaining why I devoted
my efforts in 2009 to pushing for fiscal stimulus. It seemed obvious to me that the Fed viewed the crisis
as temporary, and was just not going to be willing (or even able) to commit to a permanent change in
policy, especially with all the sniping it faced from the right. And that's still true now, even after
six years at the zero lower bound."
-----------
Let's review the charts, shall we?
We see growth dropping in 2011 while the stimulus was halfway finished but had one more leg too it.
Oil prices were up, Illinois unemployment was climbing and inflation was above 2%. Then what happened?
---------
From Wiki:
The Budget Control Act of 2011 (Pub.L. 112–25, S. 365, 125 Stat. 240, enacted August 2, 2011) is a federal
statute in the United States that was signed into law by President Barack Obama on August 2, 2011. The
Act brought conclusion to the United States debt-ceiling crisis of 2011, which had threatened to lead
the United States into sovereign default on or around August 3, 2011."
----------
The first data element we get is Q1 2012 and growth had returned. As we reduced the deficit, faster
than Clinton ever did, growth remained stable until the deficit was near 3% of GDP, at which time growth
took off, just like what Brad and Larry pulled off in 1993. In fact, it looks like we can think our
lucky stars the Obama was from Illinois because he must have gotten a lot of complaints from home as
Krugman's policies were driving up unemployment. It was shortly thereafter that Obama fired the Keynesians
and began taking instructions from the New York banks, it is seems to have paid off.
So, yes, we did get a monetary regime change, we permanently locked out the stimulators from fouling
up the fiat system worse then they had already fouled it up. Obama noticed that Bill Clinton did not
rely on Keynesians and had much better success.
Thanks for falling this piece of insanity from Matty Boy. He writes so many false pieces of garbage,
it takes an entire army to keep up with the nonsense.
OMG! Did you completely miss the take down of John Cochrane or what? Sure real GDP growth slowed. Why?
State governments were in full blown austerity. Thanks for once again proving what we all have known
from the beginning - you are incredibly clueless. Babble on!
12003? Have you invented a time machine? Did you mean 2003? Then why babble about 1993? No - today's
economy is not even remotely close to the situation either in 1993 or 2003. In 1993 - interest rates
were much higher than they are now. So the FED was able to tell Clinton it would lower interest rates
to offset any fiscal restraint. BIG difference. But of course you don't understand this. You don't understand
anything. Babble on!
How stupid is this rant? Consider the fact that interest rates fell from being over 8% in 1990 to only
3.5% by the end of 1993. Matt wants us to look at velocity but he entirely leaves out monetary policy
in a commentary about fiscal policy. This has to be the dumbest thing I have EVER heard. If someone
did this in a freshman economics class, the professor would call that person in and ask him to never
set foot in the economics class again. That freshman would not only be wasting his own time - but he
would be wasting everyone's time as well.
Matt - please never take economics. I'm afraid your professor would have to kill you.
Inflation cannot be steady. Higher inflation is needed to allow relative prices and wages to
reset quickly after a big shock than in a stead state economy.
The housing bubble allowed BigF to gain too many claims on future goods and service through
tricks of leverage and the taxpayer bailout. To bring the economy closer to pre-bubble stability,
we need high inflation to inflate away the claims of BigF and to inflate away the debt they wrongly
imposed on homeowners students and others. If wages were on trajectory to be twice as high in
2028 as in 2008, the balance sheet overhang would clear more rapidly. Relative housing prices
could settle faster.
Peter K. said in reply to bakho.
Agree, good post by Neil Irwin.
"Yet even as the idea of a 2 percent target has become the orthodoxy, a worrying possibility
is becoming clear: What if it's wrong? What if it is one of the reasons that the global economy
has been locked in five years of slow growth?
Some economists are beginning to consider the possibility that 2 percent inflation at all times
leaves central banks with too little flexibility to adequately fight a deep economic malaise."
Some have been considering it for a while now.
"At the time, the idea of a central bank simply announcing how much inflation it was aiming
for was an almost radical idea. After all, central bankers had long considered a certain man-behind-the-curtain
mystique as one of their tools of power.
The inflation goal may have reduced that mystique, but it created a kind of magic of its own.
Merely by announcing its goals for inflation, and giving the central bank the independent authority
to reach that goal, New Zealand made that result a reality. In negotiations over wages or making
plans for price increases, businesses and labor unions across New Zealand started assuming that
inflation would indeed be around 2 percent. It thus became self-fulfilling, with wages and prices
rising more slowly."
Making the target more explicit is making it more accountable and democratic instead of Greenspan's
mysticism. It also argues against those like our insufferable Matt Young who insist the Fed has
no power to effect inflation. Or Dan Kervick. Or Krugman lately (see today's wonkish post).
bakho said in reply to Peter K....
The core issue is level of Demand. Wage inflation does not hit the 2% target because there
are large pools of underemployed ready to move to jobs that meet their skills and a large number
of unemployed. Demand for goods and services in not high enough to induce companies to bid
up wages other than in remote areas.
Lack of Demand drives up the risk premium for investment. No company is going to invest in
more production or hire additional workers to increase output if there is excess and accumulating
inventory. Companies will not invest if projected return is negative no matter the interest rate
or money supply. The Fed does not have the authorization to make negative interest loans to the
states or individuals or to back high risk loans (like the GI Bill business loans) are utilize
many of the channels by which money could be placed more directly in the hands of people who have
unmet demands and would spend the money. Instead, the Fed is stuck with channeling money through
the banks who won't loan if demand is insufficient as to make loan repayment unlikely.
Low demand increases the risk premium on investments. Until demand is higher, loans won't be made
and monetary policy will operate ineffectively on a blocked channel.
Demand must be increased and that requires Congress and fiscal policy.
Peter K. said in reply to bakho...
"Demand for goods and services in not high enough to induce companies to bid up wages other
than in remote areas."
Except as I understand it wages are going up a very small amount which is why the hawks want the
Fed to raise interest rates by June.
I agree Congress and fiscal policy would be the better, more equal and direct route to boosting
the economy. But the Krugman seems to say the Fed could raise inflation expectations to 3 percent
and make a permanent increase in the price level if it wanted to. What it could do now is not
raise rates.
For some people this is a tough question; that's because they're using the wrong framework
The GDP revisions boosted the level of output, and more interestingly, raised the measured pace of
growth since the end of the recession. Figure 1 shows the trajectory of real GDP, normalized to 2009Q2,
the trough of the last recession.
Figure 1: Log GDP from 2013Q2 advance release (blue), from 2012Q1 3rd release (red),
both normalized to 2009Q2=0. NBER defined recession dates shaded gray. Source: BEA, NBER, author's
calculations.
While the measured pace of growth is faster than previously reported, what's true is that output
growth is still pretty tepid. As
Jim notes,
in a mechanical sense had fiscal drag been less, growth would have been measurably faster.
I think these observations link in with a puzzle often remarked upon -- why is inflation so low
and declining?
Figure 2: Quarter on quarter annualized inflation, measured by personal consumption
expenditure deflator (blue), CPI (red), and chained CPI (green), measured as log differences. Quarterly
data is averages of monthly data. NBER defined recession dates, shaded gray. Sources: BEA, BLS, NBER,
and author's calculations.
I think this is only a puzzle for those who believe that potential GDP has shrunk considerably
so that there is little slack in the system. For the rest of us, it's the large amount of slack that
is the answer. In the past I've shown output gap relative to potential as measured by CBO; here I
plot in addition potential output implied by an alternative approach, inferred from observed inflation.
Steven
I think inflation is not low, but only seems low...
pete
My main problem is adding in the bubble data to the GDP numbers. Since the bubble and crash
were errors of great magnitude, then using, say peak employment during the bubble or the horrid
trough is kind of weird. Seems like a much longer trend is desirable. Of course, by some thinking
the bubble begain in 1996, the date of the coined irrational exuberance. Then there was (finally)
a securities burst in 2000, and (really finally) a housing burst in 2007. Seems that pre 1996
benchmarks might be required.
2slugbaits
jonathan There are many here on this board who believe just that. I don't want to mention
any names, but some of their initials include Ricardo and Steven Kopits. The latter
has said many times that he does not believe GDP growth is weak because of weak aggregate demand,
but is supply constrained because we don't have enough oil. And then there's Ricardo who
can't get past a world of 1979 style stagflation, which he blames on Komrade Bernanski and his
fellow helicopter Kommissars at the Central Committee known as the FOMC. And of course more than
a few on this board blame that atheist Islamic pinko gay married socialist in the White House
taking away Medicare and cramming socialized medicine down the throats of uncertain business owners.
Ricardo
Slack is just another way of describing the manifestation of malinvestment. When we are in
an economic decline with broken mechanisms of credit transmission there simply can be no inflation.
What Keynesians do not understand is that if the government picks up the "slack" of malinvestment
through government spending and paying workers to be unemployed it does nothing to increase produciton.
It only moves the waste of malinvestment into the government and makes the taxpayers ultimately
pay for the waste.
During the Bush years I was very concerned about inflaiton and even at the start of the Obama
administration because of the massive monetary expansion, but monetary expansion can only create
inflation if it can get into the productive economy. In today's depressed economy and over-leveraged
asset debt loads monetary supply increases go into excess bank reserves and, as Steven points
out, an inflated stock market.
Edward Lambert
Funny, I have spent the last day thinking about the low inflation...
I will use this log graph of inflation, unit labor costs and labor share for this comment.
(1970 to present) http://research.stlouisfed.org/fredgraph.png?g=l7Q
So why low inflation? Inflation basically depends upon
enough money in the economy to support it,
enough wages or credit consumption in the hands of labor to support it,
expectations of inflation and
purchasing behavior.
As for #1, we see that lending is not getting enough money into the economy and into the hands
of labor, the consumers.
As for #2, we see that low wages and de-leveraging do not support more inflation.
As for #3, the driving force behind consumption is labor, and labor does not have expectations
of higher wages. They have expectations of lower wages.
Then as for #4, prices are a reflection of the consumer's fear to not spend more on items than
they are accustomed to within their budget. Labor share has fallen 5% since the crisis. Total
labor hours are still the same as 15 years ago. The consumer has weak purchasing power on balance.
Here is a conceptual equation for inflation. Inflation = (unit labor cost - labor share)/(utilization
of labor and capital).
According to this equation, increased utilization of labor and capital will tend to lower inflation.
As you increase supply using more factors of production, prices decline, all else being equal.
We now have a situation where real GDP growth is dependent upon increased labor hours and capital
utilization because productivity has been flat for 3 years. So the equation above is holding true
and inflation is tracking downward at the rate the equation would predict. Increased utilization
of labor and capital is depressing inflation.
Normally unit labor costs rise in relation to labor share. It's the normal result of labor
market forces in an expanding economy. Inflation is nudged ever higher by those forces. Inflation
= unit labor cost/labor share
Over the years though, unit labor costs have been growing more slowly. There was an abrupt
slowdown during the Volcker recession. See log graph at start of comment.
The long-run suppression of wages and labor hours is reflected in lower unit labor costs,
weakening the purchasing power of labor and this then feeds back to push down inflation.
Lower wage power and lower inflation is a self-reinforcing dynamic over time. Easy credit hid
this dynamic before the crisis, but not now.
2slugbaits
Ricardo.
Since the short-term nominal interest rate is already at the zero lower bound, exactly how
would a higher interest rate and less government spending redirect "malinvestment" toward more
productive uses? Everything we know about interest rates tells us that higher rates only lead
to evermore idle capital. Or are you saying that idle capital is evidence of good investment and
employed capital is evidence of malinvestment? And of course you can divine good investment from
"malinvenstment"?
During the Bush years I was very concerned about inflaiton and even at the start of the
Obama administration because of the massive monetary expansion, but monetary expansion can only
create inflation if it can get into the productive economy.
With this single sentence you have shown why your understanding of the Great Recession is completely
wrongheaded. The conditional statement "...if [money] can get into the productive economy" tells
us all we need to know. Apparently it took awhile for you to realize that the economy was in a
recession and the nominal rate was at the ZLB. What?
You thought that Bernanke just wanted to expand the money supply for the hell of it? The liquidity
trap at the ZLB is at the heart of the problem, not just some little, perhaps inconsequential,
piece of information that you forgot to take into account. You worried about inflation because
your model was (and still is) completely wrong. Instead of going through all kinds of mental gymnastics
to salvage what's left of a half-baked Austrian theory of economics, why not admit that a Keynesian
(even an Old School Keynesian) framework got it right?
Let's face it...Hayek and von Mises is economics for sophomores engaging in dorm room BS sessions.
I'm guessing that it's been a long time since you were a sophomore. Time to move on.
However, I do believe that growth is limited by the binding constraint and that, in this case,
oil is the binding constraint.
I read many things, including Zero Hedge. I don't agree with everything said there (or here),
but Tyler Durden's tenacity, commitment and effort is simply breathtaking, and he has both
broken a number of econ related stories and followed some important stories from my perspective
(to wit, Cyprus) that others haven't.
The Rage
Inflation is "low" because it is a lagging indicator and global energy consumption is down.
Inflation is as much a "global" indicator as a national one.
The US economy clearly is picking up speed. Government data lags are showing as the 2010-12
upward revisions in GDP is saying.
Malinvestment is a myth. All investment is malinvested then.
Vangel
Why Is Inflation So Low?
It isn't. If we use the pre-1980 methodology inflation comes out to around 10%, which is
hardly benign.
But let us ignore that inconvenient fact and look at the inflation argument. Inflation is defined
as an increase in the supply of money and credit. Nobody can deny we have seen an explosion on
that front. The confusion lies in expectations. The Keynesians believe that the increase in money
and credit has to manifest itself as increasing prices for consumer goods. But this is not true.
When you have great increases in productivity we expect prices to actually fall as they have for
items like TVs, i-Pods, or Personal Computers. Just like the late 1920s, the great inflation in
the supply of money and credit is preventing such price declines and keeping the prices of many
goods much higher than they should be.
But it gets worse than that. The great increase in money and credit has made its way into
other parts of the economy. In the bond market we now have the greatest bubble in history.
Housing has also seen the creation of another bubble as institutions with access to cheap borrowing
have purchased properties that would be pooled to create rental units that can create a pool of
income that can be securitized and sold to unsuspecting investors reaching for yield in a ZIRP
environment. Equities have risen to record high levels even though earnings are growing weaker
and companies are having a huge problem with revenue growth. That makes three bubbles and we have
yet to look at prices for health care, insurance, education, and other services.
"Capex compression is a term we use to describe the reduction of upstream spending by the oil
companies when their exploration and production costs are rising faster than their oil revenues.
That's what's happening today. Hess is divesting oil producing properties to increase profits;
BP has shelved the deepwater Mad Dog Phase 2 project in the Gulf of Mexico.
This is occurring because oil prices haven't been increasing, and costs have. So oil companies
are looking at their portfolio of projects and deciding to postpone or cancel some of them.
Were the oil supply rising quickly and oil prices falling, this sort of capital restraint would
be normal-the usual boom-bust cycle of the industry. But oil is still in short supply, and very
few of the large oil companies have been able to hold oil production over the last few years-even
as they were investing massively in oil exploration and production.
Now, they are actually reducing investment in upstream projects, even in the face of historically
high oil prices and falling production. That's capex compression."
Is Inflation a Consideration?, by Tim Duy: The decision of the Fed to define a time line for
tapering given the low inflation numbers has been something of a puzzle. Cleveland Federal Reserve
President Sandra Pianalto provides a concise explanation of that puzzle in
her speech today:
Last fall, the FOMC initiated a third round of asset purchases. In this program, which is often
referred to as "QE3," we are purchasing $85 billion of Treasury securities and mortgage-backed
securities per month. This policy was designed to drive some near-term momentum in the economy
with the specific goal of achieving a substantial improvement in the outlook for the labor market.
Labor market data comes in every month and is subject to different interpretations. In my view,
there has been meaningful improvement in both current labor market conditions and in the outlook
for the labor market since the FOMC launched the current asset purchase program. Employment growth
has been stronger than I was expecting, and the unemployment rate today is more than half a percent
lower than I projected it to be last September.
In light of this progress, and if the labor market remains on the stronger path that it has
followed since last fall, then I would be prepared to scale back the monthly pace of asset purchases.
Thus, according to Pianalto, QE3 was never about inflation, but instead was always about the labor
market. And, by her assessment, they can roll out the "Mission Accomplished" banner. In short, the
improvement in the labor market - or, more specifically, the stability of the labor market in light
of fiscal contraction - is a driving force in the tapering decision. Hence why officials are not
willing to end speculation on a September taper despite no evidence that inflation is trending back
toward the Fed's target in a timely fashion.
Inflation management, it would seem, is a problem that many policymakers simply think is a task
best left for interest rate policy.
"...each interest group chooses the inflation indicator that best fits its cause. ". There are two
types inflation: asset price inflation (financial bubbles) and consumer price inflation. The author
is arguing that asset price inflation is more deadly for economy.
Where is inflation? This is the question floated by the media based on US consumer price statistics,
which show that the Federal Reserve's trillions of dollars in money injection and near-zero interest
rates have not triggered the feared inflation. Some media put it as "the dog that did not bark".
As core inflation has remained at the magical 1% for the past decade, media pundits have suggested
that the Fed could step its quantitative easing until core inflation exceeds the target of 2.5% per
year. In fact, the question of "where is inflation?" is similar to looking for an object among an
infinity of objects.
Austrian economist Ludwig von Mises pointed out that there are millions of goods and services
in the economy which are exchanged for money, out of which one can make millions of different price
indices; each interest group chooses the inflation indicator that best fits its cause.
If a policy maker wants to boast price stability, then he cites core inflation, which excludes
core food and energy products; this has been maintained at 1% per year in the past decade; if one
wants to trigger inflation alarm, then one may cite housing and stock price inflation, which
have been at a two-digit annual rate of 20% since early 2012.
Very low core inflation at around 1% per year did not prevent the financial collapse of 2008
and the drawn out economic recession that followed. Similarly, very low consumer price inflation
in 1926-29 did not prevent the 1929 crash and the ensuing Great Depression. In 1929 as well as in
2008, asset price inflation was lethal and flared up in the context of very low consumer price inflation.
Some actions are basically wrong and one should not wait for disaster to happen to renounce them.
For instance, smoking two packs of cigarettes per day is not recommended; one should not wait for
cancer to spread to reduce smoking. Likewise addiction to drugs is not recommended; one should not
force higher doses until brain damage occurs. Massive money printing is basically wrong, creates
inflationary pressure, and is conducive to economic disorders.
Many economists have dismissed inflation as an indicator for prudent money policy. The so-called
textbook Taylor rule (a guideline for interest rate manipulation) has long been repudiated by many
economists including late professor and Nobel Prize winner Milton Friedman. Very low inflation
is not an indicator of banking stability nor is very high inflation an indicator of bank fragility.
Panics and bank runs may hit one bank and spread to the whole banking system in the context of very
low inflation or even deflation.
The failure of the banking system causes loss of wealth to depositors, loss of financial capital,
and therefore economic dislocation. In some countries, inflation may be very high because of monetization
of large fiscal debt by the central bank; however, the private banking remains very safe because
the interest rate and credit structure is not corrupted by distorted central bank policies.
The late Professor Charles Kindleberger described episodes of high asset price inflation and stable
or declining wholesale and consumer prices indices in the US for 1927-1929, Japan 1985-89, and Sweden
1985-89. He noted that central banks failed to intervene to arrest asset price inflation,
essentially for two reasons: central banks never undermine a stock market boom, and they are
concerned only with consumer price inflation.
He pointed out that the consequences of asset price inflation were financial crises and economic
turmoil. He wrote,
"When speculation threatens substantial rises in asset prices, with possible collapse
in asset markets later and harm to the financial system, monetary authorities confront a dilemma
calling for judgment, not cookbook rules of the game."
When we address the question "where is inflation?" as "the dog which did not bark", we are bewildered
by the traditional controversy about inflation, its measurement, and its political objective. As
Mises pointed out in many of his writings, there are millions of prices and consequently millions
of price indices; each price index will serve the cause a party stands for. Moreover, there are many
definitions of money aggregates; each aggregate affects differently inflation.
We should note that the quantity theory of money is a long-run relationship, that holds tightly
over a long period, between money aggregates and general levels of prices. It is an empirical
fact that "inflation dogs" do not bark instantaneously when thieves sneak into the property;
some dogs bark after some delay - with the thieves already leaving or having departed with the spoils;
others may bark with an even longer delay.
While consumer price inflation measurement was less controversial in the '60s and '70s and
led to price controls under the Richard Nixon administration, this concept was stripped and limited
to core inflation; moreover, the notion of substitution has been introduced among groups of products.
For instance, if the price of leather shoes increases then the statistician assumes consumers will
buy plastic shoes whose price has dropped. Apprehending price increases may be elusive; for instance,
bus fares remain the same; however, passengers are no longer issued transfer passes for other bus
lines. In this case, is the price increase zero percent or is it 100%?
Undeniably, the question of where is inflation depends on which inflation one is looking for and
the time span for measuring it. If one considers airfares cross the Atlantic, then prices have
risen by more than 100% since 2011. If one is interested in the same airfares during the past
three months, then the rate of increase is very small.
Likewise, if one is interested in crude oil prices since early 2009, then the overall increase
is 133%; if one is interested in the rate of increase of crude oil prices for the past year,
then it is 16%. Similarly, if one is interested in the price of soybeans since early 2009, then it
is 72%; for the past year, it is 9.3%. For corn, the overall price increase since 2009 is 66%, and
9% for the past year.
If we omit groupings and use money, which buys every product and service, as a measure of inflation,
then the rate of growth of US M1 money supply has been 12% in the past year.
Where is growth? The answer is totally disappointing. Trillions of dollars in new money and near-zero
interest rates combined with trillions of dollars in fiscal deficits failed to bring about economic
growth. Average real growth in the US during 2009-2012 was 0.8% per year; in the euro-zone a
negative 0.4% per year; and in Japan 0.15% per year.
The spectacular stock market boom underway is fueled purely by the Fed's massive money printing
and has no connect to the real economy; the average return on stocks at about 20% a year is pure
redistribution of wealth as it far exceeds the real return of the economy at about 0.8% a year.
The dismal growth performance shows the deep inefficiencies of the Fed's policies. A simple truth
is growth and employment need real capital; Fed's money printing and near-zero interest rates have
not made real capital more abundant. Will the fall in real per capita income be reversed through
more of the Fed's money creation? This is what is promised by the Fed. Money creation is a panacea
to all diseases and is the path to economic prosperity, says the US Federal Reserve.So
then must be looting and counterfeiting.
A central banker can be as arrogant as they come and as obstinate as an ass. The Fed will keep
printing trillions of dollars and forcing near-zero interest rates till the end of the world. The
question of "where is inflation?" will have the usual answer: there is none.
Undeclared inflation will encourage borrowers to step up their borrowing. Borrowers are favored
by near-zero interest rates, high true inflation, and by defaulting as usual on monumental loans.
It is a free for all: grab as much as you can. As has become fully admitted, the Fed will buy all
failing loans. It is wealth redistribution via the Fed's money printing.
Noureddine Krichene is an economist with a PhD from UCLA.
Betting markets aren't really my thing, but many people seem to like the topic, so let me take
advantage of Rajiv Sethi's kind permission to echo his posts:
Haircuts
on Intrade, by Rajiv Sethi: When Intrade halted trading abruptly on March 10, my
initial reaction was that the company had commingled member funds with its own, MF Global
style, in violation of its
Trust and Security Statement.
I suspected that these funds were then dissipated (or embezzled), leaving the firm unable to honor
requests for redemption.
The latest announcement from
the company confirms that something along these lines did, in fact, occur:
We have now concluded the initial stages of our investigations about the financial status
of the Company, and it appears that the Company is in a cash "shortfall" position of approximately
US $700,000 when comparing all cash on hand in Company and Member bank accounts with Member
account balances on the Exchange system.
A shortfall of this kind could not have emerged if member funds had been kept separate from
company funds. As it stands, the exchange is technically insolvent and faces imminent liquidation.
But the company is looking for a way to "rectify this cash shortfall position" in hopes of
resuming operations and returning to viability. It has requested members with large accounts to
formally agree to allow the exchange to hold on to some portion of their funds indefinitely:
The Company has now contacted all members with account balances greater than $1000, and
proposed a "forbearance" arrangement between these members and the Company, which if sufficient
members agree, would allow the Company to remain solvent...
By Tuesday, April 16, 2013, we expect to be able to inform our members if sufficient forbearance
has been achieved. If so, we will then resume limited operations of the Company and we will
be able to process requests for withdrawals as agreed. If sufficient forbearance has not been
achieved, it seems extremely likely that the Company will be forced into liquidation.
So traders find themselves in a
strategic situation
similar to that faced by holders of Greek sovereign debt a couple of years ago. If enough members
accept the proposed haircut, then the remaining members (who do not accept) will be able to withdraw
their funds. The company might then be able to resume operations and eventually allow unrestricted
withdrawals. But if enough forbearance is not forthcoming, the company will be forced into immediate
liquidation.
What should one do under such circumstances? As Jeff Ely might say,
consider
the equilibrium. The best case outcome from the perspective of any one member would be immediate
reimbursement in full. But this can only happen if the member in question denies the company's
request, while enough other members agree to it. As long as members can't coordinate their actions,
and each believes that his own choice is unlikely to be decisive, it makes no sense for any of
them to accept the haircut. Liquidation under these circumstances
seems inevitable.
On the other hand, what choice do members really have? Although their funds are senior to all
other claims on the firm's assets, the cash shortfall will prevent such claims from being honored
in full. And since members are scattered across multiple jurisdictions and lack the power to coordinate
their response, even partial recovery through litigation seems improbable. Facing little or no
prospect of getting anything back anytime soon, some might choose to roll the dice one last time.
The obvious lesson in all this is that in the absence of vigorous
oversight, "trust and security" statements can't really be trusted to provide security.
...But it was widely accepted that the conditions attached to the agreement would turn the bedrock
of Cyprus' economy – its offshore financial industry – to rubble.
Cyprus's economy could shrink 15 per cent this year, and then 5 per cent in 2014, predicted Fiona
Mullen, a local economist who heads Sapienta Research.
Michala Marcussen, economist at Société Générale, foresaw a 20 per cent contraction by 2017, and
warned: "Cyprus will in all likelihood require additional financial assistance further down the road."
A downturn would reduce tax receipts and make Cyprus's debt load even heavier relative to its
GDP, argued Raoul Ruparel, an economist at the Open Europe think-tank, warning there was "a strong
chance Cyprus could become a zombie economy – reliant on eurozone and
ECB funding to function".
Cypriots themselves expressed disbelief and a deepening sense of betrayal as they contemplated
what their lenders – the International Monetary Fund, the ECB and the European Commission – were
calling a "rescue".
"I understand they wanted to destroy our financial model . . . but it did not have to be done
in one night," said one financier. "It's going to be chaos."
Like others, he questioned how a country – deprived of an industry that accounts for about three-quarters
of its economy – would have the means to repay its new loans.
Cyprus invented the offshore industry in the 1980s in the wake of another historic disaster that
upended its economy: Turkey's 1974 invasion of the island. The system was built on a low corporate
tax rate and – some say – a lax attitude toward money laundering by Russians and other foreign clients.
The bailout, which will lead to the liquidation of its second-largest bank and haircuts of 30
per cent or more on large deposits, appears to have fatally undermined trust in the sector.
"The banking system is collapsed and I don't think we can find a way to bring the customers back.
This system is finished," said Adanos Seraphides, managing director of Fameline Investments, which
controls a shipping services company that employs 120 people. "We have to try to reinvent something."
Cyprus is sitting on potentially vast natural gas reserves in the Mediterranean, although it could
be years before they are developed – a process that has been complicated by lingering territorial
disputes with Turkey. Meanwhile, analysts say its tourism industry, its other engine, is held back
by higher costs associated with the euro.
Months before the bailout, Cyprus's economy was under pressure from its exposure to nearby Greece.
The surprise news last week that creditors were seeking to raid the country's bank deposits to lower
the cost of a rescue brought commercial activity to a standstill.
With banks closed for the last 10 days, businesses and consumers have been forced to operate on
a cash basis, making even the most routine transactions challenging. Cash machines operated by the
two largest banks have limited daily withdrawals to €100 and €120 per customer. Supplies of food
and other basic items have been interrupted, leading some citizens into a panicked stockpiling.
The bailout will allow banks to begin reopening this week. Yet customers will still be constrained
by the imposition of capital controls that will limit their ability to withdraw money, shift it among
accounts or send it across borders.
"We are in the shipping industry – we have to make payments every day. We need flexibility," Mr
Seraphides said. "A lot of our suppliers are already asking for pre-payment, which has made our life
very difficult."
Like other Cypriots, he argued that the country should now plot a way out of the euro.
In an interview with Bloomberg, Christopher Pissarides, Cyprus's Nobel Prize-winning economist,
appeared to agree. "We should sit down and think very carefully about the future of this country
and whether it's better to be within the eurozone or without," Mr Pissarides said.
"We have seen that if you run into trouble you're not necessarily going to be rescued in a way
that's most beneficial to your economy."
The Cyprus bailout, at least in the form that was decided Monday morning, represents a drastic
policy shift in the fight against the still-smoldering Euro crisis. For the first time, money is
being taken directly from bank clients - without their permission - to unwind ailing banks. Investors
with more than 100,000 euros in their accounts at the Laiki Bank, also known as Cyprus Popular Bank,
will lose the majority of their money. Laiki, Cyprus' second-largest bank, is being phased out.
For bank clients throughout Europe, the signal is clear: Your money isn't truly safe anymore,
because when nations are close to bankruptcy they will take whatever they can get their hands on.
For banks, the signal is different. No longer will institutions that have bet and lost money in the
capital market casino be saved at all costs. That had previously been the case with Greece, Italy
and Spain.
There are a few catches. The majority stakeholder of Laiki is the state of Cyprus. The money Cyprus
is losing will be returned in the form EU and IMF rescue packages. Numerous pension funds on the
island also have their money invested at Laiki Bank. It won't be possible to simply confiscate those
deposits. Whether the unwinding of Laiki will ultimately release the promised 4.2 billion euros has
yet to be seen.
As for the European Central Bank (ECB), it's in a nice position. It had previously provided nine
billion euros in loans to prop up Laiki Bank. Those debts will now be assumed by The Bank of Cyprus.
In any event, the loans funded by European taxpayers will be serviced.
Exit a better solution for Cyprus
For Cyprus, then, the price of remaining in the currency union is high. Economically speaking,
it would probably make more sense for the small island to leave the union and start fresh with its
own, devalued currency. The other 16 nations that share the euro, however, were not ready for such
an extreme step. They feared a global loss in trust in the eurozone. Nobody can predict the effect
of a Cyprus exit.
From a purely economic perspective, Cyprus is of little relevance to the eurozone – and "systemically"
speaking, not at all. EU nations don't need to fear the so-called domino effect of a Cyprus bankruptcy
since Cypriot banks have hardly any debts abroad. Over time, branches of Cypriot banks in Greece
will be split off.
Most agree that the crisis management of the eurozone, as well as that of Cyprus's government,
was a disaster. Recent dramatic maneuvers were both harmful and unnecessary. They destroyed a lot
of trust inside eurozone and well beyond it.
But banks in Cyprus could not be saved in their previous incarnations. That much has been clear
since June 2012, when Cyprus applied for aid because of the losses it bore in the wake of Greece's
rescue. The Cypriot government negligently delayed dealing with those issues - and the eurozone tolerated
it. Only the ECB's ultimatum of a complete cessation of Cyprus aid proved enough of a wake-up call.
This process has shown that the ECB is in charge - and not finance ministers. And that is not
a good development. After all, who controls the ECB?
The parliaments in Germany, the Netherlands and Finland still have to pass the Cyprus deal, which
they likely will. The Cypriot parliament won't have any say at all. This will surprise some parliamentarians
and make the Cypriots even angrier with Europe, but they don't have an alternative. When it came
down to it, Russia gave Cyprus the cold shoulder. Now the small state in the Mediterranean has to
stick to the conditions or leave the eurozone.
Cypriots face a suspension of credit card payments for overseas goods and a ban on cashing cheques
under draft capital controls designed to avert a run on the banks.
So, we have a "quick and painless" conversion out of the Euro in terms of technical "execution",
because the conversions are "baked in" via serial tracking of Euro notes and coins. I.E. "We had
xyz Marks in circulation which were replaced by xyz Euros of serial number X." The implication
here is a parallel tracking of "what a Euro of serial number x would be if it were a lira, or
dmark, or ffranc, or kroner, or what have you". The fx is thus already in place and can be pre-figured
with some accuracy.
If a country veers towards leaving or makes indications that they may leave the Euro, all Euro
notes and coins of their given serial number (of the originally replaced currency) can be filtered
out from the banking system (via a bank holiday in which banks actually, literally, remove the
notes and coins of serial number X like children picking pennies from a can of spare change) so
that the remaining Euros in circulation are not suddenly joined by their exiled Euro brethren
from no-longer-member-nations.
The Euro cats are NOT dumb as it's being seen by most. They are quite intelligent.
"By punishing those who put their faith in the solidity of the euro as a single currency, the eurozone
has crossed a line and in the process poisoned Europe beyond redemption.Not since the second world war
has anti-Germany feeling been so acute. Where's the solidarity in a bailout which imposes such "solutions"
on its member states?"
There is no mess quite so bad that eurocrat intervention won't make
even worse.
Ever since the Dutch finance minister Jeroen Dijsselbloem declared that Cyprus would act as a
template for other struggling eurozone lenders, the sound of screeching brakes and gear sticks being
wrenched rapidly into reverse has been deafening. This is what he told Reuters:
"If there is a risk in a bank, our first question should be 'Okay, what are you in the bank going
to do about that? What can you do to recapitalise yourself?'. If the bank can't do it, then we'll
talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalising the
bank, and if necessary the uninsured deposit holders," he said.
No, no, no – he didn't mean that at all, everyone is now keen to stress. It's horses for courses.
Cyprus was a unique situation requiring a template all of its own. Of course we are not going to
bail-in uninsured depositors in all situations.
Unfortunately for them, the cat is now out of the bag. Unique Cyprus may be, but it is also part
of Europe's single currency, and in any credible monetary union you cannot go around applying one
set of rules to one constituency and a different set to another.
Except that is precisely what they are going to do, it would seem. The ECB's Coeure and Nowotney
were first out of the hatches to deny that the Cypriot "solution" had any implications for the rest
of the eurozone, followed quickly by the French President Francois Hollande and the Spanish premier
Mariano Rajoy.
Here's a number of conclusions that can be drawn from this latest outbreak of all round confusion.
One is that a template has indeed been set, but only for smallish, non-systemically
important banks in non systemically important countries. This is actually not so very different from
the situation that already exists in the US, and since the introduction of a new resolution regime,
Britain too.
In the US, little banks go bust all the time, with uninsured creditors, including deposits above
the Federal insurance maximum, automatically bailed in. And it's even happened in Britain, though
in the one case we've had of it so far, it only affected a handful of uninsured depositors.
But would it be allowed to happen if a really large, systemically important bank went bust? No
it wouldn't. It's impossible to imagine uninsured depositors in a Royal Bank of Scotland, BNP Paribas,
Deutsche Bank or Citigroup being bailed in. This is because the vast bulk of such deposits would
belong to other banks or larger corporates. If they lost their money, it would produce cascading
insolvency across the wider economy – the so-called too big to fail problem.
And nor can one really imagine it being allowed to happen even among Germany's legion of tiny
little sparkasse. These are implicitly underwritten by the German state: Germany is not going to
do anything to undermine the foundations of its own banking model. Cypriots
are right to think they are being unfairly singled out. If Laiki Bank was a landesbanken, it would
have been bailed out.
But there is also a much more worrying implication. If uninsured deposits
in smallish banks in peripheral eurozone economies are at risk, you'd be mad to put your money there
unless compensated by a very high interest rates. As a consequence, money is going
to get sucked out of the peripheral economies into the safer, core economies where the too big to
fail rule still holds true.
The flight of capital from the periphery already seen because of fears
of a eurozone break up will be further enhanced. No wonder the European Central Bank
is so worried, for it is the the ECB which gets called on for funding when eurozone banks are facing
deposit flight. Indeed, the absurdity of the German position on Cyprus,
which is that creditor countries should not be expected to support periphery country banking systems,
is that the ECB will have to support them instead, or as Machel Alexandrovich of Jefferies International
puts it: "In saving €5.8bn in bail-out money, the other euro area countries will likely be on the
hook for 4 to 5 times more in contingent Central Bank liabilities". Hey ho.
Cyprus did not go bankrupt, but its business model is gone, and it will begin a long slide into deep
recession. Cyprus could become a permanent problem for the European Union.
Interesting that Cyprus looses Euro, 4 billion due to a Troika action (Greek PSI) and is then
pushed into crisis by the same Troika over the need to come up with Euro 5.8 billion.
Before our eyes, there was a financial counterrevolution. Depositors of the EU crisis - not only
in Cyprus, but also Spain, Portugal, Greece and Italy have realized that you can not keep the money
in the accounts. And that the state does not protect them - said "News" German financial expert Thomas
Bell.
How long will this situation last is still unknown. It will depend on how much of these
amounts of money the government will need to collect € 5,8 billion only in this case the EU will
provide assistance in the € 10 billion maximum loss of large depositors may increase to 40%.
Before our eyes, there was a financial counterrevolution.
Depositors of the EU crisis - not only in Cyprus, but also Spain, Portugal, Greece and Italy have
realized that you can not safely keep the money in the accounts. And that the state does not protect them - said "News" German financial
expert Thomas Bell.
Under attack, he said, were people with small savings. Even if the
Cypriot banks return the money to those whose investments do not exceed € 100 thousand, the shock
remains. Suffice it to recall that in his first term Eurogroup, without flinching,
required for them to enter the bank tax at the rate of 6.75%. Bell also said that for the first time
in the history of the EU violated the right of free movement of capital
- Cypriot banks stopped payments, issuing ATM from € 100 to € 250 per day.
Blow was struck, and the image of the European Union, and the sovereignty of its member states.
For the EU is no longer prohibitive barriers, - said Paul Nefidov. - There has been a precedent,
when a group of major creditor countries raises an ultimatum, which are contrary to national law.
- These measures will work in the short term, but did not solve radically
- said in an interview with "Izvestia" Director of the Center for European Studies of the Higher
School of Economics, Timofei Bordachev. - The question
remains, what will be the backbone of the economy of Cyprus, where the share of the offshore banking
sector - over 50%?
He believes that the measures taken by Europe would force major contributors go to other offshore
companies, and the country itself will send in poverty, because tourism
is not as profitable to alone be the basis for its development.
According to experts, the loss of Russian depositors can be up to several billion euros. According
to the Central Bank of Cyprus, of its € 20 billion of foreign deposits - € 18 billion are Russian
That's a huge blow to EU banks. Trust is lost. Cyprus GDP collapses. Capital control are lethal
for financial services.
Cyprus and the EU reached a new late-night bailout deal last night that will reduce the chance
that Cyprus's financial system and economy will completely implode.
The 10 billion euro deal requires Cyprus to drastically shrink its banking sector, which has grown
to 8Xs the size of the country's economy, by unwinding Cyprus' second largest bank, Laiki. In doing
so, bondholders and depositors with more than 100,000 euros will take a hair cut.
The new deal is better than the last deal in one key respect -- deposits under 100,000 euros will
be protected.
That's very important. Those deposits were ostensibly "insured." To seize them, the way the last
bailout deal would have, would have been grossly unfair and would have set a truly alarming precedent.
Now, small depositors in European banks can breathe more easily. At least in this case of gross
malpractice on the part of reckless bank managers, their life savings have been preserved by the
EU.
"Not hitting the insured deposits is a good thing except they showed they were prepared to do
it a week ago" says Lee Buchheit, partner at Cleary Gottlieb Steen & Hamilton and sovereign debt
restructuring expert, in the accompanying interview with The Daily Ticker's Aaron Task. "I'm afraid
that will not be forgotten by insured depositors wherever they are in the eurozone if the crisis
moves forward to another country."
This deals spares Cyprus' largest bank and lender the Bank of Cyprus.
Although deposits under 100,000 euros will be spared, deposits over 100,000 euros will be seized
and subjected to an as-yet undetermined haircut--with the confiscated money going to bail out the
gambling losses of the aforementioned reckless idiots who run some of Cyprus's banks.
"The Europeans are not putting any money into the bank recapitalization,
which means, that as far as I can tell, there is nothing in this deal that could not have been done
by the Cypriots last year or the year before," says Buchheit.
This seizure, needless to say, will dampen the enthusiasm of rich depositors for keeping money
in banks that get themselves into financial trouble.
And because many, many banks in Europe have gotten themselves into financial trouble, this will
create a general state of unease among rich depositors throughout the Eurozone.
And it should wig out some bank lenders, as well.
After all, never before in the history of this global financial crisis
has a major banking system allowed depositors to lose money, no matter how reckless and stupid and
greedy their bank managers have been. And only rarely have bank lenders--those who hold bank bonds--been
asked to pony up.
In this case, however, the depositors will lose money. Perhaps a lot of money. And if there had
been big bank debtholders in Cyprus, they probably would have been socked with losses, too.
It's possible that everyone will just laugh off Cyprus, viewing it as an exceptional one-off.
After all, the Cyprus banking system was notorious for being the offshore money-laundering arm of
many Russian oligarchs, so many folks will likely view this asset seizure as a case of "just desserts."
But this optimistic view of the Cyprus horror show overlooks one key fact:
The main reason that Cyprus depositors will lose their cash is because
it has become politically difficult (impossible?) for leaders in Germany and other rich European
countries to bail out their brethren in the "periphery" without taking many pounds of flesh.
And it is that precedent, in addition to the fate of big depositors in Cyprus, that should spook
Europe's big bank depositors and lenders.
If Germany is done bailing out countries and banks without having those countries and banks cover
some of the cost, it's not clear why Germany will relent next time Spain, Italy, Greece, and other
countries in near-desperately bad financial shape come rushing to the EU with their hands out.
Unlike Cyprus, the banking systems in these countries do have bondholders that can get haircut
before the depositors get haircut, but the effect will be the same.
"The one lesson that you can take from the Cypriot experience is:
the race goes to the swift," says Buchheit. "And if you get out of Dodge early, you are completely
protected. If you stay, and in effect trust the politicians, they not only come after [your money]
they lock it up."
And that means, for the first time since the collapse of Lehman Brothers, those who lend their
money to banks or keep their money in banks are at risk.
Because the neighborhood loan shark (Germany) is now extracting much more onerous terms. That's
a sobering precedent. And it will likely cause many people to wonder and worry about where their
money is.
Despite the deal Cyprus will remain at risk of default and a Eurozone exit for a "prolonged
period," believes Moody's senior credit officer Sarah Carlson.
"The system's profile as an offshore financial center is unlikely to survive this crisis,"
Carlson added. "The potentially irreparable damage to the country's current drivers of economic
growth leaves its ability to sustain its current debt highly in doubt."
Nik
I'm a former Laiki Bank customer in Melbourne. Their slogan 'By your side, all your life'.
ROFL
Anonymous user
Wealthy russians are victim of their govt willingness to punish oligarchs w/o law. They hid
money
Anonymous user
Well, that was pretty predictable. It was a test run. Watch out, they're going to continue
pushing.
The agreement confirm the damage that German government wants to do to Cyprus economy. Germany
acted as prosecutor, judge and executioner.
IMF had allied itself with Germany. This is a reflection of dysfunction of how Europe works now.
Cyprus got in between of election in Germany when Merkel was pressed by ...
{ the island nation will have to maintain fairly draconian controls on the movement of capital
in and out of the country.}
Yet another southern-European underbelly country that has learned "if you play with fire you
can get burnt".
They thought they had an "easy market" by accepting the funds of Russian millionaires who preferred
their assets kept in Euros than rubles. And the business building full-time residences for them
(because these families were so rich they were afraid their children would be kidnapped), from
which they could run their businesses in Russia.
Understandable, that - but really not the EU's probleme-du-jour.
So some of these Russian business-nomads now find their funds in a "BadBank". Once again, the
solution employed by Japan, then Sweden, then Iceland, then etc., etc., then Greece and now Cyprus
has proven the Only Alternative for a country that had lost control of its Financial Management.
Will such wonders never cease? Not until the EU climbs out of the Financial Hole it so richly
deserves - because, once again, EU and ECB inspectors should have been all over Cyprus for its
"exclusivity" that could have and finally did almost sink the euro.
It's a sad day for everybody, but particularly for the Commission
in Brussels to whom is attributable First Responsibility for this mess. Which has
been building quietly ever since the Euro was born just waiting for an Economic Recession (curtailing
seriously tax-revenues necessary for debt-maintenance) to bring down its Financial House-of-Cards.
Let's call it birthing pains ... if it doesn't kill the mother first. In which case, we must
call the episode "The Money That Never Should Have Been".
It is none the less unbelievable that a common-market entity larger than the US in numbers
of consumers and GDP-value, with a economic demography almost identical to the US, could possibly
have arrived in this predicament. And yet it has ...
Due to the naive supposition by Euro founders that it neither needed a diligent Central Bank
oversight of internal National Finance Markets, nor an EU Executive (issuing from its Parliament
as Prime Minister) to knock-heads when the going got tough.
Eric377:
Hot money? I think a more significant cause of the problems in Cyprus is that that Republic
has critical ties with mother Greece and it frequently acts as if it were not truly sovereign.
When a significant portion of what you consider to be your nation is beyond your authority and
in the hands of Turkey, it is understandable that they align very strongly with Greece. Do you
think Laika and Bank of Cyprus invested in Greek debt and other Greek assets without Cyprus' government
approval and probably even requirement? The hot money provided more fuel for the fire but the
fire did not ignite due to the hotness of the extra deposits.
anne:
Since 1980, however, the roster has been impressive: Mexico, Brazil, Argentina and Chile in
1982. Sweden and Finland in 1991. Mexico again in 1995. Thailand, Malaysia, Indonesia and Korea
in 1998. Argentina again in 2002. And, of course...: Iceland, Ireland, Greece, Portugal, Spain,
Italy, Cyprus....
-- Paul Krugman
[ There is a reason for Chinese currency controls, controls that are continually criticized
but that have been repeatedly successful in protecting Chinese development programs. The Chinese
peg of the Yuan to the dollar came about in 1994 in the wake of a Mexican currency crisis, and
the peg protected China during the Asian currency crisis beginning in 1997. ]
The official Russian line is one of a typical professional chess player - calm, cool, collected:
Russia doesn't see need to take any additional steps now, may still agree to restructure loan, First
Deputy Prime Minister Igor Shuvalov told reporters earlier. Shuvalov, unlike Merkel and ECB's Mersch
who sees nothing but green shoots (literally) everywhere in Europe, said that Russia is concerned
Cyprus crisis may have negative effect on euro.
The deputy PM says that he has no estimate for Russian losses in Cyprus but added that Russian
money in Cyprus is "legal."
The most likely next candidate is Slovenia with a banking system that's as bankrupt as the
ones in Ireland and Cyprus, a permanent recession and a government that has higher borrowing costs
than Spain or Italy.
Yup, the Russians bailed out Greece and they didn't even know it at the time. Ze Germans are
playing a VERY dangerous game here and I'll bet Benny and the inkjets are in it balls deep.
Unwashed
...and Goldman Sachs was behind the the derivatives that helped Greece disguise their debt.
Wolferl
Lol. The truth is that Merkel and Putin are in perfect agreement about this Cyprus event. The
Kremlin now has even more control of the Russian oligarchs and the Russian economy. A win-win
situation for Germany and Russia.
j0nx
Indeed. Putin got to herd those cats back home and didn't even have to lift a finger
to do it.
SmallerGovNow2
who cares about the cats, their money will be confiscated for the bailout. so i don't see a
lot returning to Russian banks. there must be something else...
Jendrzejczyk
Perhaps Putin's rivals all had their money stashed there, and now they are a little less powerful
to oppose him.
Also, there are still mountains of money being made in Russia and much of it will now remain
there (where Putin can keep it safe) instead of fleeing to other tax havens.
NoDebt
SOME of their money. Some. This plays into Putin's hands in several ways. Further consolidation
of his power within his own borders. And did you notice his line about how Russian banks are extremely
stable? He's been on a mission to sound like he's all business friendly the last couple years-
even did a Dog-n-Pony show in Silicon Valley not long ago.
Come back to Jamaica (err, um, Russia)! We're all warm and friendly, mon! We won't steal your
money like them other guys, mon! Great place to do your biziness!
udge fudge
Quite true , Vlad did want the cats and the roubles back inside the house Thing is though can
he control a few vengeful cats ? I'd be more than a little concerned were I some EU people.
bardot63
Now the cat is out of the bag - the ship has sailed - the genie has not only left the bottle
but has left the building. Everyone with real money, or just a little money, knows, or should
know, he and his money are now targets of bankrupt, corrupt governments everywhere. So much for
"full faith and credit." Players, like the anti-Putin Russian billionaire found dead in his London
bathtub Saturday, now check for horse heads under the sheets.
It turns out it's true that you can't solve debt problems by going deeper into debt. Governments
running the printing presses at full speed are recognizing this only now. Plan B is to skip the
messy paperwork of debates and votes and taxation and inflation and just go for the cash.
Cyprus is in Europe but this is a US Fed test run. The Fed Reserve's fingerprints are all over
Cyprus and they ain't even trying to hide it. The big players know this, and that means the big
players across the globe are going to be the next to panic, after the little Cypriot nobodys who
are lined up at ATMs right now at midnight to get 100 bucks a day of their own money. The players
only hope that you and I will wait to panic later. He who panics first panics best.
LawsofPhysics
Perhaps, but look at those around you. History is very very clear on all this. Not a damn thing
will change until the supply lines break and folks are faced with the fact that modern eCONomics
is completely detached from reality.
Once more people start starving, some real efforts to prosecute the fraud and make some real
changes towards a real fucking market that allows for true price discovery, but I doubt it.
The world will simply become like Russia post-collapse. There will be "official" prices in
the official "markets", and then there will be the prices that everyone actually pays. No one
is going to qualify for any type of credit except for the ivy-league chosen few.
I'd like to be optimistic and think the heads of the latter will roll, but I just don't see
that happening with the average sheep being what they are.
The more the tastes of the elite run to risky business, the more fragile the complex edifice
of global finance becomes. Spectacular failures, mind-boggling crashes, and mighty
people instantly reduced to public mockeries through their own perversion or crimes become the norm.
In this madhouse of absolute power, would it be so strange to hear of another Incitatus? The
original, of course, being the favorite horse of the Emperor Caligula:
To prevent Incitatus, his favourite horse, from growing restive he always picketed the neighbour-hood
with troops on the day before the races, ordering them to enforce absolute silence. Incitatus
owned a marble stable, an ivory stall, and a jewelled collar; also a house, furniture, and slaves
- to provide suitable entertainment for guests whom Caligula invited in its name. It is said that
he even planned to award Incitatus a consulship.
Suetonius: Caligula 55
Such is the contemporary reality we live in. People try to live their lives, to
avert their eyes, to hide their children from the sight and effect of the monstrous cavorting of
the elites. But they loom above all others on the horizon, intent on their self-aggrandizing
excesses, like a constant, living, writhing surrealist mountain range. And the uncaring fragments
of the elites' collapsing 'entertainments' rain down like meteors upon the rest of the population.
Perhaps a crazed fad for frugality will break out and suppress the urges of the elites.
In the meantime, hide your valuables as well as you can, and treat your
children with the sympathy they deserve. They are among the chief victims of our era's unholy
orgies of risk and corruption. Frugality or fragility? The choice is yours,
as well as theirs.
zorba THE GREEK:
"Frugality or Fragility?"
I think it is obvious by now that we are all going to get FRUGALED.
After all, banks remain closed in Cyprus, which means a euro in a Cypriot bank has very little
value. If you can't spend it, is it really a euro? And even when banks reopen, it is assumed that
capital controls will be imposed to prevent euros from leaving the island. So a French euro will
be able to purchase goods and services in Germany, but a Cypriot euro will not. It seems then
that a Cypriot euro is unambiguously worth less than a French euro.
Thus, there will be two Euros in circulation (if not already). This is the
thesis of blogger Guntrum B. Wolff (ht
Ed Harrison):
The most important characteristic of a monetary union is the
ability to move money without any restrictions from any bank to any other bank in the entire
currency area. If this is restricted, the value of a euro in a Cypriot bank becomes significantly
inferior to the value of a euro in any other bank in the euro area.
Effectively, it means that a Cypriot euro is not a euro anymore. By agreeing to this measure,
the ECB has de-facto introduced a new currency in Cyprus.
I think this might be right. If I can spend my dollar in Oregon but not in California, it is
really the same dollar? I think not.
Is this how the Eurozone experiment will end? Not with a formal "exit," but with a return to
banking dominated by national boundaries and enforced by capital controls? No longer a true common
currency, but a dozen currencies sharing the same name, each with a different value?
There will be another banking crisis in Europe (just as a bank will fail in some US state)
and depositors are now aware that they are fair game in any crisis response, so capital flight
will intensify at an earlier stage in the crisis. As may have been noted, European policymakers
find rapid crisis resolution to be something of a challenge, thus accelerated capital flight will
necessitate a more rapid imposition of capital controls in the future - and with each round of
capital controls, a new sub-euro will be born.
Bottom Line: Europe's response to the Cyprus situation will have long-lasting impacts on the
Eurozone experiment itself, none of the good. Indeed, the imposition of capital controls should
lead one to wonder if the "solution" to Cyprus is effectively an exit from the Eurozone is everything
but name. And don't forget that the crisis also threatens to destabilize
the region
geopolitcally. I don't think that "disaster" is too strong a word in this case.
Fred C. Dobbs:
Just imagine the money laundering opportunities for enterprising capitalists.
hix:
Nothing wrong with a situation where small savers in Cyprus prefer to save their mony at Austrian
or French banks. This can be done very fast, using onlinebanking.
The small ex-tax havens would still free ride the rest of the Eurozone, but to a much smaller
extend and creating much less systemic risk in the process.
mrrunangun:
It may not be a great idea for a tax haven to agree to provide deposit insurance for large
accounts belonging to foreigners using the advantages of investing in said tax haven. Knowing
that foreigners who value tax havens may also value deposit insurance and so may split accounts
to keep them under the deposit insurance limit, it may not be a great idea to offer deposit insurance
at all to the accounts of foreigners' investment vehicles. There was no deposit insurance in Russia
last time I looked, and Russian investors may be particularly sensitive to its availability in
an offshore tax haven. If your banking system's assets are several times your GDP, the foreigners
may not take your deposit insurance too seriously anyway.
havnaer said...
Does this mean a Cypriot Euro is also worth less OUTSIDE the Eurozone than a German Euro?
Were I a Russian oligarch with gobs of money in a Cypriot bank, I'd be vacationing in the Cayman
Islands right about now. Or maybe in Manhattan, having a conversation with a broker from Goldman
Sachs...
The more dicey the Euro looks, the better the Dollar looks. All that foreign money is going
to be bidding up the price of Treasuries, keeping interest rates (on housing and investment) low.
So much the better for OUR recovery.
Hooray for the European policymakers!!
Mark A. Sadowski said in reply to havnaer...
"Were I a Russian oligarch with gobs of money in a Cypriot bank, I'd be vacationing in the
Cayman Islands right about now. Or maybe in Manhattan, having a conversation with a broker from
Goldman Sachs..."
By most accounts the wealthiest of those Russians who based their money in Cyprus have already
moved it out:
"The more dicey the Euro looks, the better the Dollar looks. All that foreign money is going
to be bidding up the price of Treasuries, keeping interest rates (on housing and investment) low."
This is the trouble with looking at monetary policy purely from an interest rate perspective.
From a money supply and demand perspective anything that increases
the demand for dollars effectively tightens US monetary policy (the dollar goes up, and inflation
expectations, reflecting nominal income growth expectations, fall).
If you have any doubts ask yourself why the Swiss National Bank (SNB) has been working overtime
to keep up with the demand for Swiss francs.
... In the end, it's all about gas and the race to the finish line to develop massive Mediterranean
discoveries. Cyprus has found itself right in the middle of this geopolitical game in which its
gas potential is a tool in a showdown between Russia and the European Union.
The EU favoured the Cypriot bank deposit levy but it would have hit at the massive accounts
of Russian oligarchs. Without the promise of Levant Basin gas, the EU wouldn't have had the bravado
for such a move because Russia holds too much power over Europe's gas supply.
The Greek Cypriot government believes it is sitting on an amazing 60 trillion cubic feet of
gas, but these are early days-these aren't proven reserves and commercial viability could be years
away. In the best-case scenario, production could feasibly begin in five years. ...
RepubAnon said...
Ultimately, some form of Eurozone-wide bank deposit insurance will be needed. Banks choosing
to purchase that insurance would be able to use that fact in their advertising. Banks without
such protection would also need to prominently display this in their advertising. Only insured
banks would be protected, and folks with funds at uninsured banks would know up front what risks
they were taking.
Insurance policies, of course, are only as good as their underwriting policies. There would
need to be strict disclosure and risk analysis policies in place, monitored by folks whose salaries
depended on making correct risk assessments. There would also need to be a European version of
Glass-Steagall in place. Each Eurozone member country would need to pass strict laws criminalizing
violations before the insurance could be sold in that country, and repeal of those laws would
automatically void the policies.
Of course, the odds of something like this happening are quite small. Playing roulette with
other people's money where you get to keep most of your winnings and the losses are palmed off
on others is quite addictive. It's also profitable, so investing a small percent of one's profits
in the re-election campaigns of the appropriate politicians is a necessary cost of that business
model.
Nothing will change until the disaster is of such proportions that it can't be plastered over
with taxpayers' funds, or cries of "austerity now!" Still, it's worth thinking about now.
Cheap Thoughts on Euro Area Unemployment: It's a Guy Thing By Dean Baker
As we get our latest dose of euro crisis thrills with the battle of the Cypriot banks, it might
be a good time and step back to reflect on the havoc wreaked by the European Central bankers.
While the double-digit unemployment rates throughout much of the region have grabbed headlines,
if we flip the picture over and look at employment rates we see a somewhat more complicated picture.
First, if we look at employment population ratios for the adult population as a whole (ages
16-64), the euro zone story does not look especially dire.
[Graph]
If we want to do a direct comparison of employment population ratios (EPOP) for
the euro zone as a whole, the relevant lines are the top line and the third line. In 2006 the
United States had an EPOP for its adult population of 72.0 percent compared to 64.6 percent for
the euro zone as a whole. By 2011 most of this gap had closed as the EPOP for the U.S. had dropped
to 66.6 percent compared to 64.3 percent for the euro zone.
The closing of this gap is the story of two Europes. The north,
led by Germany, has seen a rise in its EPOP since the downturn. While Germany had an EPOP in 2006
that was 4.8 percentage points below that of the U.S., in 2012 data (not on the chart), its EPOP
was more than 6 pp higher.
By contrast, the crisis countries of the periphery have seen declines in their EPOPs, but considerably
less than might be expected given the severity of their downturns. Italy's EPOP had fallen by
just 1.4 pp, from 58.4 percent in 2006 to 57.0 percent in 2011. The drops in Greece and Spain
were larger through 2011, but still comparable to the decline in the United States. In Greece
the drop in the EPOP was 5.4 pp and in Spain it was 7.1 pp. This compares to a drop in the U.S.
of 5.4 pp. Through 2011, even in the crisis countries the picture does not look especially bad
compared to that in the United States.
There is an important qualification to this story. In 2012 the EPOP in the U.S. began to rise
modestly. By contrast it fell sharply in both Greece and Spain. The EPOP in the third quarter
of 2012 in Greece (the last quarter for which the OECD has data) was 50.4 percent, 5.2 pp below
its year-round average for 2011. The EPOP for Spain in the fourth quarter of 2012 was 54.6 percent,
3.1 pp below its year-round average for 2011. The employment situation in these crisis countries
may not have looked much worse than the employment situation in the U.S. through 2011, but it
certainly does now.
The other striking part of the story is the extent to which the employment falloff is a story
of male workers.
[Graph]
While the drop in EPOPs for men in the U.S. from 2006 to 2011 is modestly larger than the overall
drop, at 6.7 percentage points, it is much more severe in both Greece and Spain. In Greece the
decline was 7.7 pp through 2011 with an additional decline 6.3 pp through the first two quarters
of 2012 for a total fall of 14.0 pp. In Spain the drop was 12.9 pp through 2011, with a further
decline of 3.9 pp through the fourth quarter of last year for a total fall of 16.8 pp.
By contrast, women do not seem to have been hit nearly as hard.
[Graph]
As is the case with men, the EPOP for women in Germany rises substantially over this period,
going from 61.5 percent in 2006 to 67.7 percent in 2011. It continued to rise to 68.1 percent
in the third quarter of 2012. The EPOP for women in the euro zone as a whole also showed a modest
rise in this period, going from 56.6 percent in 2006 to 58.2 percent in 2011. By contrast, the
EPOP for women in the United States fell by 4.1 pp over this period.
Interestingly, even in Greece and Spain the EPOP for women showed only a modest decline, dropping
by 2.3 pp in Greece and just 1.2 pp in Spain. However as was the case with men, it seems the situation
worsened notably in 2012. The EPOP for women had fallen by another 2.9 pp in Greece through the
third quarter of 2012 and by 2.1 pp in Spain through the fourth quarter of 2012.
There are a couple of important takeaways from this picture. First, even in the hardest hit
countries the drop in employment was not notably worse than in the United States through 2011.
The better situation for women largely made up for a worse situation for men, compared with the
picture in the United States. That is not necessarily entirely positive. If women who had preferred
not to enter the labor force ending up taking low paying jobs because their husbands were unemployed,
this is not a good story. However it means that the hardship may not be as severe as the unemployment
data indicate.
The other really big takeaway is that 2012 was much worse than 2011. The fact that Greece,
Spain and other crisis countries were able to endure the pain through 2011 does not imply that
they will be able to endure 2012 level pain for an indefinite period of time. One hopes for evidence
of intelligent life at the European Central Bank.
raskolnikov:
It could be argued that the men who created the Eurozone did so to ensure the free flow of
capital. They thought they could preserve that policy without creating the institutions that make
it possible, like a banking union, fiscal transfers, a central fiscal authority etc. So now the
whole thing is blowing up in their faces because free trade laws alone don't create the political
framework for putting out fires.
It looks to me like little Cyprus could be the straw that broke
the camels back, but maybe I'm just having a bad day.
Here are some unedited thoughts I just shared with the BBC's Radio 4 on Cyprus while we are all
waiting for the new deal to shape up:
Cyprus' banking sector must shrink. As did Ireland's, the hard way. What is essential, as every
Irishman and woman will tell you, is that the politicians do not load up the weaker citizen's/taxpayers'
shoulders with enormous debts on behalf of bankers that refuse to wither.
Every bailout agreement, beginning with Greece's in May 2010, seems less logical and more toxic
than the previous one. The culmination was of course Cyprus this past week. Think about it: In one
short week, Europe has managed:
To put in jeopardy the hitherto sacrosanct concept of state guaranteed deposit insurance
The monetary integrity of the Eurozone
The European Union's single market principle according to which capital controls are a no-no.
If only the agreement reached at last June's EU Summit to de-couple the banking crisis from the
public debt crisis had been implemented, we would not be having this conversation now.
The Cyprus debacle is the homage that denial of the systematic nature of the euro crisis pays
to a systemic crisis.
Cyprus parliamentarians offered the Eurozone a reprieve from the stupidest and most potentially
destructive Eurogroup decision since this Crisis began three years ago. It now remains to be seen
whether, scared by the sound of their own NO, they will now succumb to an even less rational deal.
By Yanis Varoufakis, Professor of Economics at the University of Athens. Cross posted
from
his
blog.
from Mexico says:
You know, I was talking to a Canadian politilogue, Peter Dale Scott, earlier today, and he
was telling me some stuff about politics around those parts in the Americas that would really
blow the mind of the average clueless American. I know I was flabbergasted.
For example, did you know that the "unofficial" government in the United States - the "deep
state" (CIA, NRO, NSA, DIA, DEA, NED, USAID, etc.), in collusion with that country's military
sector and the transnational banking cartel, is a lot more powerful than the "official" government
there? And to use a euphemism of a Pakistani fellow I was talking with the other day, if the United
States legislature failed to do what the triumvirate of US deep state, the US military sector
(both private and public), and transnational banking cartel instructed it to do, then it would
be "cleaned". In his own words: "We are heading towards an international new order where the power
of the state will be totally in hands of a corrupt mafia, who will usurp all human rights on pretext
of controlling terrorism…. The boomerang will come back and as they say the wheel turns !" http://nsnbc.me/2013/02/01/the-volatility-of-gas-geo-politics-and-the-greater-middle-east-an-interview-with-major-agha-h-amin-2/
I think this accounts for the surprising pattern of unanimous votes there against rank and
file Americans that have occurred over the past 35 years, and also likely means that any actions
going forward by the sock-puppet government of the United States will be at the direction of the
actual governing institutions of that particular state. Which is not to say that that is necessarily
a bad thing, at least for the 1%, the neoliberals and neoconservatives. I'm just pointing out
that unless you happen to be talking to people who are from the region and are somewhat politically
connected, you might not have any idea what is really going on there.
The Dork of Cork:
This is not a mistake.
Capital controls within the Euro on a island be it Cyprus today or Ireland in the future is
a very effective measure for core Euro and chief IMF shareholders ( the banks which control the
western treasuries )
Core Europe needs basic (energy resources). If Cypriots or Irish fight for the last Euro in
the company store the oil they once burned will flow elsewhere.
Thats the point of this.
I have kept saying for some time now. The Irish are worth more dead then alive.
from Mexico says:
March 24, 2013 at 8:43 am
What is it going to take to wake up the rank and file of Ireland, Cyprus, Spain, Portugal,
Italy, Greece, etc. to a very simple reality: They're being colonized? We've seen this movie before.
It's what Hannah Arendt called "continental imperialism."
And it is all facilitated by a small group of privileged elites who hail from within the colonized
nations. The relationship between inside colonizer and outside colonizer that exists in neo-colonialism
is explained by Carlos Fuentes as follows:
In the phase immediately after independence, Britain managed Latin America's foreign trade;
in the latter part of the nineteenth century, the United States came to be the principal partner.
However, they employed the same instruments of economic power, namely favorable agreements
for their merchants, loans and credits, investment, and the handling of the export economy…
A highly privileged local minority served as intermediaries, both for these exports and for
the imports of manufacured European and North American goods, which were in demand among the
urban population in the interior…
Large haciendas, intensive exploitation of minerals and cheap labor forces proliferated.
Was this what independence was all about - land and mine owners profiting handsomely while
the majority remained impoverished?
– CARLOS FUENTES, The Buried Mirror
For an excellent contemporary analysis of the same phenomenon there's Ljubiša Mitrović's "THE
NEW BOURGEOISIE AND ITS PSEUDO-ELITE IN THE SOCIETIES OF PERIPHERAL CAPITALISM":
Following the neoliberal ideology and concept of development (characterized by market fundamentalism,
monetarist economic policy, privatization, liberalization, deregulation, Washington Agreement),
the forces of the global capitalism, whose agents are the leading countries of the world centre
and the USA, TNCs and the financial bank bourgeoisie, have imposed
the neoliberal ideology of dependent modernization on the countries of the semiperiphery and
the periphery.
Here's how Mitrović describes the role of the inside colonizers:
Comprador bourgeoisie is the upper layer of the bourgeois class… It is a tycoon group
ruthlessly led by its interests. It posits its own interests over general social ones.
It is not national in character and is socially irresponsible. It is a blind servant of foreign
capital, ruthless in the exploittaion of the domestic workforce and dictatorial in relation
to its fellow countrymen. Its homeland is where its interests are. It is the
agent of the megacapital in the function of global economy. It is a "Trojan horse" of the foreign
TNCs in Serbia and the region. Its god is the god Mammon, the capital. Its aim is to amass
capital, and it puts profit above individuals. It is a predatory class of the nouveau riche
and often bon vivant and parasitic upstarts. It is a peculiar jet-set of bandit economy.
The imposition of capital controls has the potential to alarm depositors in periphery countries
even more than deposit seizure. While the Eurocrats can try claiming that the deposit grab is a one-off,
the result of Cyprus having a huge financial sector that was heavily deposit funded, it was already
troubling that they didn't go after equity or bondholders. But the imposition of capital controls
effectively creates another currency without the benefit of allowing the currency to revalue. As
Jeremy Warner of the Telegraph explained:
Yet the point is that if capital controls are introduced, it basically makes Cypriot euros into
a national currency, rather than part of wider monetary union. The capital controls will severely
limit your ability to get your euros out of Cyprus, rending them essentially worthless in the wider
eurozone. It would be a bit like telling Scots they can't spend their UK pounds in England. Monetary
union is many things, but above all it is about free movement of money and a uniform value wherever
it is spent. When these functions are disabled, then you cease to be part of a single currency.
John Dizard of the Financial Times is of the same view:
So even after the banks (presumably) reopen on Tuesday, a euro in Cyprus will now not be as freely
transferable, or, really, as valuable, as a euro in Frankfurt. In some very real ways that is also
true of euros on deposit in Greece, whose use is increasingly subject to detailed review and delay
by tax authorities; or euros in Italy, where the size of cash transactions is severely restricted,
at least by law.
Therefore, now that the Article 65 capital-controls cat is out of the bag, it is reasonable to consider
when and where it will be used again, when a European banking system gets into trouble. You may be
rich, in nominal Cypriot euros, or (fill in the blank) euros, but so what?….
In the same way that starting wars is much easier than ending them, the lifting of capital controls
in Cyprus is likely to be a long time off. Britain imposed temporary exchange controls, as they were
called then, in September of 1939 and did not lift them until 1979.
As we've indicated, the big risk coming out of the cramdown of Cyprus is a resumption of the flow
of deposits out of periphery countries, which had been underway last year but was arrested by the
introduction of the OMT. You'd be nuts to keep your money in a Spanish bank after the brutal treatment
of Cypriot depositors. Expect Swiss, German, American, and, as Dizard put it, "banco de Mattress"
to be the beneficiaries.
from Mexico
Yves said:
Indeed, the President and key members of Parliament are likely at physical risk and it's
not hard to imagine that some will find it necessary to leave the country.
Kind of like Argentine president Fernando de la Rúa and his Economics Minister, the neoliberal
guru Domingo Cavallo, escaping from Argentina in a helicopter in the wee hours of December 20th,
2001.
ltr:
Argentina's Domingo Cavallo was a Harvard guy, and America's darling for keeping the peso pegged
to the dollar so that Americans could invest in Argentina with no exchange rate risk.
Capital controls are being implemented, since news reports from Cyprus indicated that residents
intended (understandably) to drain accounts once banks reopened.
It seems like capital controls won't stop people from withdrawing their money from the banks
and keeping it under their mattresses. This is what happens in countries like Argentina and Mexico
where there is little faith in the banks. You get these unbelieveably large, underground cash
economies. Here in Mexico, a good friend of mine is an antique dealer and he recently sold an
antique to a man who is perhaps the biggest real estate developer in Mexico. It was about $80,000
and he paid cash. Likewise he sold an antique to the owner of one of the TV monopolies here in
Mexico, and again he paid in cash. This would never happen in the US.
Likewise, in Argentina cash in the hands of individuals accounted for 51 percent of private
money supply.
So where there is little or no faith in the banks, these large
underground cash economies can develop. As the article above on Argentina explains,
this robs banks of deposits, deposits which can be leant out for productive investment in the
formal economy. But both Mexico and Argentina have monetary sovereignty, so can print up more
pesos. What's going to happen to poor little Cyprus, who can't print up more euros?
from Mexico:
This whole thing went down according to plan. Never let a crisis go to waste.
In 1995, when Clinton placed a gun to Mexico's head and pulled the trigger, where was Mexico's
governing group, all Ivy League trained (Harvard, Yale, MIT)? As Fuentes inquires in A New Time
for Mexico:
In effect, President Clinton withdrew the original $40 billion loan requiring Congressional
approval and gave Mexico $20 billion out of a discretionary fund. Strings were attached: Mexico's
oil revenue would serve as collateral and be paid directly into the Federal Reserve Bank in
New York. President Zedillo didn't even blink at this onerous condition and both Zedillo and
Clinton knew that the U.S. lent Mexico money to repay U.S. banks, and investors… Production,
employment, salaries, education, and social services - the real saviors of the Mexican economy
- were once more postponed. Sovereignty was serverely affected: the agrement gave the U.S.
the right to monitor Mexico's economic policies…
Even after taking into account the executive branch's lack of controls, its internal agenda,
the tradition of secrecy, and the deluded complicity of Washington, a bitter doubt remains
in Mexico. If the devaluation of the peso was not done in time, why was it done so badly? What
happened to the technicians, the economists, the boys at the blackboard? Why did they not negotiate
with the U.S. government before the devlauation, so that credit could be obtained at less risk
to our national sovereignty? Why was it all done so late, so ineptly? In the last days of January
1995, when the illusion of a rescue loan was fading, our supplicant diplomats returned home
with empty hands, equipped only with nails to scratch outselves with.
skippy:
I cannot fathom the ironic incongruity of neoliberalism… cough… Anarcho capitalism
Anarcho-capitalism (also referred to as free market anarchism,[1] market anarchism,[2] private-property
anarchism,[3] libertarian anarchism,[4] and voluntaryism) is a libertarian political philosophy
that advocates anarchy in the sense of the elimination of the state in favor of individual sovereignty
in a free market.[5][6] In an anarcho-capitalist society, law enforcement, courts, and all other
security services would be provided by privately funded competitors rather than through taxation,
and money would be privately and competitively provided in an open market. Therefore, personal
and economic activities under anarcho-capitalism would be regulated by privately run law rather
than through politics.
Various theorists have differing, though similar, legal philosophies which are considered to
fall under "anarcho-capitalism." The first well-known version of anarcho-capitalism was formulated
by Austrian School economist and libertarian Murray Rothbard in the mid-twentieth century, synthesizing
elements from the Austrian School of economics, classical liberalism, and nineteenth century American
individualist anarchists Lysander Spooner and Benjamin Tucker (while rejecting their labor theory
of value and the normative implications they derived from it).[7]
In Rothbardian anarcho-capitalism, there would first be the implementation of a mutually agreed-upon
libertarian "legal code which would be generally accepted, and which the courts would pledge themselves
to follow."[8] This legal code would recognize sovereignty of the individual and the principle
of non-aggression. – wiki
Skip here… which then begs the question what is the NAP (Non-aggression principle) which underpins
this ology – ism mean see:
Justifications:
The principle has been derived by various philosophical approaches, including:
Argumentation Ethics: Some modern libertarian thinkers ground the non-aggression principle
by an appeal to the necessary praxeological presuppositions of any ethical discourse, an argument
pioneered by libertarian scholar Hans Hermann Hoppe. They claim that the act of arguing for the
initiation of aggression, as defined by the non-aggression principle is contradictory. Among these
are Stephan Kinsella[5] and Murray Rothbard.[6]
Consequentialism: Some advocates base the non-aggression principle on rule utilitarianism or
rule egoism. These approaches hold that though violations of the non-aggression principle cannot
be claimed to be objectively immoral, adherence to it almost always leads to the best possible
results, and so it should be accepted as a moral rule. These scholars include David Friedman,
Ludwig von Mises, and Friedrich Hayek.[7][not in citation given]
Natural rights: Some derive the non-aggression principle by appealing to natural rights that
are deemed a natural part of man. Such approaches often reference self-ownership, ethical intuitionism,
or the right to life. Thinkers in the natural law tradition include John Locke, Lysander Spooner,
and Murray Rothbard.
Social contract: The social contract is an intellectual device intended to explain the appropriate
relationship between individuals and their governments. Social contract arguments assert that
individuals unite into political societies by a process of mutual consent, agreeing to abide by
common rules and accept corresponding duties to protect themselves and one another from violence
and other kinds of harm. Many libertarians, however, reject the "social contract" term as it has
been historically used in a non-voluntary fashion. They argue that for a contract to be enforceable
it must be voluntarily accepted.
Social progress: Herbert Spencer, the 19th century polymath, first proposed that aggression
either between individuals or the state against the individual inhibits sociocultural evolution.
Based on his theory of social evolution (from Lamarckian use-inheritance), he concluded that aggression
in all its forms impedes progress by interfering with the individual's ability to exercise his
or her faculties. He wrote, "… when each possesses an active instinct of freedom, together with
an active sympathy-then will all the still existing limitations to individuality, be they governmental
restraints, or be they the aggressions of men on one another, cease. … Then, for the first time
in the history of the world, will there exist beings whose individualities can be expanded to
the full in all directions. And thus, as before said, in the ultimate man perfect morality, perfect
individuation, and perfect life will be simultaneously realized."[8]
Objectivism: Ayn Rand rejected natural or inborn rights theories as well supernatural claims
and instead proposed a philosophy based on observable reality along with a corresponding ethics
based on the factual requirements of human life in a social context.[9] She stressed that the
political principle of non-aggression is not a primary and that it only has validity as a consequence
of a more fundamental philosophy. For this reason, many of her conclusions differ from others
who hold the NAP as an axiom or arrived at it differently. She proposed that man survives by identifying
and using concepts in his rational mind since "no sensations, percepts, urges or instincts can
do it; only a mind can." She wrote, "since reason is man's basic means of survival, that which
is proper to the life of a rational being is the good; that which negates, opposes or destroys
it [i.e. initiatory force or fraud] is the evil."[10] – wiki
Skip here… so whats all the humbug about aggression or is it assertiveness? When does it begin
and what is its path through out ones life… is part and parcel of adaptive behavior or some part
that should be genetically bred out – removed from the herd… eh.
Children:
The frequency of physical aggression in humans peaks at around 2–3 years of age. It then declines
gradually on average.[103][104]
These observations suggest that physical aggression is not only a learned behavior but that
development provides opportunities for the learning and biological development of self-regulation.
However, a small subset of children fail to acquire all the necessary self-regulatory abilities
and tend to show atypical levels of physical aggression across development. These may be at risk
for later violent behavior or, conversely, lack of aggression that may be considered necessary
within society. Some findings suggest that early aggression does not necessarily lead to aggression
later on, however, although the course through early childhood is an important predictor of outcomes
in middle childhood. In addition, physical aggression that continues is likely occurring in the
context of family adversity, including socioeconomic factors. Moreover, 'opposition' and 'status
violations' in childhood appear to be more strongly linked to social problems in adulthood than
simply aggressive antisocial behavior.[105][106] Social learning through interactions in early
childhood has been seen as a building block for levels of aggression which play a crucial role
in the development of peer relationships in middle childhood.[107] Overall, an interplay of biological,
social and environmental factors can be considered.[108]
What is typically expected of children?
Young children preparing to enter kindergarten need to develop the socially important skill
of being assertive. Examples of assertiveness include asking others for information, initiating
conversation, or being able to respond to peer pressure.
In contrast, some young children use aggressive behavior, such as hitting or biting, as a form
of communication.
Aggressive behavior can impede learning as a skill deficit, while assertive behavior can facilitate
learning. However, with young children, aggressive behavior is developmentally appropriate and
can lead to opportunities of building conflict resolution and communication skills.
By school age, children should learn more socially appropriate forms of communicating such
as expressing themselves through verbal or written language; if they have not, this behavior may
signify a disability or developmental delay
What triggers aggressive behavior in children?
Physical fear of others
Family difficulties
Learning, neurological, or conduct/behavior disorders
Psychological trauma
Corporal punishment such as spanking increases subsequent aggression in children.[109]
The Bobo doll experiment was conducted by Albert Bandura in 1961. In this work, Bandura found
that children exposed to an aggressive adult model acted more aggressively than those who were
exposed to a nonaggressive adult model. This experiment suggests that anyone who comes in contact
with and interacts with children can have an impact on the way they react and handle situations.[110]
Summary points from recommendations by national associations
American Academy of Pediatrics (2011):
"The best way to prevent aggressive behavior is to give your child a stable, secure home life
with firm, loving discipline and full-time supervision during the toddler and preschool years.
Everyone who cares for your child should be a good role model and agree on the rules he's expected
to observe as well as the response to use if he disobeys."[111]
National Association of School Psychologists (2008):
"Proactive aggression is typically reasoned, unemotional, and focused on acquiring some goal.
For example, a bully wants peer approval and victim submission, and gang members want status and
control. In contrast, reactive aggression is frequently highly emotional and is often the result
of biased or deficient cognitive processing on the part of the student."[112]
Situational factors
See also: Stereotype threat
There has been some links between those prone to violence and their alcohol use. Those who
are prone to violence and use alcohol are more likely to carry out violent acts.[122] Alcohol
impairs judgment, making people much less cautious than they usually are (MacDonald et al. 1996).
It also disrupts the way information is processed (Bushman 1993, 1997; Bushman & Cooper 1990).
Pain and discomfort also increase aggression. Even the simple act of placing one's hands in
hot water can cause an aggressive response. Hot temperatures have been implicated as a factor
in a number of studies. One study completed in the midst of the civil rights movement found that
riots were more likely on hotter days than cooler ones (Carlsmith & Anderson 1979). Students were
found to be more aggressive and irritable after taking a test in a hot classroom (Anderson et
al. 1996, Rule, et al. 1987). Drivers in cars without air conditioning were also found to be more
likely to honk their horns (Kenrick & MacFarlane 1986), which is used as a measure of aggression
and has shown links to other factors such as generic symbols of aggression or the visibility of
other drivers.[123]
Frustration is another major cause of aggression. The Frustration aggression theory states
that aggression increases if a person feels that he or she is being blocked from achieving a goal
(Aronson et al. 2005). One study found that the closeness to the goal makes a difference. The
study examined people waiting in line and concluded that the 2nd person was more aggressive than
the 12th one when someone cut in line (Harris 1974). Unexpected frustration may be another factor.
In a separate study to demonstrate how unexpected frustration leads to increased aggression, Kulik
& Brown (1979) selected a group of students as volunteers to make calls for charity donations.
One group was told that the people they would call would be generous and the collection would
be very successful. The other group was given no expectations. The group that expected success
was more upset when no one was pledging than the group who did not expect success (everyone actually
had horrible success). This research suggests that when an expectation does not materialize (successful
collections), unexpected frustration arises which increases aggression.
There is some evidence to suggest that the presence of violent objects such as a gun can trigger
aggression. In a study done by Leonard Berkowitz and Anthony Le Page (1967), college students
were made angry and then left in the presence of a gun or badminton racket. They were then led
to believe they were delivering electric shocks to another student, as in the Milgram experiment.
Those who had been in the presence of the gun administered more shocks. It is possible that a
violence-related stimulus increases the likelihood of aggressive cognitions by activating the
semantic network.
A new proposal links military experience to anger and aggression, developing aggressive reactions
and investigating these effects on those possessing the traits of a serial killer. Castle and
Hensley state, "The military provides the social context where servicemen learn aggression, violence,
and murder."[124] Post-traumatic stress disorder (PTSD) is also a serious issue in the military,
also believed to sometimes lead to aggression in soldiers who are suffering from what they witnessed
in battle. They come back to the civilian world and may still be haunted by flashbacks and nightmares,
causing severe stress. In addition, it has been claimed that in the rare minority who are claimed
to be inclined toward serial killing, violent impulses may be reinforced and refined in war, possibly
creating more effective murderers.[citation needed]
As a positive adaptation theory
Some recent scholarship has questioned traditional psychological conceptualizations of aggression
as universally negative.[24] Most traditional psychological definitions of aggression focus on
the harm to the recipient of the aggression, implying this is the intent of the aggressor; however
this may not always be the case.[125] From this alternate view, although the recipient may or
may not be harmed, the perceived intent is to increase the status of the aggressor, not necessarily
to harm the recipient.[126] Such scholars contend that traditional definitions of aggression have
no validity.[citation needed]
From this view, rather than concepts such as assertiveness, aggression, violence and criminal
violence existing as distinct constructs, they exist instead along a continuum with moderate levels
of aggression being most adaptive.[24] Such scholars do not consider this a trivial difference,
noting that many traditional researchers' aggression measurements may measure outcomes lower down
in the continuum, at levels which are adaptive, yet they generalize their findings to non-adaptive
levels of aggression, thus losing precision.[127] – wiki
Skippy… boy oh boy I sure am confused over this w]Ihole neoliberlism thingy – cough… Anarcho
Capitalism… I mean… if squillionaires are sovereign entity's on top of – pinnacle of – ownership's
– propertarianism's mental thunit excrement pile… well history is well defined on this subject
matter… can you say Tudors on steroids… the individual[s of wealth become **religious creators**
in their own – individual – rights! Dark ages 2.0 value added w/ devolution sq – cubed…
PS. is it possible to barf, retch, and sob all at the same time… uncontrollably?
Assuming that happens, artificial 100K limit or not:
1. Core banks win, peripheral banks lose
2. All depositors lose, since their savings can be garnished between 4:59PM Friday and 9:01AM
Monday if the powers that be think that's a good idea. Never let a crisis go to waste.
So it's all good.
kris:
I don't think many common people have deposit of more than 100k. It seems to me this is rich
robbing rich, elite infighting.
Jim Haygood
The awful ruin of Europe, with all its vanished glories, glares us in the eyes.
When the designs of wicked men or the aggressive urge of mighty States dissolve over large
areas the frame of civilised society, humble folk are confronted with difficulties with which
they cannot cope. For them all is distorted, all is broken, even ground to pulp.
From Stettin in the Baltic to Trieste in the Adriatic, an iron curtain has descended across
the Continent.
A previous reader posted a comment "we are Cypriots now". Maybe, but "we" Cypriots join one
other nation that has history of government imposed wealth confiscation and capital levies foisted
on its poor, benighted, downtrodden, hapless population; Germany.
Since 1913, Germany's government has imposed 'forced loans', capital levies or a wealth tax
on its citizens, no less than eight times: In 1913, the government introduced a one-off levy on
higher wealth and income as a defense tax; in 1919, the national emergency tax levy was introduced
as an general capital levy as part of Erzberger's financial reforms; the government also levied
a forced loan in 1922/23, which taxed citizens with a 'one time' 100,000 marks; in 1949, a retroactive
capital levy was raised on the asset base of citizens from 1948; 'The Investment Aid Act' of 1952
forced loan from the commercial sector for reinvestment in the 'primary' industries; and, in 1982,
the coalition government introduced an 'Investment Aid' levy to promote housing construction –
paid back at a later date with no interest.
Clearly , Germany sees the correlation between forced loans and capital levies as obvious:
Forced loans can more or less be converted into capital levies due to the structure, interest,
and repayment methods. Larger one-off capital levies are easily spread over longer periods of
time to minimize the liquidity burden on taxpayers (E.g. the 1950′s, the capital levy was uniformly
spread over a 30-year period (including interest) and collected in quarterly installments). Germany
sees that forced loans and one-off capital levies serve as an "one time" fiscal instrument to
secure public debt refinancing, without having to rely on external aid.
If we want to see where the next expropriation of private wealth might be, look not to Greece,
Spain or Italy but,perhaps, look to Germany itself. What easier way to lead by example on the
way back to economic strength?
We are all 'good Germans' now.
craazyman:
That sounds like lifting weights in the gym with chalk all over your hands and old cotton sweatpants
and sweatshirts. Grey, no flashy bright colors or shoes that light up when you walk. I'm talking
leather high tops with laces. That's how Rocky Marciano used to work out.
That's an interesting history-slice into the Geode of the Teutonic mind. Let's forget about
the Nazis for a second.
The theory is. You can do a correlation going back 100 years between capital levies and industrial
might. The r-squared is nearly 1.00.
Cyprus will eventually be the strong man of the Mediterranean! Hanz and Franz will PUMP YOU
UP!
Ned Ludd:
It's not a wealth tax, it's a liquidity tax. Wealthy people don't keep large sums of money
deposited at the bank. They invest in real estate, equities, bonds, derivatives, futures, options,
and swaps. They have financial advisers who advise them not to let their money sit in a savings
account.
Who has large amounts of money in savings accounts? Risk-averse retirees. Small businesses.
A person or business saving up to make a large capital purchase without taking out a loan. The
middle class – the financially conservative middle class. This seizure of wealth is aimed straight
at the middle class.
Lambert Strether:
It's not a tax. And who do you think is running the show? Somebody other than plutocrats?
kris:
It seems that Washington drew the red line.
Europeans can't solve anything. They always beg DC to solve problems.
http://armstrongeconomics.com/2013/03/22/russia-rejects-cyprus-deal-watch-france/
Extract:
They say USA made calls warning Russia not to intervene and others claim this will help Europe.
Yves Smith:
Please see Ned Ludd's comment above.
This is not a wealth tax. No wealthy person would keep a lot of money in 'friggin deposits.
This is a tax on conservative retirees and small-medium sized businesses. Just watch Greek
and Cyprus news and see how many businesses fail as a direct result of the deposit seizure.
ary:
That's because this isn't a wealth tax. It's a confiscation of assets to bailout more filthy
banksters. A true wealth tax is assessed on all assets and collected annually like an income tax
and is used to punish rentier behavior and incentivize the productive allocation of assets.
It is usually 1-2% and is done in lieu of capital gains and gift taxes. Instead of letting
wealth build-up and languish in offshore bank accounts accruing interest, a true wealth tax encourages
productive investment. The Cyprus saga is nothing of the sort, especially since it is supposedly
a "one-off" phenomenon. It is just a blatant heist of people's money to avoid giving a banksters
a big sad.
Finnucane:
I'm not wise in the ways of finance, banking, etc., so correct me if I'm wrong:
doesn't the imposition of a "reverse toaster" fee amount to a nullification of the EMU deposit
insurance?
And without said insurance, won't there be a run on the banks in other EMU countries? If I'm,
say, a Spanish pensioner, won't I have an incentive to run to my bank first thing Monday morning,
take out my euro-cash, and exchange it for dollars or yen or shrunken heads or something, because
my heretofore safe deposit is now exposed to the threat of "bailout fee" confiscation?
And aren't bank runs bad or something?
As a kid growing up in monolingual small town 'merica, I always figured the Europeans, with
their Goethe and Latin schools and Anatole France and le bac and all that, must be smarter than
us.
Now I realize they're just 99%-er losers, just like the rest of us. Welcome (back) to the trailer
park, Proust!
Protect personal accounts from confiscation for bank bailouts
Whereas, during recent events in Cyprus, the European Union sought to confiscate personal accounts,
including insured accounts, for a bank bailout;
And whereas the Open Bank Resolution of the Bank of International Settlements considers holders
of personal accounts "creditors" and hence subject to "losses" during a bailout;
And whereas millions of Americans have entrusted their money to banks for safekeeping;
Be it resolved that the President of the United States, Barack Obama, shall issue this statement:
"Neither the Federal Reserve, the U.S. Treasury, nor any other governmental or international
body shall ever levy deposits from U.S. personal bank accounts for the purpose of a bank bailout."
The President shall enforce this statement with appropriate regulations.
1 down, 99,000 to go….
Laughing_Fascist :
You would think the FDIC would payout if there were a (bondholder) bank robbery in the U.S.
But FDIC only pays if the bank fails. Very clever.
auntienene:
99,993 to go
Carla:
I do not know if the following was referenced here on Naked Capitalism or not, but the following
article: "The Progressive Movement is a PR Front for Rich Democrats" cannot be mentioned or forwarded
too often:
I am not sure that Putin sympathizes too much with those Russians who put money in tax heaven
or run businesses via tax heaven. I would think they are more his enemies and West friends (Yeltsin
gang, oligarchs, etc)
BTW in an unrelated news Berezovsky died (heart failure or suicide) in London
emptyfull
Good blow-by-blow in the FT on how the deposit "tax" happened. Surprise! Everybody looks bad.
As alluded to in the article, there is now a Two Tier Euro.
There are FROZEN EUROS, like those in the Cyprus banks and subject to capital controls, and HOT
EUROS, those free to roam. This sure looks like the future model for the EURO NOSTRA.
Should be lots of financial jobs for those monitoring capital controls. Will business accounts
be treated the same as Momma's. Lots of opportunity for more corruption and influece peddling
to manipulate these capital controls.
The EURO NOSTRA will also be able to measure the Financial Consciousness of the rest of Europe
by seeing how many run for the Exits. If there is little reaction, expect even more draconian
cramdowns.
hugh fowler:
I notice that the whole financial MSM has gone very quiet on the subject of Credit Default
Swaps. One of the reasons the Cypriots banks have become insolvent is becuase they were forced
to take a large write down on Greek bonds when the Eurozone constructed the bailout for Greece.
One assumes that at least part of that debt was insured by CDS. It is the holders of these instruments
that are getting bailed for free at every stage of this crisis not the debtor nations who are
being stuck with austerity and yet more 'loans' to repay. Anyone got any figures who wa on the
wrong end of insuring Greek debt because they bear a huge responsibility for what is happening
in Cyprus and once again they are not beeing held to account.
TC:
Whatever it takes to provide assets on the cheap to fascist loving swindlers working the London-New
York Axis of Fraud whose out-of-control use of leverage spewed from its zero due diligence regime
positively must increase, lest the whole house of dirty cards collapse (which is doomed to happen
anyhow). That ridiculous satrap of this imperial dung pile, Germany, evidently has all the creative
capacity of moon rock.
Michael Hudson:
If I understand this, Yves, ONLY Laiki is suffering. The Russians do NOT have money in it -
it's a Greek bank with Arab backing. So this looks like Cyprus is saving the Russian deposits
EXCEPT for secondary effects from their cross-ties to Laiki.
This seems to me to be the path of least resistance, keeping the Russians happy. My guess is
that it's mainly Greek cypriots who are depositors in Laiki. Not much love lost there …
the Germans must be fuming. I think that their action was aimed largely against Russia from
the start, hoping to drive it to bank with the Europeans. (Meanwhile, Putin is stepping up pressures
with the BRICS next week to create their own banking and currency area.)
watch what Sara W. said in the Bundestag yesterday.
Yves Smith:
No, that's just what they've voted through so far is the Laiki restructuring. That gets them
only €2 billion of the €5.8 billion they need. They are voting today to go after other deposits
(well that could go into Sunday, but the plan was to vote on it today). The reporting isn't as
granular as I like, but I think that's because the structure is still in play, but at a minimum,
they intend to take ~22% to 25% of the deposits over €100,000 of the biggest bank (Laiki is #2),
and the question of how much to hit other depositors is still being sorted out. The President
and his finance ministers are flying to Brussels (I think Brussels) today for more negotiations.
They still want to borrow against pension fund assets, which the Troika nixed. They I believe
are trying to get the Troika to accept a smaller amount of borrowing against state pensions (a
bill authorizing that was passed) but I don't think the Troika is gonna budge.
Basically, they can't get to the €5.8 billion without taking a LOT from other depositors. There
is only €3 billion in deposits at the Russsian state bank sub, which is perfectly solvent (one
source of the Russian unhappiness). It's pretty clear Russians have euros in other banks too,
I've seen no guesstimates on the distribution.
The other thing which is NEVER NEVER mentioned is there is a lot of Lebanese money in Cyprus
and some Saudi as well. The reporting has clearly been heavily influenced by the Troika demonization
of the Cypriots.
AMSTERDAM (Reuters) - Dutch insurance and banking group ING (ING.AS: Quote) said on Friday
it had about 900 million euros ($1.16 billion) of exposure at year-end to companies registered
in Cyprus, but that its credit risk linked to the island was negligible
sum luk:
But step back ... and consider the incredible fact that tax havens like Cyprus, the Cayman
Islands, and many more are still operating pretty much the same way that they did before the
global financial crisis. Everyone has seen the damage that runaway bankers can inflict, yet
much of the world's financial business is still routed through jurisdictions that let bankers
sidestep even the mild regulations we've put in place. Everyone is crying about budget deficits,
yet corporations and the wealthy are still freely using tax havens to avoid paying taxes like
the little people.
Sebastian:
SPOOL said: "What about the part where the people who had their Cyprus savings clipped get
fractional compensation with ownership in the bank? Or did I dream that?"
No, I saw that somewhere, too. Don't know whether it's going to make it into the final bill.
There's talk of somehow issuing shares/bonds/interest based on Cyprus' off-shore natural
gas deposits, except that they haven't been developed, and it's a long, difficult and expensive
process, years away from actually producing any money.
Also talk of nationalizing pension funds.
Even with the extraordinary measures the Parliament is considering, it's looking like they'll
still come up short on the 5.8 billion euro goal...unless they up the haircut on depositors.
JMO, FWIW.
S.
josap:
"You must be out of your mind!" snapped tycoon Igor Zyuzin, main owner of New York-listed
coal-to-steel group Mechel (MTL.N), as he dismissed a suggestion this week that the financial
meltdown in Cyprus posed a risk to his interests.
His response is typical across the oligarch class of major corporations and super-rich individuals,
reflecting the assessment of officials and bankers on the Mediterranean island who say the
bulk of the billions of euros of Russian money in Cyprus comes from smaller firms and middle-class
savers.
black dog:
how many small/mid/ size businesses will be WIPED OUT if the $$s for payroll vaporized?
morons
LoserBeachBum:
Everybody in Europe knows Cyprus is at least a little bit "shady", like Las Vegas
in the 1960's. How is demanding adequate bail-in somehow German financial blitzkrieg?! And
btw, the toughest "string them all up by..." demands came from the Dutch and the Finns in this.
Comrade Alexei Mikhailovich wrote on Fri, 3/22/2013 - 9:53 am
vtcodger:
I would assume that any Russian who has managed to come by a significant amount of
money probably has some of it stashed beyond the immediate reach of what passes for a government
in Russia.
All of it transited through Cyprus and lots still resides there, but plenty of it in London.
Those who keep their fingers in the pie in the motherland keep money in Cyprus. Because of
the same reasons the crooks moved money to Cyprus(low taxes, implausible interest rates, english
rule of law), intranational lending also routinely passes through and I'm sure a certain amount
stays parked there.
End of the day, nobody knows how much it is. Russia told Cyprus to FOAD this morning, all
but ensuring that at least 1 bank goes into wind down mode, bondholders wiped out, anybody
above 100k euros is bailing in. Russia may take care of the people on their nice list through
other means, but that's it
sm_landlord:
LoserBeachBum wrote:
Everybody in Europe knows Cyprus is at least a little bit "shady", like Las Vegas in
the 1960's. How is demanding adequate bail-in somehow German financial blitzkried?!
Everybody knows that Greece and Italy are at least a little bit shady. What happens when
the bail-ins come to those countries?
Citizen AllenM:
Ye gawds, nitpicking. Show me where you can get a 10% interest rate today without risk?
Your deposits are guaranteed up to 100k euros, after that you shoot craps.
That is the ultimate outcome of this, and the knockon by the
Greek debacle is accurate, but the real question is what kind of other problems are now coming
home to roost? Think about how much foreign money is currently propping up our equity markets,
in light of the paltry returns loans and investment generate.
The entire world financial system still has too much leverage, and people wonder why when
the tide goes out some folks are butt naked?
That one bank is in trouble and causing such a huge knock on effect tells you that you need
a real Glass Steagal reinstatement worldwide.
And Kruggles is right to point out the tax dodging nature of that money. When it goes bust,
it will be the end of a lot of dirty money. And since I don't play that game, I really don't
care if they lose it all.
Reminds me of the Albanian Pyramid Investment Scheme from a
while back, with beaches and more politics.
No way the German Taxpayers are gonna contribute any more hard euros to that mess, but this
is most likely the straw that breaks the back of too big to fail in the southern European periphery.
The Bank walk is going to turn into a run and a half.
Splitting the Euro up is going to be one big headache that will consume Europe for the next
decade.
Someday this war's gonna end...
Someday this war's gonna end...
Citizen AllenM:
So, let us move on to our own question mark tax havens- Cayman Islands, Panama, Bermuda,
etc. How much dirty money sleeps soundly there- oh yeah, what about that fraudster in Texas
who ripped off what, $6 billion?
With safety and "security", there should be low risk at high cost, or high hidden risk at
low cost.
Meanwhile, the petty rentiers look at their bank accounts here and think they would be vulnerable
to this, but as Kruggles points out, we have our own central bank, and it didn't let the really
big bank go- it printed enough to tide them through this period of financial repression, while
the financial sector continues to shrink in America.
Someday this war's gonna end...
LoserBeachBum:
"Splitting the Euro up is going to be one big headache that will consume Europe for
the next decade."
Actually, USA has much wider GDP per capita variations among states than France-Germany-Italy-Netherlands-Spain
axis.
Tommy Vu:
What happens to the Cypriot economy after the bail-in? Not in good shape now.
RayOnTheFarm:
Tommy Vu wrote:
What happens to the Cypriot economy after the bail-in?
I'm guessing the off-shore tax haven aspect will cease to operate. Beyond that, it may be
less of a desired destination for certain Russian citizens, but who knows.
poicv2.0
"They are giving those that want their money back now a huge haircut, plain and
simple. "
Same as what happened in Serbia according to a friend who went through the exact same thing.
Want you money now? Sure here it is at X% off. Or you can get it whole 20 years from now.
Rickkk:
Cyprus: The Sum of All FUBAR - NYTimes.com
March 21, 2013 - The Krugmeister
"I've done some asking around, and cleared up something that was puzzling me. Officially,
only about 40 percent of the deposits in Cypriot banks are from nonresidents, which would imply
resident deposits of almost 500 percent of GDP, which is crazy.
But the answer is that I do not think that word "resident" means what you think it means.
Some of the money is from wealthy expats living in Cyprus; much of it is from rich people who
have resident status without, you know, actually living there. So we should think of Cypriot
deposits as mainly coming from non-Cypriots, attracted by that business model....And the business
model only works until there's a big loss somewhere; since Cypriot banks were investing in
Greece and in their own domestic real estate bubble, doom was inevitable.
....the situation is by no means under control. There's still
a real estate bubble to implode, there's still a huge problem of competitiveness (made worse
because one major export industry, banking, has just gone to meet its maker), and the bailout
will leave Cyprus with Greek-level sovereign debt...
(Reuters) - If Russian oligarchs still have money in Cyprus, where a lot of them base their
businesses, they aren't letting on.
"You must be out of your mind!" snapped tycoon Igor Zyuzin, main owner of New York-listed coal-to-steel
group Mechel (MTL.N),
as he dismissed a suggestion this week that the financial meltdown in Cyprus posed a risk to his
interests.
His response is typical across the oligarch class of major corporations and super-rich individuals,
reflecting the assessment of officials and bankers on the Mediterranean island who say the bulk
of the billions of euros of Russian money in Cyprus comes from smaller firms and middle-class
savers.
The collapse of an
economy 75
times smaller than its own may not have much impact in
Russia, though the crisis
has strained relations with the European Union, raised questions on Russian influence over Cypriot
politicians and highlighted geopolitical competition for new offshore gas fields. But some would
suffer.
As much as losses likely to be sustained on deposits held in Cypriot
banks, pain for the Russian
economy could
come from a disruption in money flows between Russians which pass through the island - transfers
that dwarf Cyprus's own national income.
Light regulation and taxes, cultural ties through Orthodox Christianity and the weather have
long attracted the capital and savings of Russians - many keen to keep their wealth out of the
sight of often predatory bureaucrats at home.
Yet precisely because investors can hide their wealth behind nominee structures - often held
in the name of a local lawyer - it is difficult to say just how much Russian money is tied up
on the Mediterranean island. Or how much has already left.
Where it is going is also unclear, though a possible rise in Russian deposits in fellow EU
member Latvia, a former Soviet republic that hopes to enter the
euro zone next year,
has raised concerns of displacing instability northward.
BILLIONS HELD
Russians are believed to account for most of the 19 billion euros of non-EU, non-bank money
held in Cypriot banks at the last count by the central bank in January, when total non-bank deposits
were 70 billion, 60 percent of them classified as "domestic". Of 38 billion in deposits from banks,
13 billion came from outside the European Union.
But the ease with which Russians can establish residency and local corporations in Cyprus muddy
the data. One senior financial source in Moscow said a total of 20 billion euros held by Russian
firms in Cyprus was a "significant underestimate".
Cypriot central bank chief Panicos Demetriades was asked by Russia's Vedomosti newspaper this
week how much Russians held on the island. He replied: "It depends how you count it."
Deposits formally identified as Russian totaled 4.9 billion euros, he said. Add the funds of
shell companies believed to be linked to Russia and the figure rose to 10.2 billion euros. But
many Russian and other analysts think the sums are much higher.
One Cyprus-based lawyer reckons that $2 billion in Russian money fled in the 10 days before
banks were shut down this week while Nicosia argued over an EU bailout. Phones are ringing from
Malta to the Isle of Man as that cash seeks a new safe haven.
Russian business
leaders criticized the EU bailout plan, and the "haircut" it would impose on depositors. However,
if Cyprus stands by its rejection, heavier losses could result.
"There will be a serious outflow of capital from Cyprus," said Vladimir Potanin, the chief
executive of Norilsk Nickel (GMKN.MM),
the world's largest nickel and palladium miner.
"It won't affect me or my company. But they have put Cyprus to the knife and what has happened
is a disgrace."
Sources in the wealth management, advisory and banking industry in Nicosia say Russia depositors
are typically smaller savers and entrepreneurs. Fiona Mullen, a British economist in Cyprus, said
Russians she encounters tend to be buying 300,000-euro homes, not the palaces favored by oligarchs
in London.
"There is a lot of Russian business done through Cyprus," she said. "It's so difficult to do
business in Russia, you've got to bribe so many people, that it's easier to do it through Limassol.
It's kind of the back office for Russia."
A business adviser said of his Russian customers: "Clients would be well off, but not the private
jet kind." Most did not use Cypriot banks to keep money but as a conduit for funds.
Cyprus charges foreigners no tax on dividend income and capital gains. A double taxation treaty
with Russia provides attractive incentives for Russians to use Cypriot banks. Even on Thursday,
with Nicosia in crisis, one adviser said he had had two new requests from abroad to set up Cyprus
shell companies.
CAPITAL CONTROLS
Given the risk of disruption to its financial flows, Russia in particularly concerned about
any imposition of controls on capital movements; Cyprus has already drafted such legislation as
a precaution in case the EU cuts off aid to its banks.
"If, in any way, capital flows are restricted that would have a significant impact on Russian
businesses," said German Gref, chief executive of state-controlled Sberbank (SBER.MM),
Russia's largest bank.
"I hope the Cypriot government has the wisdom not to undertake such measures, because if they
do all investors will leave the country. It would be a perfect case study in what not to do,"
the former economy minister told Rossiya 24 television.
Morgan Stanley has estimated that Cyprus, with a GDP of just $25 billion, is both the source
and destination of 25 percent of Russian inward and outbound foreign direct investment - a result
of Russians "round-tripping" their own cash via the island.
Cyprus was also the source of $203 billion in foreign loans to Russia between 2007 and 2011,
equivalent to 24 percent of the total,
Morgan Stanley economists wrote in a research report this week. Shrinking the Cypriot banking
sector could force Russian firms to borrow more dearly elsewhere, they warned.
Russia's central bank gave a public assurance on Friday that it did not see Cyprus posing a
meaningful danger for the Russian banking system: "I don't see any systemic or individual threat
here," First Deputy Chairman Alexei Simanovsky told reporters.
State-controlled VTB (VTBR.MM)
has the largest presence on Cyprus, through its subsidiary Russian Commercial Bank. It has estimated
potential losses in the tens of millions of euros in a worst-case scenario.
Russian banks have, meanwhile, shown no interest in a rescue deal through which they could
acquire stakes in Cypriot banks, Finance Minister Anton Siluanov said on Friday after two days
of talks with his Cypriot counterpart ended without a deal.
(Additional reporting by Maya Dyakina, Megan Davies and Oksana Kobzeva, and Laura Noonan in
Nicosia; Writing by Douglas Busvine Editing by Timothy Heritage)
[Mar 22, 2013] Medvedev: EU in Cyprus behaves like an elephant in a china store
Prime Minister Dmitry Medvedev in an interview with European media spoke about the situation with
Cyprus. According to Medvedev, the actions of the EU and Cyprus to resolve the debt problems of the
Republic can be compared with the behavior of an elephant in a china store.
"While the actions of the European Union, the European Commission, together with the Government
of Cyprus to resolve the debt problem, unfortunately, reminiscent of the elephant in a china store"
- says Medvedev.
According to him, "all the possible errors that could make in this situation to have been complicated,
including the undermining of confidence in financial institutions in general, and not only located
in Cyprus." "Are they became too board to live without another financial
crisis ? Forgotten what happened a few years ago?" - Wonders Medvedev. He explained
that such ill-considered actions caused by their rough estimations from Russia.
Recall that Cyprus needs about 17 billion euros to recapitalize banks and support the budget,
as previously reported by the European Commission. This amount is comparable to the size of the economy
of the island state. The Government of Cyprus, at the insistence of the EU creditors took a preliminary
decision on forced confiscation of bank deposits in the form of a "tax" - 6.75% of deposits in 20-100
thousand euros and 9.9%, with larger deposits. This caused panic among investors and threatening
the financial system of the island. Cyprus Parliament on Tuesday rejected the proposed bill. On Wednesday,
the Cypriot authorities have held talks with representatives of the EU and Russia, trying to save
the country from default.
According to Medvedev, the idea of a tax on deposits in Cyprus can be compared with the actions
of the Soviet authorities, who never cared about the money of ordinary people. "The measure, which
was proposed, is clearly confiscatory, ekspropriatorsky nature is unprecedented in nature and I can
not compare with anything, except for some decisions that were made in a particular period by the
Soviet authorities, who are reckless with the savings of the population" - Medvedev said.
The Prime Minister did not rule out that Russia may raise the issue of avoidance of double taxation
with Cyprus. "We have an agreement on the avoidance of double taxation with Cyprus. I do not know
whether we need such an agreement in this case. Question may arise about the termination of the treaty,
its denunciation. Consequences can be very, very serious. So again I say: act carefully, "- said
Medvedev.
In his view, the situation in Cyprus can cause a new series of other countries financial crises.
Replying to a question, it will be reflected on future relations between Russia and Europe, the Prime
Minister said: "We have to wait for the final decision." "We believe that these negotiations and
decisions still need to be discussed with the various interested parties, and not hide behind the
phrase that Cyprus wrong to discuss it with anyone. But then let all the decisions and will only
be accepted in the EU, but I'm not sure it's good, "- he said.
Cyprus will face a huge number of lawsuits from companies and individual investors because of
losses related to the banking crisis, said Medvedev. "In fact, they stopped existing operations.
They cancelled a lot of transactions, transactions. All these deals is under the control of banking
authorities, and if these operations are not unfrozen, it is facing a very big loss, not to mention
the fact that it is possible be safely bury all the Cypriot system of banks. It just will not be
", - said the prime minister.
"If such problems arise, a lot of clients, representing and state agencies, and private entities
will handle claims. These actions will in respect of the republic of Cyprus, and to other persons
who are involved in the beginning of this very difficult period , "- said Medvedev.
According to the latest Bank of Cyprus, which had been closed on Saturday against the possible
action of forced taxation of deposits will remain closed at least until Tuesday, March 26. Earlier,
the government of the island state has been considering opening financial institutions as early as
Thursday. In this case, the authorities were planning to impose restrictions on the movement of bank
capital.
For the first time, bank customers in a crisis-plagued euro-zone country are being forced
to contribute to its bailout. In an interview, German economist Peter Bofinger warns the strategy
is "extremely dangerous" and could lead to a run on banks.
... ... ...
SPIEGEL ONLINE: Do you expect that despositors in Spain, Italy, Portugal and other crisis-plagued
countries will make a run on their accounts because they, too, might have to pay someday?
Bofinger: Yes. These fears will now be stoked. The Spaniards, Italians and Portuguese may
not run to the banks today or tomorrow, but as soon as the crisis intensifies in a euro-zone country,
the bank customers will remember Cyprus. They will withdraw their money and, by doing so, intensify
the crisis.
SPIEGEL ONLINE: The Cypriot government wants to minimize this panic effect. The Wall
Street Journal reported today that the latest proposal in Nicosia would include only a 3-percent
one-time levy for small-scale depositors rather than the 6.75 percent tax included in the deal reached
in Brussels over the weekend.
Bofinger: That wouldn't change anything. If you live in a home,
then you expect 100 percent safety. If someone says to you, "Three percent of your roof could cave
in," then you still wouldn't want to live there anymore.
SPIEGEL ONLINE: The euro-zone partner countries seeking to provide Cyprus with a bailout
view the participation of small-scale depositors as a necessary evil. This is because any aid provided
by the long-term euro rescue fund, the European Stability Mechanism (ESM), would be added on top
of Cyprus's national debt. Without the contributions of bank customers, the government's debt level
would be unsustainable.
Bofinger: Shaking the confidence of depositors across Europe cannot be the solution. Those
seeking to save the euro should be contributing true aid during an emergency.
SPIEGEL ONLINE: You mean they should give free money to Cyprus?
Bofinger: At the end of the day, it would be better to take charge and provide a billion
euros to rescue the small-scale savers in Cyprus than to risk a collapse of the euro financial system.
SPIEGEL ONLINE: But that would also mean entering into a transfer union and breaking another
taboo that is at least as big. Greece, Portugal, Spain and co. would want their money for free in
the future, too.
Bofinger: That can be easily avoided. Cyprus is a special case, and it can be communicated
as such. No other euro-zone country in Southern Europe has such a bloated financial sector. And there
is no other country that could have a comparable domino effect in the euro crisis.
Cypriot banks lent some €22 billion to Greek firms and private households, and they have suffered
very high losses as a result of the restructuring of Greek bonds.
SPIEGEL ONLINE: Nevertheless, it would be almost impossible to justify giving money away
to a crisis country for free. How is Finance Minister Wolfgang Schäuble
supposed to explain to parliament that he is giving away German taxpayers' money to a government
that is accused of having insufficient controls against money laundering?
Bofinger: Such political failings should be dealt with as quickly as possible. But the
main issue here is not Cyprus. It's how we guarantee the euro's stability. That's also in Germany's
interest.
SPIEGEL ONLINE: In what sense?
Bofinger: After the election in Italy, the situation within the currency union is once
again very unstable. An end of the common currency would be the equivalent
of a nuclear meltdown for German industry. The question is this: How can the euro
be stabilized as cost-efficiently as possible? If depositors across Europe make a run on their accounts,
the rescue will get a lot more expensive than it would if money were raised to save the small-scale
depositors in Cyprus.
SPIEGEL ONLINE: The participation of Cypriot bank customers also serves another purpose.
The financial institutions are holding a lot of money from wealthy Russians in their accounts. Some
believe those accounts contain illicit funds from money laundering. The partial expropriation of
depositors is supposed to counter the accusation that the ESM has become a bailout package for Russians.
Bofinger: There are better solutions for that, too. Depositors with up to €100,000 should
be able to keep all their money. But richer depositors should be made to pay more. For example, starting
at €1 million, 20 percent of an account's savings could be seized. At €10 million, that figure could
be 30 percent. One could also review whether it would be legal to tax depositors from non-EU countries
in Europe at a greater rate.
SPIEGEL ONLINE: So you're calling for a bigger compulsory levy
for Russians than for Europeans?
"Those who think there is little risk of a levy being imposed
on other periphery members are missing the point. The seeds of doubt have been planted. As
a saver facing zero yields on deposits and a potential haircut, why keep your savings in a
bank? Sure it is convenient for electronic transactions, but individuals can adapt easily.
As one of my more amusing colleagues put it, 'mattresses now hold
a 10 per cent premium.'"
Ben Davies, Cyprus, Oh the Irony!
"Making small-scale savers pay is extremely dangerous. It will shake
the trust of depositors across the Continent. Europe's citizens now have to fear for their money...
The Spaniards, Italians and Portuguese may not run to the banks today or tomorrow, but as soon
as the crisis intensifies in a euro-zone country, the bank customers will remember Cyprus. They will
withdraw their money and, by doing so, intensify the crisis."
Peter Bofinger really understand it. This is due to the he laws. But by and large the enforcement
is not equipped to deal with all but the outliers to a general compliance with the law. This is,
of course, the basis of the power of civil disobedience, and why autocracies are so sensitive to
any mass demonstrations of dissent.
The President of Cyprus, Nicos Anastasiades, recently elected from the conservative DISY party,
blanched at the original bailout deal offered by the troika, the European Commission, the
European Central Bank, and the International Monetary Fund, to assess a levy only on the non-guaranteed
deposits in the troubled Greek banks, which are those deposits in excess of €100,000.
He proposed instead to limit the levy on large deposits to 9.9%, and to make up the difference
by violating what had been the general guarantee in Europe by assessing a lesser amount, of about
6.7%, on the 'guaranteed deposits' of less than €100,000 by small savers. That the troika did
not blanch at the prospect of violating what had been a generally established EU policy to ensure
bank stability speaks volumes about their cravenness.
The arrangement was made all the more clever by promising equity in the (worthless) banks in return
for the levy, and perhaps even a guarantee of return based on 'future natural gas discoveries' which
seem to be of much less value to the EU and the government.
This was one of their conditions for a €10 billion loan to the government under the European Stability
Mechanism (ESM). The other involved the usual austerity measures, which are a favorite of the International
Monetary Fund.
The austerity proposal had been revealed last November and include cuts in civil service salaries,
social benefits, allowances and pensions and increases in VAT, tobacco, alcohol and fuel taxes, taxes
on lottery winnings, property, and higher public health care charges.
The troika did not care about the details of the levy as long as the 'bail in' by depositor funds
occurred. This was a sacrifice of a general European principle and was
a serious policy error.
When this 'levy' on bank deposits was revealed over the weekend during a bank holiday, because
it had to be submitted to a vote by the Cypriot Parliament, there was a general revulsion expressed
amongst the markets and the people of Cyprus at such blatant misuse of the money power.
Monetary inflation, such as had been used in the US and UK, is more
often used because so few people see their loss as blatantly as when the government simply confiscates
10 percent of their wealth on deposit. It is much easier done in smaller amounts,
over longer periods of time. But one needs to have their own currency to do it. These days
monetary policy and inflation is merely the continuation of bank fraud and plunder by other means.
By the way, this is why I thought the 'platinum coin' of a notional and whimsical trillion dollars
in value was such an awful, dangerously cynical idea. It exposed the
farce of monetary inflation in too great an amount, in too short a period of time, in a way in which
too many people would readily understand it. And it therefore had the potential of fomenting
a money panic.
Cyprus had been reasonably stable before the financial collapse, but was rocked by the Greek bond
restructuring. What dealt a fatal blow was the impediment to borrowing because of a credit downgrade
to BB+, which made the Cypriot bonds unacceptable as collateral to the
ECB, and certainly not viable on the public markets.
And like many small, warm weather island nations, it's economy was overly dependent on tourism,
retirement, and an outsized financial sector. Since Cyprus had been a British crown colony, its legal
system resembles that of Britain, which still maintains significant military bases on the island,
involving approximately 3,500 serving members.
Cyprus is in a bit of a box, because it really needs to leave the Eurozone and default on its
obligations, and issue a currency of its own at a devaluation to the euro. But how would they recapitalize
their banks, and what would the basis be for any reasonable valuation on this new currency?
If Cyprus owned gold reserves, or even forex reserves of some stable
currency, they could make this the basis of their currency, while imposing capital controls.
They could liquidate, nationalize if you will, the banks, and keep the depositors whole. Although
the conversion to the new Cyprus currency would be a haircut of sorts, and likely impair their banking
haven status.
Iceland was able to do something like this, and so was Russia for that matter, when they defaulted,
devalued, and reissued the rouble back in the 1990's.
What would the Eurozone say if Cyprus forged a deal with Russia and provided them with military
bases similar to the Sovereign Base Areas, currently occupied by the British, in return for a Russian
bailout? Russia is a key debtholder and a major stakeholder in Cyprus. Their interests and presence
must be dealt with, and carefully.
The question of Cyprus is important, not because it is a large and significant portion of the
Eurozone economy. It is most certainly not, being much less than one percent of the total.
Rather, Cyprus is showing the fatal flaws in the conception of the
Eurozone, and their single currency without real fiscal union, transfer payments, a common system
of taxation, and a banker of last resort.
And it has also demonstrated the weakness of the guarantees by the bureaucrats, not only in Europe
but elsewhere, when it comes to money.
This is a lesson that every central banker around the world should keep in mind. And the
bureaucrats should remember that there is a step beyond which they may go, which will shatter the
confidence of the people. And once that confidence is broken, it is very hard to recover it.
There is one lesson I hope that the people of the world take away from this. And that is
to remember that a single currency is not possible without a complete union of monetary policy, and
therefore a fiscal and political union that is complete and comprehensive. Otherwise a powerful
group will wield monetary policy for their own benefit, and the rest of the currency area be damned.
When the single world currency proponents come around again with their proposals, what they are
really proposing is a one world government to be established in the ensuing crisis which their actions
will eventually provoke.
And despite the consistent capping of the precious metal markets, it demonstrates that there is
only one money of last resort, that provides for no counterparty risk. And that is gold.
And to a lesser extent the reserve currency of the world, which for now is the dollar.
It is confidence that sustains the integrity of a system based on counterparty risk, and
it is that confidence that supports modern money. And where confidence declines, force is required.
And where both force and faith fail, a break in confidence happens, and hyperinflation ensues. Hyperinflation
is not simply a very high level of inflation.
A hyperinflation is a break in confidence, a monetary panic.
And in what is certainly a bit of historic irony, the German people are once again flirting with
bank failures and a hyperinflation. But in this case it is because they, in their righteous
indignation, are imposing the same kind of collective punishment, in terms and conditions of economic
austerity and privation on others, that were imposed on them in post war reparation. Oh the
irony, indeed.
Spring is in the air. Plus ça change, plus c'est la même chose.
The traditional concern of central bankers is, of course, that the permanent monetisation of budget
deficits will lead to an unhinging of inflation expectations. That is not exactly an original objection,
but it cannot be swept under the carpet.
Lord Turner responds as follows. He believes that all forms of monetary or fiscal stimulus, conventional
or unconventional, work by increasing nominal demand in the economy. Once demand is increased, the
split between higher prices and higher real output is determined separately, according to whether
there is enough spare capacity to allow real output to expand in line with the extra demand. The
particular method used to increase demand is independent of how inflation responds to the monetary
stimulus.
Turner prefers to choose a method which he knows will be successful in boosting demand, rather
than worrying about the different inflationary consequences of different methods, because he does
not allow much role for inflation expectations to be affected differently by OMF compared to QE.
But there is the rub.
In both monetarist and new Keynesian models of the economy, permanent monetisation will eventually
produce higher inflation [4], although "eventually" may refer to a very long time indeed. It is much
more likely that inflation expectations could rise markedly under permanent monetisation and, in
my view, that is not a price worth paying for (perhaps temporarily) higher output.
Conclusion
Does that mean that no-one should ever contemplate using permanent monetisation? Well, never is
a long time, encompassing many possible scenarios. Adair Turner and Martin Wolf make a very convincing
case that Japan cannot find any other way out of the public debt trap into which it has fallen, except
default or deep recession. Japan needs actively to raise inflation expectations. But neither the
US nor the UK are anywhere there yet.
"The pace of recovery in high-income countries is likely to remain disappointing. "
They are talking for expansion of 0.1% for some countries (Bulgaria, etc), but they should talk
about stagnation as the accuracy of estimating inflation is probably around +/- 1% (that means that
official 2% inflation can in reality well be 3%).
Four years after the onset of the global financial crisis, the world economy continues to struggle.
Developing economies are still the main driver of global growth, but their output has slowed compared
with the pre-crisis period. To regain pre-crisis growth rates, developing countries must once again
emphasize internal productivity-enhancing policies. While headwinds from restructuring and fiscal
consolidation will persist in high-income countries, they should become less intense allowing for
a slow acceleration in growth over the next several years.
More than four years after the global financial crisis hit, high-income countries struggle
to restructure their economies and regain fiscal sustainability.
Developing countries, where growth is 1-2 percentage points below
what it was during the pre-crisis period, have been affected by the weakness in high-income countries.
To regain pre-crisis growth rates, they will need to focus on productivity-enhancing domestic
policies rather than demand stimulus.
Although the major risks to the global economy are similar to those of a year ago, the likelihood
that they will materialize has diminished, as has the magnitude of estimated impacts should these
events occur. Major downside risks include the loss of access to capital markets by vulnerable Euro
Area countries, lack of agreement on U.S. fiscal policy and the debt ceiling, and
commodity price shocks.
In an environment of slow growth and continued volatility, a steady hand is required in developing
countries to avoid pro-cyclical policy and to rebuild macroeconomic buffers
so that authorities can react in the case of new external or domestic shocks.
Headwinds:
While there have been substantial forces acting
to slow the global economy in 2012,and many of these
are expected to persist through 2013 and into 2014/15, there are also growing forces
of recovery that should support prospects going forward.
In the United States, improving labor market conditions
(since June 789,000 jobs have been added to the US economy and the unemployment rate has fallen
from 8.2 to 7.8 percent) are helping to support income and consumer demand growth. These improvements
should, if fiscal uncertainty is lifted, result in a strengthening of investment growth.
In addition, the restructuring in the housing market, which has been a persistent
drag on growth since 2005 (between the fourth quarter of 2005 and the first quarter of 2011
residential investment activity fell by 58 percent),
appears to have reached a turning point. While there are still many problems (including underwater
mortgages and regional oversupply), the overall market has begun growing, supported by low mortgage
rates. Some observers argue that the housing sector alone could add as much as 1.5 percentage
points to US growth in 2013 (Slok, 2012). Indeed, increasingly tight housing market conditions
have supported a recovery in prices and activity.[7]
Residential investment is up 14 percent from a year ago, sales of single-family
homes rose 9.1 percent in the first 8 months of the year, and existing home sales reached a 27-month
high in August. New single-family homes inventories are at an all-time low and, although rising
somewhat, inventories of existing single-family homes remain at depressed levels.
Prospects, will depend importantly on how the remaining fiscal challenges of
the United States, are dealt with. While the January 1, 2013 agreement on tax measures resolved
most of the immediate concerns about the fiscal cliff, the legislation offers only a temporary
reprieve (until end of February) before the remaining mandatory cuts to government spending included
in the fiscal cliff kick in (approximately $110bn in 2013 or 0.1 percent of GDP).[8]
If no credible medium-term plan for fiscal consolidation is found by end of February and debt-ceiling
legislation is unchanged or only short-term extensions provided for,
the economy could be subjected to a series of mini-crises and political wrangling extending over
the foreseeable future. This could have potentially strong negative consequences for
confidence, and even the credit rating of the United States.[9]
In the baseline forecast of the
Global forecast summary table, a deal is assumed to be found before March 2013 that prevents
the remaining elements of the fiscal cliff from significantly disrupting economic activity in 2013.
It assumes that in the new deal, the total of tax increases and expenditure cuts for 2013 will amount
to about 1.6 percent of GDP and that progress is made towards establishing a credible medium-term
plan to reduce spending and increase revenues. Moreover, it assumes that the deal includes agreement
to provide for a medium-term path for the debt ceiling that is consistent with the medium-term plan.
The fiscal compression of this baseline is about 0.6 percentage points larger than in 2011, which
contributes to a slowing of GDP growth from an estimated 2.2 percent in 2012 to 1.9 percent in 2013.
In the outer years of the forecast, growth should pick up to around 3 percent, as the contractionary
effects of continued consolidation are partially offset by improved confidence that the fiscal accounts
are returning to a sustainable path. Should the fiscal impasse remain unresolved, the implications
for growth in the United States and the rest of the world could be much more negative (see the more
detailed discussion below).
But, while I agree with keeping rates low to support the economic recovery, I also know
that keeping interest rates near zero has its own set of consequences.
Specifically, a prolonged period of zero interest rates may substantially
increase the risks of future financial imbalances and hamper attainment of the FOMC's 2 percent
inflation goal in the future.
A long period of unusually low interest rates is changing investors' behavior and is reshaping
the products and the asset mix of financial institutions. Investors of all profiles are driven
to reach for yield, which can create financial distortions if risk is masked or imperfectly
measured, and can encourage risks to concentrate in unexpected corners of the economy and financial
system...The push toward increased risk-taking is the intention of such policy, but the longer-term
consequences are not well understood.
We must not ignore the possibility that the low-interest rate policy may be creating incentives
that lead to future financial imbalances. Prices of assets such as bonds, agricultural land,
and high-yield and leveraged loans are at historically high levels. A sharp correction in asset
prices could be destabilizing and cause employment to swing away from its full-employment level
and inflation to decline to uncomfortably low levels. Simply stated, financial stability is
an essential component in achieving our longer-run goals for employment and stable growth in
the economy and warrants our most serious attention.
The Fed's current Quantitative Easing ∞ program involves its buying risky bonds--thus diminishing
the pool of risky assets that the private sector can hold. Esther George objects because… it
does not make complete sense to me...Because there is less in the way of risky assets for the
private sector to hold--and because that pushes prices of risky assets up and returns on risky
assets down--QE ∞ actually makes private-sector portfolios riskier? Is that the argument?
I think DeLong is looking at a continuum of assets from safe to risky, where cash anchors the
safe end of the continuum. Right next to cash is the somewhat riskier Treasury security. Thus
by exchanging cash for Treasury securities, you by definition must be removing risk from the continuum,
and thus the public's portfolio is now less riskier.
But, as he notes, this is obviously not how George views the situation. And, note that George
claims that the intention of Fed policy is in fact to push people into riskier portfolios, which
implies that the Fed believes that they are in fact making the public's portfolio more, not less,
risky. This implies that DeLong's view is not just in opposition to George's, but to that of the
majority of policymakers as well.
I think a way you can explain George's position if you consider Treasuries as less risky than
cash. At first, this sounds crazy, but if you assume there is no default risk (which I don't think
there should be if you can print currency of the same denomination as the bond), then the Treasury
bond may be perceived as a safer because it provides some return. Assuming no default risk, for
any given inflation rate, the Treasury bond will thus be a safer store of value. If you viewed
the world from this perspective, then the Fed is increasing riskiness of the public's portfolio.
This, however, is not how I think the Fed considers the situation. I think the Fed tends to
view the public's desired cash holdings as roughly constant (although
the rise in
deposits would call this into question). If by QE the Fed swaps out some of the safe Treasury
securities for cash, the public, not wanting to hold anymore cash, takes the cash and, by default,
purchases riskier assets, and thus is left with holding a portfolio of riskier assets. George
believes this disrupts the natural order of things by creating financial market distortions.
In any event, I tend to take this in a different direction from here. George appears to be
saying that the Fed is eliminating (more accurately, removing) the safe assets that the public
wants to hold. Suppose that this is true. Does this mean that the Fed should reverse policy to
increase the proportion of safe assets in the public's hands? Or does it mean that another agency
- perhaps a fiscal authority, hint, hint - should take action to increase the proportion of safe
assets in the public's hands?
Once again, we come back to the issue of coordinating monetary and fiscal policy. If the public
has a strong demand for noncash safe assets, monetary policy has something of a secondary role
by providing an accommodative environment by which the fiscal authority can issue those assets.
If the proportion of safe to risky assets is not "correct", the the fiscal authority should have
a role in correcting that imbalance. In this world, then, it is not really the actions of the
monetary authority that is creating the financial sector imbalances that concern George. It is
the lack of action by the fiscal authority that creates those imbalances. George should be criticizing
the fiscal authorities, not the monetary authority.
In other words, if a recession is the result of the public shifting to safe assets, the Fed
is trying to respond by taking away the option of safe assets, leaving only risky assets. Instead,
the Fed should view their role creating an environment (making clear that default is not an option)
that allows the fiscal authority to issue more safe assets.
All of this, however, suggests that fiscal policy has a much greater role in stabilizing economy
activity than conventional wisdom would hold. I suspect, however, that thinking along these lines
is anathema to Federal Reserve officials who maintain that stabilization policy is
the domain of monetary policy only. But if in fact there needs to be greater cooperation,
and instead we continue to rely solely on monetary policy, then we will continue to experience
less-than-satisfactory economic outcomes which will eventually endanger the
cherished independence of central banks.
In short, I don't think you can have a discussion about the influence of monetary policy on
the riskiness of the public's portfolio without including some discussion about the role of the
issuer of those safe assets, the fiscal authority.
bakho :
Exactly.
Monetary policy does not operate in a vacuum.
Monetary policy operates in an economic system that includes fiscal
and regulatory tools. It is a mistake to lock the fiscal and regulatory tools in a shed.
Fiscal policy ALWAYS operates in a recession, at least in the form of automatic stabilizers,
(UI, etc.) and sometimes in the form of additional stimulus. The meagre automatic stabilizers
currently in place are enough for a mild recession, but are woefully short of what is needed in
a recession like the recent one.
The primary objection to fiscal policy manipulations is that fiscal policy is more easily
politicized. This overlooks the fact that monetary policy is not only political but bankers (who
constitute a wealthy special interest) have an agenda that tilts monetary policy to their own
self interests.
The primary objection to using fiscal stimulus to address our unemployment crisis is POLITICAL.
Wealthy special interests want pay less taxes and short term stimulus would interfere with
their political agenda to roll back spending and reduce spending as a percent of GDP.
Wealthy special interests have the upper hand at the moment because enough politicians are
dependent on their campaign donations. However, this politicalization of fiscal policy, doing
too little to address unemployment, is the prime force behind the Fed keeping interest rates low.
If enough fiscal stimulus was enacted to quickly return to full employment and inflation at or
slightly above the target, the Fed would not have to consider extraordinary measures.
Anyone unhappy about extraordinary monetary measures should be urging Congress to fix unemployment
now. This is not what our elites are doing. They are complaining about extraordinary monetary
measures AND about additional stimulus. This suggests that these policy elites care nothing about
social problems of long term unemployment, are content to have the US become a divided nation
between haves and have nots and are content to oversee the creation of an underclass in order
to concentrate wealthy upward.
Xylix :
A hideously complex explanation.
First, let me propose a law of finance:
--------------------------
Conservation of Risk: Financial manipulation, no matter how complex, can not change the total
amount of risk present within a system.
--------------------------
In other words, financial manipulation can transfer risk between entities but it cannot reduce
it. If our retarded financial system had grasped this, the entire scheme involving AAA bonds would
have been torpedoed before it began.
What does this mean? In this context it tells us that one of three things must be true:
1) The Fed is transferring risk from the private sector to the public.
2) The risk distribution of the private/public sector is unchanged.
3) The Fed is transferring risk from the public sector to the private.
Now for case #1 to be true, the Fed must have increased its risk by absorbing potential financial
loss. However, by its very structure, the Fed can never take a loss. Any loss experienced by the
Fed will eventually be transferred to the broader economy via inflation.
As such, case #1 is implausible. Doubly so when we include the fact that the public sector
is debt financed and thus extracts a huge boon in the form of depressed interest rates. Thus,
the rational conclusion is that monetary policy is currently causing case #3.
Brad DeLong is wrong.
Incidentally, increased risk in the private sector is exactly what we want. One of the
primary points of monetary policy is to coerce private entities into spending their savings.
This is done by making existing investments less profitable (reduced interest rates) while shoving
up inflation (increased loss potential). Through this means that wealthy are forced to 'use it
or lose it'.
Of course, it a better question is whether risk is being transferred to the right private entities...
When considering the spectrum of assets, I think it's important to consider not only the riskiness
but also duration. At the short-end, the Fed has been swapping Treasuries for interest-paying
reserves, which are practically equivalent from a risk perspective. At the long-end, the Fed has
been removing Treasuries and Agency-MBS, which are the least risky assets. Therefore, at least
at the long-end, the Fed is removing the safest assets and leaving the private sector with a riskier
basket, on average.
Separately, I agree that the fiscal authority is the primary option for increasing the quantity
of safe assets, if desired by the private sector. The recent years of trillion dollar deficits
has gone a long way towards doing so.
All that being said, I think George makes a good point about financial imbalances that is misunderstood
by DeLong. The Fed is knowingly reducing the quantity of safe assets, especially at the long-end,
with hopes of pushing asset prices higher than they otherwise would be. Higher prices, however,
do not imply higher earnings or lower default rates. It is very possible that this could create
asset bubbles that ultimately burst with unknown consequences for inflation and employment.
bakho :
In a recession, the relative risk of many investments goes sky
high. Investments that have a good prospect of decent returns when demand is near
or above capacity have no chance of delivering returns when the gap between demand and capacity
is enormous.
At higher interest rates, returns must be greater to make investment worthwhile. When the Fed
lowers rates it lowers the necessary return and promotes riskier investments. However, in a severe
recession, the interest rates cannot go low enough to cover the increase in risk. The only way
to reduce the risk (and increase investment) is to increase demand.
Discussions of "flight to safety" are fine, but they often ignore the change in risk for investments
that is a function of demand.
bakho :
In the 1990s, the US had much better coordination of fiscal and monetary policy. Coming out
of the recession, we had extension of EITC and other benefits for the unemployed and working poor.
As the unemployed moved to work, fiscal spending was reduced, particularly on the military but
the economy was stimulated by subsidizing low income workers rather than direct hiring of labor
by BigG and competing with the workforce.
Today we have no effort on the part of our Congress to coordinate fiscal policy with monetary
policy. In fact, many of our ruling elites are denialists who don't
even believe that fiscal policy has a role in ending recessions. This lack of coordination is
problematic for monetary policy.
When did economic policy stop coordinating fiscal and monetary policy?
By the end of the 1990s, the US economy was at full employment and fiscal policy was collecting
over 20 percent of GDP as revenue. At this time fiscal and monetary policy split. Unhappy with
the rise in the BigG share of revenue the Greenspan Fed tightened the money supply which on top
of the fiscal contraction due to taxation, was too much contraction. This sent the US economy
into a recession.
During the recession, the money supply was increased, revenue was slashed and fiscal spending
was increased. On the fiscal side, rather than spend on job creation, making up the gap for the
loss of wage subsidy or efforts to create Jobs and demand, fiscal policy increased spending on
defense, one of the least stimulatory forms of spending, and decreased taxes a lot on the wealthy
and practically nothing for the lowest incomes- a formula that provides little additional economic
demand.
The Middle Class was presented with rising housing prices as a way to replace lost wages with
"investment income". However, the "investment" was a scam and the housing bubble burst.
Economic policy first went off the rails in the late 1990s. The sharp rise in inequality, that
was briefly halted in the mid-1990s, took off again. The sad part is that many of our wealthy
policy elites are satisfied with the rise in inequality and the damage it does to an economy and
a society. Today lack of coordination between fiscal and monetary policy is in large part due
to the politicization of fiscal policy by wealthy special interests who are intent on manipulating
fiscal policy for their own short term personal gain and care nothing about the state of the domestic
economy or the majority of its citizens.
Mark A. Sadowski :
"I think a way you can explain George's position if you consider Treasuries as less risky than
cash. At first, this sounds crazy, but if you assume there is no default risk (which I don't think
there should be if you can print currency of the same denomination as the bond), then the Treasury
bond may be perceived as a safer because it provides some return..."
Except that Treasuries don't provide a positive return through the 10-year Treasury Bond when
one adjusts for inflation:
And money, for all intents and purposes is essentially a zero maturity T-bill. Since
the risk premia increases with the term of the bond, there's nothing safer or more liquid than
cash.
That's why fundamentally excess demand for safe assets is an excess money demand problem. The
Fed isn't reducing the supply of safe assets by satisfying the demand for money, and in fact by
raising nominal income expectations the Fed will ultimately increase the supply of private safe
assets.
"In this world, then, it is not really the actions of the monetary authority that is creating
the financial sector imbalances that concern George. It is the lack of action by the fiscal authority
that creates those imbalances. George should be criticizing the fiscal authorities, not the monetary
authority."
George is most certainly not advocating the generation of more T-Bills through fiscal stimulus.
Like all hawks her primary concern is the risk of inflation. And her dim view of the Fed's recent
turn towards unemployment thresholds should be a clue that she doesn't think unemployment is a
problem.
Matt Young:
The bond market is a very safe bet as long as growth rates remain in the state they are,
a 35 year decline. Just hold onto bonds as nominal rates decline and bond values rise.
There is no clearer evidence of this affect then the recent downgrades to growth we just witnessed.
The Fed has clear evidence that real growth rates are negative, mainly because of fiscal
actions by DC. The real concern is not directly stated, namely the Fed has no business
in driving real rates down, even if fiscal policy demands it. At this point, the Fed has to take
actions that get us out of the recession, not create more of a recession. They are stuck, legally.
The reliable data which policymakers and the public need if effective solutions are to be found
is not available. As Tullett Prebon's Tim Morgan notes, economic data has been subjected
to incremental distortion; Data distortion can be divided into two categories. Economic
data has been undermined by decades of methodological change which have distorted the statistics
to the point where no really accurate data is available for the critical metrics of inflation, growth,
output, unemployment or debt. Fiscal data, meanwhile, obscures the true scale of government obligations.
While he does not believe that the debauching of US official data is the result of any grand conspiracy
to mislead the American people; he does see it as an incremental process which has taken place over
more than four decades. From 'owner equivalent rent" to 'hedonics', few
series have been distorted more than published numbers for inflation, and few if any economic
measures are of comparable importance; and the ramifications of understated inflation are
huge.
Witness the 10 percent drop in refinance applications from a week ago, on the Mortgage Bankers
Association's weekly report.The rate on the 30-year fixed moved from 3.62 percent to 3.67 percent.
"We're busy because we're pushing," says Julian Hebron at California-based RPM Mortgage. "Mostly
people have been lulled into complacency by long-term rate lows, and it's common for them to maintain
their 'It'll come back down' stance when rates rise. But rates are now up .375 percent, and it may
hold given MBS/Treasury market technicals and moderately improving economic fundamentals. The complacency
has a lot to do with rates having been low enough to make no-cost refis easy. But when rates rise
this much, the no-cost options go away and people tend to wake up."
In Bethesda, Maryland, Apex Home Loans CEO, Craig Strent, says a rise in rates could actually
bring in more business in the short term.
"There is a huge population that have benefitted from adjustable rate mortgages. When the rates
adjusted, they adjusted down. Those homeowners have been riding those low, one-year arms. If they
start to hear about rates going up, they may come out of the woodwork to lock into fixed rates,"
says Strent.
That may be, but 88 percent of loans outstanding today are fixed, according to the Mortgage Bankers
Association. Just 12 percent are adjustable rate. Even if rates do not rise any higher than they
are today, which they may not, they would have to fall below last year's lows to see the high refinance
volume of 2012 continue in 2013.
I've paid off my mortgage. But there is no relief. All my other costs are NOT fixed. Property
taxes, Home Insurance, Water bills, Utility bills, HOA fees. Those are all inflating like balloons.
They could keep rates low, while pumping money into banking system. But there is no escaping laws
of economics, the inflation is gonna get you.
And the problem is not even so much the Fed's propensity to stimulation in the manner of Keynes.
The problem is that they are pouring the stimulus into an unreformed rathole of corruption, in the manner
of sending aid to a country where it is intercepted by thieves and regional warlords, with little reaching
the people.
"One might argue that when the government has to find a private sector buyer for its debt first,
rather than selling the debt directly to the central bank, that imposes a certain degree of market
discipline on fiscal policy. But it's hard to see that there is all that much of a disciplinary bonus
here.
When a central bank announces that it is prepared to buy government securities, the announcement
automatically guarantees an eager private sector market for the securities – if there wasn't one
already. If dealers know that they can promptly re-sell newly purchased securities to the central
bank, at some amount over the purchase price no matter how low, then they know they can make a profit
from the purchase...
This is why we have no need to worry about those dreaded bond vigilantes in a country like the
US that controls its own currency and monetary operations. To the extent that the Fed signals it
is willing to buy US debt aggressively, the Treasury can set almost any price it wants for its debt.
So it's not just that there is no insolvency threat haunting US public debt. There is also not a
bond vigilante attack threat – not unless the Fed allows that attack to occur."
The limit of the Fed's ability to monetize sovereign debt is the value of the dollar and its acceptance,
at value, for the exchange of goods in a non-compulsory environment. And there is nothing neo-liberal
about this. I don't like the neo-liberal approach, but this notion of pain-free monetization is nuts.
If one chooses to not worry so much about the 'bond vigilantes,' history suggest that they may well
have a care for what I would call the 'dollar vigilantes.'
The Fed may be hard pressed to buy dollars with - dollars.
The problem with such an approach is that one can ignore the risk for a time, trusting to probability
and chance, but when the possible becomes more likely with repetition, it often results in a disaster.
It is sort of like driving while texting, a tourist eating street food in Asia, or a small speculator
being a non-insider customer at the Comex.
In a increasingly Machiavellian way, they could set up a reciprocity with another central bank or
two, say, the BofE and BofJ, and perhaps even the ECB, and I think this has been done even if informally
in the past.
But the limitations are still there, even if hidden in a fog of financial engineering. Such an arrangement,
which I think exists somewhat informally today, is merely kicking the can of currency failure down the
road.
"This is why we have no need to worry about those dreaded bond vigilantes in a country like the US
that controls its own currency and monetary operations."
Overt monetization only works for a protracted period in a system in which one has political control
over everyone who uses that currency. The logical outcome of a global dollar regime with unilateral
monetization is an eventual bid for a one world government where a false vision of reality can be enforced
with -- force. Force and fraud are the perennial instruments of economic tyranny.
Hence we are in what is called 'the currency war' wherein the US dollar monetarists are attempting
to increasingly impose their will on the rest of the world, and a portion of the rest of the world defers
to accept that arrangement.
Blatant exposure is the most dreaded pitfall of any Ponzi scheme. A fiat currency is based on faith
and confidence, and the monetary magicians can hardly show their hand, directly monetizing debt without
any independent restraint, for fear of provoking a panic, first at the fringes and then at the core
of the nation, or empire.
That is the policy error that is also known as 'hyperinflation,' a break in confidence in a currency
that is analogous to a 'run on the bank.' It is the case for hyperinflation which I am watching, and
still give a low probability. I am fairly sure that even Zimbabwe Ben would not fall for such an obvious
trap. But the craven dissembling of Alan Greenspan was also hard to imagine, until it happened.
There are other ways to deal with unpayable debts than merely printing money. A novel idea is to
make the issuers and holders of the bonds bear the negative effects of their bad judgement, as in the
case of Iceland. But the Banks will always try to shift the burden, which they have created, to the
financially illiterate and the weak.
And the problem is not even so much the Fed's propensity to stimulation in the manner of Keynes.
The problem is that they are pouring the stimulus into an unreformed rathole of corruption, in the manner
of sending aid to a country where it is intercepted by thieves and regional warlords, with little reaching
the people.
The US does not have a spending problem so much as it has a 'corrupt financial system problem,' a
'wealth inequality problem with a stagnant wage base,' an 'unsustainable healthcare model problem,'
and 'a free trade without adequate domestic policy based boundaries problem.' It was not all that long
ago that the US was holding a small annual surplus. What changed was financial deregulation with the
financialization of the economy, the easing of trade conditions, concentration of corporate power, tax
cuts for the wealthiest, a corrupting political campaign bubble, and unfunded discretionary wars with
their associated profiteering.
Forcing small business and workers to compete with state directed slave labor while maintaining a
social system founded on private business and median worker wages is insane. The capitalists are not
yet selling them the rope, but they are certainly selling them the 97%, and with them the bulk of their
customer demand over time.
Perhaps the biggest problem is, as Lord Acton observed, that when you have a concentration of power,
men with the mentality of gangsters have taken control. And the US financial system and corporate structure
are highly concentrated based on historical standards, resembling the worst of the gilded age of robber
barons, or some third world oligarchy in which the people live in voiceless misery.
In summary, I call this 'just monetize the debt without restraint' alternative the "pernicious myth
of modern monetary theory." There are quite a few examples of how this sort of other worldly myth, like
the efficient market hypothesis, the Black-Scholes risk model, and the benefits of unrestricted trade,
have turned out in the past. When you crush the reality out of a model with a few key assumptions that
allow you to obtain a license to do what you will, you often open a Pandora's Box.
The real shame is that an economic tragedy is not outside the plans of some of the worst of the country's
elite. Crisis provides opportunity if one is powerful enough, positioned for it, and egotistically twisted
enough to think that they can control the madness once it is unleashed. I suggested that the Bankers
would make the country another 'offer that they think it cannot refuse' as they did in the manner of
TARP. The so called fiscal cliff may be the wrapping paper for it.
I am not suggesting that the current debt based currency system is optimal, not at all. The continual
theme here is that the financial system is broken, and that it is based on an unsustainable US dollar
regime, and the excesses of money creation through credit expansion by private banks. But to merely
shift the corruption from the banks to their partners in the government Treasury is hardly a viable
solution.
The answer, as I calculate it, is transparency and reform, and equal justice for all, with malice
towards none, in the rule of law. That is an ideal never fully achievable, but that is the benchmark,
and one that is worth pursuing, It is sustainable if held close, and continually renewed. That is the
spirit of the American experiment in equality and freedom, and is something worth fighting for.
"The man who is admired for the ingenuity of his larceny is almost always rediscovering some earlier
form of fraud. The basic forms are all known, have all been practiced. The manners of capitalism
improve. The morals may not."
John Kenneth Galbraith, The Age of Uncertainty
"Gentlemen! I too have been a close observer of the doings of the Bank of the United States. I have
had men watching you for a long time, and am convinced that you have used the funds of the bank to
speculate in the breadstuffs of the country.
When you won, you divided the profits amongst you, and when you lost, you charged it to the bank.
You tell me that if I take the deposits from the bank and annul its charter I shall ruin ten thousand
families. That may be true, gentlemen, but that is your sin!
Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are
a den of vipers and thieves. I have determined to rout you out, and by the Eternal, (bringing his
fist down on the table) I will rout you out."
Andrew Jackson, Andrew Jackson and the Bank of the United States (1928) by Stan V. Henkels
"Do not forget that every people deserves the regime it is willing to endure!
Please make as many copies of this leaflet as you can and distribute them.
Demand-siders like me saw this as very much a slump caused by inadequate spending: thanks largely
to the overhang of debt from the bubble years, aggregate demand fell, pushing us into a classic
liquidity trap.
But many people - some of them credentialed economists - insisted that it was actually some
kind of supply shock instead. Either they had an Austrian story in which the economy's productive
capacity was undermined by bad investments in the boom, or they claimed that Obama's high taxes
and regulation had undermined the incentive to work (of course, Obama didn't actually impose high
taxes or onerous regulations, but leave that aside for now).
How could you tell which story was right? One answer was to look at the behavior of ... inflation.
For if you believed a demand-side story, you would also believe that even a large monetary expansion
would have little inflationary effect; if you believed a supply-side story, you would expect lots
of inflation from too much money chasing a reduced supply of goods. And indeed, people on the
right have been
forecasting
runaway inflation for years now.
Yet the predicted inflation keeps not coming. ... So what we've had is as good a test of rival
views as one ever gets in macroeconomics - which makes it remarkable that the GOP is now
firmly committed to the view that failed.
Edward here again. I was talking to my friend Rob Parenteau about internal devaluation. He doesn't
think it will work. His argument against it is similar to the one I have been making about the origins
of this crisis. Here's what I said.
I do not believe this private sector balance sheet recession can be successfully tackled via collective
public sector deficit spending balanced by a private sector deleveraging. The sovereign debt crisis
in Greece tells you that. More likely, the western world's collective public sectors will attempt
to pull this off. But, at some point debt revulsion will force a public sector deleveraging as well.
And unfortunately, a collective debt reduction across a wide swathe of countries cannot occur
indefinitely under smooth glide-path scenarios. This is an outcome which lowers incomes, which lowers
GDP, which lowers the ability to repay. We will have a sovereign debt crisis. The weakest debtors
will default and haircuts will be taken. The question still up for debate is regarding systemic risk,
contagion, and economic nationalism because when the first large sovereign default occurs, that's
when systemic risk will re-emerge globally.
Rob puts why internal devaluation is not a plausible strategy differently. Here's the flow of
his argument.
1.Many nations try internal devaluation at the same time; 2.Private sectors have debt to income
ratios that well exceed public debt to income ratios; 3.Credit to households to supplement buying
power (in excess of wage and salary) is unlikely to be forthcoming given the mess in the banking
system and the falling price of (real estate and equity) collateral; 4.Many nations are pursuing
multiyear fiscal consolidation, which is proving far from expansionary to date; 5.Many countries
around the world are already trying to run export led growth strategies, and not only is it impossible
for the whole world to run a current account surplus, but there is no market or policy mechanism
insuring that the current account surplus nations reinvest their net savings in productive investments
in the current account deficit nations that will allow the current account deficit nations to service
their external liabilities without defaulting. Rob encouraged me to re-read Chapter 19 of Keynes'
General Theory, saying
"We know these deflationist arguments inside out. We know why lowering wages is unlikely to introduce
a self-stabilizing return to a full employment growth path."
I skimmed through Chapter 19 on "Changes in Money-Wages" as Rob suggested. Here's the quote that
bears remembering:
"the volume of employment is uniquely correlated with the volume of effective demand measured
in wage-units, and that the effective demand, being the sum of the expected consumption and the expected
investment cannot change, if the propensity to consume, the schedule of marginal efficiency of capital
and the rate of interest are all unchanged. If, without any change in these factors, the entrepreneurs
were to increase employment as a whole, their proceeds will necessarily fall short of their supply-price."
Yes, that is where I was going with my thoughts yesterday on manufacturing inflation in a wage
deflationary environment. I said that "until incomes rise enough to support the debt (numerator)
or you get enough credit writedowns so that incomes support the debt (denominator), it's not going
to work." What I meant was that we have household sector balance sheet problems. Unless you fix the
debt/income number instead of the debt/GDP number, the balance sheet problem remains. Eroding the
real burden of debt is dependent not on raising nominal GDP, but on raising nominal income to keep
pace with consumer price inflation. A lot of economists are talking about 'market-clearing' wage
prices, that is lowering incomes, to reduce unemployment. That will make the debt problem larger
and leads to a debt deflationary outcome.
Bottom line: you won't cut your way to prosperity. While you need to see a lot more credit writedowns
to get through this crisis, the best one can hope for from the deflationary path is a reduction in
debt from these defaults and writedowns with debt deflation attenuated by automatic stabilizers.
This outlook is especially true when you see a collective debt reduction across a wide swathe of
countries in both public and private sectors as we saw in the 1930s and as we are seeing again today.
More on this topic (What's this?) America's Only Escape From its Debt Noose (Part I) (Wall Street
Daily, 8/3/11) Prisoners of Debt: Inside the Global Banking Crisis (Finance Documentaries, 9/24/11)
The Debt Compromise Doesn't Cut the Debt (Learn Mining News, 7/31/11) Read more on Debt at Wikinvest
Topics: Guest Post, Macroeconomic policy, The destruction of the middle class, The dismal science
Email This Post Posted by Edward Harrison at 7:14 pm
Selected Comments
rn
at 7:49 pm My two cents worth of responses.
I think it is a problem of income/wealth inequality/ distribution.
There is probably some optimal level of inequality to sustain economic growth.
It may be possible to lower wages across the board )with reduced level of inequality,) to bring
back economic growth.
I wish some economists do serious research on inequality to understand depressions.
rd
at 8:35 pm Current income inequality levels in the Us are similar to the late 1920s. We know what
followed then, and we seem on track to follow a similar path now.
Income inequality was MUCH lower in the 50s and 60s which seems to be the golden age of US
growth over the past century.
While I am always careful about correlation vs. causation, there are probably some strong linkages
here that are not coincidence.
I will note that sensible regulation following basic principles
of the financial sector appears to coincide with lower income inequality while high income inequality
appears to coincide with unfettered speculation in the financial sector. Some leash on the animal
spirits may be necessary.
Anonymous Jones
at 9:03 pm
Some have posited that it is the very process of going from relatively
equal wealth distribution to relatively unequal wealth distribution that generates outlier growth
numbers.
These same people predicted that China's growth would outstrip India's because the communist
revolution leveled the playing field and set the stage for massive transfers of wealth from the
masses to new oligarchs.
I am agnostic regarding this theory. It is interesting, however. Depressing, but interesting.
joebhed
at 9:33 pm The income -wealth distribution gap manifests itself in the difference between the
creators of monetary assets, who own these 'money-based' debt instruments of various colors and
flavors, and the rest of us, who pay the interest on those monetary assets. Forever through compounding
interest.
Through "financialization", the pace and scale of the monied enrichment of the few has erupted
noticeably over the past dozen years, but it has been underway from the times of the earliest
of financial deregulation, and before.
You cannot attack wealth mal-distribution without attacking the tools and vehicles of its success
– the private creation of purchasing power by the financialistas and the capital marketeers who
create NOTHING of real wealth in the real national economy. And if you want to end that, then
you better understand how the monetary system works. And take it back. Because it does not work
for the restofus.
For the Money System Common.
liberal
at 10:17 pm
"I wish some economists do serious research on inequality to understand depressions."
The current depression is not caused by income inequality; rather,
both have the same root cause: economic rent.
Patrick
at 11:04 pm By definition it is a distributional problem: for every debtor their is a creditor!
nonclassical
at 4:11 pm ..actually this fits nicely with Michael Hudson's article on "debt deflation"; both
appear accurate. especially given historical documentation on 30′s era depression..
friend
at 8:26 pm I am trying to follow along.
What I am weakest on is "how"?
I get (think I get) that bad debts have to be written down. Some folks will absorb pain.
The who and how much is fuzzy to me.
Can you give the practical way forward? Or a couple possibilities, if that occurs to you?
Jim Haygood
at 8:35 pm Probably the most successful example EVER of an 'internal devaluation' was Frank Roosevelt's
40% devaluation of the dollar from 0.0475 to 0.0286 troy ounce of gold during 1933-34.
Mind you, I don't approve of his high-handed seizure of privately-held gold, and nullification
of gold clauses in bonds (the sole technical default in U.S. history, according to Reinhardt and
Rogoff).
But the internal devaluation against gold stopped the raging deflation in its tracks, and ushered
in a recovery until 1937.
Owing to another high-handed act by Nixon in 1971, such an officially-decreed internal devaluation
is now impossible … although the market has imposed one on its own.
What the gold market knows is that irredeemable fiat currencies are one of the few real-world
examples of that phenomenon which so scandalizes the editorial page of the Times-Titanic: the
dreaded 'race to the bottom.'
With the incomparable Benny Bubbles chairing the Fed, that's a race we can win, by God.
USA No. 1!!!
joebhed
at 9:43 pm As you said, it was necessary to stop the gold-flavored deflation that was spiraling
us to ruin – that's why FDR did it. That's what leaders do – what is needed. And it was hardly
a seizure, as I understand the word. All the gold was accumulated by the government in order to
restore the economy to its potential, and the original holders received the price that the gold
was worth in $US. It seems a small price to get America working again.
Eric
at 9:48 am It was a seizure by any reasonable definition of the word. The legitimate holders of
a certain property were obligated to give up that property at a price that was imposed on them
by an entity that both had and was willing to use (and, in fact did use) coersive forces to compel
the transaction. But it did accomplish what was intended economically.
This is entirely speculative, but I think there is a good possibility that the set of citizens
that are currently heavily invested in gold – particularly those that physically keep it – and
the set of citizens that are heavily armed, relying on second amendment rights, might overlap
substantially. I don't think that sending out Treasury agents, FBI or others would work as effectively
today as in the 1930s.
reslez
at 6:08 pm Owing to another high-handed act by Nixon in 1971, such an officially-decreed internal
devaluation is now impossible … although the market has imposed one on its own.
Yes, quite a shame we're no longer on a gold standard so we can unshackle ourselves from it
again. /sarcasm
The equivalent could easily be accomplished by sufficient tax cuts or federal spending. This
need not be matched by debt issuance. When there's a shortage of money the solution is not to
shrug your hands in helplessness, the solution is to create more money. "Revulsion"… please get
serious. We have 30 year mortgages under 4%.
Dan Kervick
at 8:41 pm This is a great post Edward. But I have a question about the Keynes post. Doesn't an
increase in employment increase the propensity to consume?
alex
at 7:55 am "if only Keynes were with us now"
He'd be so disgusted he'd stop commenting. "You idiots have learned nothing in over 70 years,
indeed you've forgotten what you did learn then."
Mel
at 4:45 pm It can, but without a net effect.
If you double the number of people employed by halving the wage paid to each - sure you may
have doubled the 'propensity' to consume (desire) but you've halved the money.
By my formula, demand = desire * money stays exactly the same.
TulsaTime
at 8:58 pm No finish line in that race to the bottom. It's only over when the last one stops,
when the financial devastation is complete. The nice thing is that we for sure will not have to
worry about sky-net at that point!
Real war pulls the plug on the greatest depreciation contest. Although I don't know who would
be fool enough to buy the bonds for that one.
nonclassical
at 4:15 pm ..rumour is huge middle-east conflagration on the way..Iran and others including U.S.
or U.S. proxy Israel..
Sy Krass
at 7:19 pm Actually, war will not have the same impact now as it did in the 40′s. All the ordinance
has been manufactured, such a war if it were to come would be quick, destructive, not very profitable,
and oil would go up. Not a recipee for recovery in my book.
joebhed
at 9:17 pm Hhmmmm…. – the financial-economic intelligencia have come to the same conclusion as
the world's central bankers – the jig is up, and we don't know what to do.
The national enigma is stated succinctly in the new (HR-2990) version of the Kucinich Bill,
Finding No. 10 states – ""(10) Congress is stymied by competing forces: a desire to put people
to work and an aversion to borrowing money to create programs to do so.""
This aversion to borrowing money is caused by economy-wide debt-saturation, which is in turn
brought about by our debt-based money system.
Ed and Rob, searching for any fix that will restore aggregate demand(a desire to put people
to work) find themselves, and we, in an enigma somewhat wrapped in a riddle, similar to the HR
2990 Finding.
So, it's a chicken and egg situation, in which NO PROGRESS can be made. The economists and
the financialists are, hopefully, very slowly discovering the pre-eminent reality of the national
economy – it is based on a monetary system THAT CANNOT WORK.
The sooner y'all get that, the sooner the MMTers and the post-Keynesians can get on board with
the Kucinich solution to this monetary system-based national economic paralysis. We need a new
money system, plain and simple.
We need a money system where we can have money to provide the means of exchange necessary without
debt. To do what? To put the people to work.
As Simons so eloquently stated: "The tragedy is in our learning to accept debt, and to fear
money".
It's about friggin' time we started talking about it.
Unless you have a better idea. Mr. Beard?
nonclassical
at 4:18 pm ..banks and a government BASED ON that "monetary-debt" system, and who CONTROL such,
will NEVER "give it up"…
(till it collapses-reading U.S. history)
joebhed
at 5:25 pm Well, yeah. We're waiting.
My dad, who was a christian-capitalist businessman turned monetary reformer, an avowed anti-socialist,
only ever quoted this from Marx: "Revolution is Ninety-percent opportunity".
Understanding, as he did, the mechanics and mathematics of the debt-based money system, and
understanding the innate ability of those bankers to create and destroy ever-larger bubbles, he
advised that we would have one 'opportunity' to fix this thing in my lifetime – and that the one
'opportunity' would come about three years after we increased the national debt by a $Trillion
dollars in one year. So, that's why we're here with an alternative.
F. Beard
at 9:39 pm Unless you have a better idea. joebhed
It's not my idea, in fact it is hinted at in Matthew 22:16-22 ("Render to Caesar …"), but we
need separate government and private money supplies. Then the government could freely spend without
imposing a "stealth inflation tax" on the private sector. That should silence the "deficit hawks"
since they would be free to use private currencies to escape price inflation in the government's
fiat. In fact, excess fiat creation would make it EASIER for the private sector to pay taxes because
the cost of fiat would drop.
But along with fundamental reform, the entire population, including savers, should be bailed
out equally with full legal tender fiat from all private debt. That could be done without serious
price inflation risk if banks were forbidden to create any more credit AND if the bailout checks
were metered to just replace existing credit as it is paid off.
Politically, a bailout of the entire population should be much for acceptable than excessive
infrastructure spending. Who doesn't believe that they can spend more wisely than the government?
Crazy Horse
at 10:56 pm If a country like Iceland can default and be back on their feet within two years when
their major resource is codfish, why can't the dominant nation of the most resource-rich continent
on the planet do the same?
As appealing as the Kucinich bill is, it doesn't clear away the deadwood. When the new American
Money replaces the old private Federal Reserve Notes as the medium of exchange, what better time
to start over again with economic democracy? Every citizen should receive $50,000 in new American
Money as starting capital– Bill Gates and a crack dealer from the Bronx would then have an equal
opportunity to display their entrepreneurial skills. Bill might initially have trouble paying
the heating bill on his Mercer Island mansion, but with 60,000 sq. ft. he should have plenty of
rooms he could rent out.
I doubt if there would be a shortage of consumer demand, and entrepreneurs would grow like
weeds out of the potholes in every street to satisfy that demand.
Since there would be no exchange between the old dead and abandoned Federal Reserve currency
and the legal American Money, all existing debts will be wiped out. Or better, transfer them to
the newly formed public State Banks where they will be administered as a form of tax liability
and help capitalize the North Dakota model public banking utility that will replace the TBTF vampire
banks.
We might have a little trouble maintaining our 75% oil importation level, but I'm sure there
is something we could re-learn to manufacture that the rest of the world wants. Might even have
to start manufacturing I-Pads here-.
Totally politically unacceptable you say? I wouldn't be so sure by the time 40% of Americans
have lost their homes only to watch them be bulldozed to the ground by the Repo agents, and marchers
in the street are waving AK-47′s instead of signs that say "Visualize World Peace".
Externality
at 11:47 pm Unless you also seize the hard assets of wealthy bankers
and other elites, this approach seems extremely unfair. An American with their
life savings in the bank or dollar-denominated bonds loses everything over $50K, while
wealthy bankers with multiple mansions get to keep their property.
Consider the following:
John Doe had $100K in the bank, and no other assets. They are left with $50K.
Lloyd the banker has $100K in the bank, and owns $10MM mansions in the Hamptons, San Francisco,
and France. They are left with $50K in money and $30MM in property.
Ben the banker had $100K in the bank, and a $10MM mansion. He front-runs the conversion and
buys Japanese Yen. He now had $50K in dollars, $100K dollars in Yen, and a $10MM mansion.
(Names are not intended to refer to actual people.)
This approach, in other words, would punish savers with dollar-denominated
assets while increasing, in relative terms, the wealth of bankers, large landowners, etc.
Linus Huber
at 7:16 am I do agree with you. First and foremost those looters have to be taken to account.
I am not talking about the entrepreneurs but about those who enriched themselves over the past
many years while not having any downside risk as well, like an entrepreneur is exposed too. The
downside risk was taken over by the Government (tax payer) and they are factually simply employees
who looted the system.
This is not simply a matter of economics but a matter of fairness and justice. When the law
does not resembles justice anymore due to corruption at the top, it is high to put this aspect
first before considering any other economic measures. Western society is based on the rule of
law but the spirit of this rule of law has been violated repeatedly and is destroying the social
fabric that allows a nation to florish.
Linus Huber
at 7:17 am … it is high TIME …
Crazy Horse
at 2:23 pm A few somewhat tongue in cheek paragraphs do not constitute an entire economic system!
For instance, given the political power to institute such a radical change to the banking system,
there should be no problem formulating a progressive taxation schedule for residential property.
$1.00 per year for 1,000 square ft., $100,000 per year for 10,000 square ft, and ten million per
year for 50,000 square ft. seems about right. Second homes assessed at double rate, third homes
at triple rate- you get the picture!
Kevin de Bruxelles
at 3:35 am The meme that the Icelandic economy is "back on its feet" is almost as silly as the
green shoots meme a couple years ago. Please have a look at the hard numbers. Icelandic unemployment
is now around 8%, it averaged less than 2 % before the crisis. That means it is up at least 400%.
A similar jump in the US would mean our normal 5% unemployment would have jumped to and stayed
at 20%. I hardly think anyone would be saying the US economy was "back on its feet" with at least
four times the unemployment rate of the pre-crisis period.
Also since Icelandic mortgages are indexed to the price of living (which is basically a reflection
of the weakness of their Krona). So since the Icelandic Krona is worth half (was 90 per Euro,
now 180) of its pre-crisis value, the amount due on mortgages has skyrocketed while the price
of most goods has doubled since almost everything (except fish and energy for heating) is imported.
What I was told is that almost most Icelandic men are now working 60 hours a week. They typically
have full time jobs but take a second job in the tourist industry. Even with this effort they
are unable to maintain their pre-crisis standard of living.
So if all this means an economy is "back on its feet" then America and Europe must be simply
booming!
Eric
at 1:23 pm Wouldn't that work out to up 300%?
Kevin de Bruxelles
at 3:19 pm Yes you are right, 300% is correct.
Crazy Horse
at 7:02 pm I guess there are different definitions for "landing on your feet!" After doing the
unthinkable Icelanders are making do by working extra hours: that in itself is remarkable. It
hardly seems reasonable to hold up as the standard the living conditions temporarily achieved
by a bubble economy. And by the way, how did they end up with variable principle mortgages? Looks
like they didn't twist the thumbscrews on the stocks when they had their banksters in them?
8% unemployment in Iceland? Let me describe the economy of the community where I live in here
in the USA. It is a conservative farm community that was in transition to a second home and resort
area. Lots that sold for $200,000 now remain unsold for $28,000, and there are thousands of them
on the market. Huntsman Springs, (yes, that John Huntsman's sons) is a 200 million dollar golf
course development so desperate for sales that they offer to buy back their million dollar condos
at full purchase price anytime for ten years if you will just take them off their hands now.
Existing home prices are down 40-50% and there are no buyers. Full time jobs in the county
have been reduced by 40%, and median salaries cut by at least 40%. In the absence of out-migration,
real unemployment would also be over 40%.
Across a 8,500′ mountain pass lies the richest county in the US where ordinary lots still sell
for 2.5 million each and billionaires outnumber millionaires. The unemployment rate is under 4%,
but the average wage rate is $11.00 per hour, manicuring the lawns and waiting tables for the
ultra wealthy. Not much left for food for the family after you pay the cost of commuting two hours
every day across a mountain pass swept by two major avalanche paths.
Families that want to hold on to their underwater home do have an option. Since there are no
jobs for men, the wife can put the kids in day care and drive over the Pass to her waitress job.
(by the way there is no snow plowing at night which adds to the excitement of the night-time commute)
The husband can find work in the oil patch or the coal mines 300 miles to the east if he doesn't
mind never seeing his family.
Moneta
at 8:51 am This is the same logic as the parents not getting their kids vaccinated. They are just
piggybacking on the fact that everyone else is getting it done.
Iceland's default worked because they were the only ones to go this route while all the others
printed. Had no one printed, Iceland probably would not be in a very good situation.
I do not think they are out of the woods yet.
nonclassical
at 4:20 pm Yves has long documented the fact banks=Wall $treet are holding that debt, and amounts
are secret..for good reason- banks would already be insolvent, as she has exposed often..
Chris
at 10:30 pm I'm having a hard time criticizing this post because it strains my brain, but I'll
try nonetheless. A few questions off the top of my head:
1) What is internal devaluation? 2) What in God's name does it have to do with what Rob is
talking about? 3) How in the world can you equate Greece with the US? 4) Inflation only affects
asset prices? Really? Really???
I really think that you were wrong when you started, you heard Robs argument, which was wrong,
and you wrongly thought that he agreed with you and wrongly came to more wrong conclusions based
on your wrong premises and your wrong interpretations of Robs wrong argument.
I actually agree with parts of what you say. Your statement in the previous post that incomes
will drive the recovery more than GDP is correct, but you'll have to trust me that inflation comes
with wage inflation – that's just how it works. Creating a false choice of "internal devaluation"
or "credit writedowns" is just nonsense.
nonclassical
at 4:22 pm get rid of the "greek debt" comparison and read Michael Hudson's article on "DEBT DEFLATION",
here on NK, and it all makes perfect sense..
Hugh
at 11:59 pm A lot of this seems unnecessarily obtuse. We need both better incomes and more jobs.
And as m began the thread, we need redistribution of wealth, that is society's resources, away
from the economically destructive rich (1%)back to the more productive 99% of society.
KnotRP
at 12:58 am http://www.nakedcapitalism.com/2011/09/marriner-eccles-on-the-need-to-save-the-rich-from-themselves.html
The rich need to be saved from themselves, for everyone's good.
KnotRP
at 1:09 am Quote from the transcript:
"Our problem, then, becomes one purely of distribution. This can only be brought about by providing
purchasing power sufficiently adequate to enable people to obtain the consumption goods which
we, as a nation, are able to produce. The economic system can serve no other purpose and expect
to survive"
KnotRP
at 1:19 am Another quote:
"The debt structure has obtained its present astronomical proporttions due to an unbalanced
distribution of wealth production as measured in the buying power during our years of prosperity.
Too much of the product of labor was diverted into capital goods, and as a result what seemed
to be our prosperity was maintained on a basis of abnormal credit both at home and aboard. The
time came when we seemed to reach a point of saturation in the credit structure where, generally
speaking, additional credit was no longer available, with the result that debtors were forced
to curtail their consumption in an effort to create a margin to apply on the reductions of debts.
This naturally reduced the demand for goods of all kinds, bringing about what appeared to be overproduction,
but what in reality was underconsumption measured in terms of the real world and not the money
world. This naturally brought about a falling in prices and unemployment. Unemployment further
decreased the consumption of goods, which further increased unemployment, thus bringing about
a continuing decline in prices. Earnings began to disappear, requiring economis of all kinds -
decreases in wages, salaries, and time of those employed."
I guess Sir Alan and Mr. Bernanke both managed to skip the lecture on the testimony of M. S.
Eccles, and still get diplomas, huh?
KnotRP
at 1:22 am More:
"Individuals, corporations, cities, and States can not, of themselves, do anything except play
according to the rules of the present money system and make their outgo balance their income,
or ultimately 'go broke'".
Ralph Musgrave
at 1:26 am I flatly disagree with the idea put by Edward Harrison that "a collective debt reduction
across a wide swathe of countries" will "lower incomes and GDP".
It is phenomenally easy to reduce national debts. Step 1: print money and buy back such debts
(i.e. carry on with QE). That on its own would doubtless be too stimulatory and inflationary.
So (roll of drums) implement a policy which is deflationary AND which gives governments even more
money with which to buy back debt. And that is . . . . raise taxes and/or cut public spending.
As long as the inflationary effect of step 1 equals the deflationary effect of step 2, the
net effect is NEUTRAL. That is, there is NO EFFECT on total numbers employed, GDP, etc etc. For
more details, see:
"We must correct the causes of the depression rather than deal with the effects of it, if we
expect recovery with its attendant confidence and budget balancing. This can only be accomplished
by government action tending to raise the price level of raw products and increasing employment,
thus bringing about an increased demand for consumers' goods".
Unfortunately, Ben is only raising raw product price levels….employment cures remain out of
his reach, in our global economy. Rising raw product prices without increasing employment just
speeds up the death spiral.
KnotRP
at 1:41 am More:
"…and consequently there is a great demand for the inflation of our currency, the remonetization
of silver, or the reduction of the gold content in the dollar, with the idea that any one of these
three methods would increas our volume of money and thus raise prices, relieving debtors and bringing
about prosperity. None of these three, in my opinion, would accomplish the results desired unless
a method would be provided for getting the increased supply of money to the ultimate consumer".
I think Ben must've nodded off and missed the last sentence.
joebhed
at 8:29 am Thanks for these many relevant quotes, but keying on this phrase here… "…unless you
start the purchasing power at the source with the consumer".
This is an incredible proof of what is needed, and ought to occupy this discussion entirely.
Bernanke acts as if we can jump-start the economy by putting Trillions
into the banks' excess reserves – thus foolishly pushing on the economic string.
The only real solution to implement the suggestion contained there – that of directly getting
purchasing power to the consumer – is that 'situationally' adopted by most MMT advocates – the
direct spending by the government of the additional monies into the economy – so that it lands
at M1, maybe gets velocity above 1:1 , and creates aggregate demand.
However, the real solution is to restore fully the monetary sovereignty of the nation and issue
ALL money without debt, followed by bank lending of real money. That is exactly what the Kucinich
NEED Act of 2011 (HR 2990) does.
http://kucinich.house.gov/UploadedFiles/NEED_Act_FINAL_112th.pdf
For the Money System Common
Jerrydenim
at 10:03 am Loving your comments on this thread Joebhed! I've been preaching the monetary reform
gospel for years now. If only we could break through to the Ron Paul gold bugs we would have enough
citizens on board to start effectively advocating for reform. Maybe somewhere down the line abolishing
the privatized debt-based money system could become the central thrust of the OWS movement. There's
a impromptu altar set up in Zuccotti park for people to meditate, pray, etc where people have
been leaving little votives and offerings. It struck me as the tragic irony of ironies, and bothered
me to no end that some people are leaving Federal Reserve Notes on the altar! How tragic that
some who care enough to protest greed, inequality, corruption etc. are so blind to think it appropriate
to leave the filthy paper notes of our collective oppressor in a sacred place of protest against
that very same dark force?
We must do more to get the word out.
F. Beard
at 10:54 am If only we could break through to the Ron Paul gold bugs Jerrydenim
That's easily done. Agree with them that anything can be used for private debts – gold, silver,
common stock, store coupons, futures contracts, etc.
However for government debts – taxes and fees – inexpensive fiat is the ONLY ethical money
form. That's non-negotiable since anything else is fascist privilege for someone's favourite shiny
metal or other money form.
joebhed
at 10:54 pm A lot of Paulistas are mad as hell about the private monopoly's privilege of creating
purchasing power out of nothing and collecting interest if paid, and collateral if not. They honestly
believe that those in government understand this relationship and support it. I do not know three
people in Congress who actually understand fractional-reserve banking, but they all know from
where their money comes. Unfortunately, most of the Paulists believe that a switch to gold backing
would actually add stability to the currency and reduce government growth and debt.
I don't agree with Henry Ford. I think the American people need to understand the money and
banking system completely. Because I believe we need a revolution in the morning. For the Money
System Common.
F. Beard
at 11:08 pm the private monopoly's privilege of creating purchasing power out of nothing joebhed
The temporary money, so-called "credit", is created out of nothing but the purchasing power
is stolen from all other money holders. The taking of purchasing power (at least temporarily)
is inevitable when new money is created which is why the current money owners should be allowed
to vote on new issue. Common stock as money fulfils that ethical requirement; bank credit does
not.
KnotRP
at 1:44 am same quote continues:
"It does not make any difference what kind of inflation, if the inflation is adopted - you
can print money, you can remonetize silver, you can reduce the gold content of the dollar and
it is not going to raise your price level unless you start the purchasing power at the source
with the consumer".
Consumers….Bankers…..what's the difference….lets just give it all to the bankers….it's easier.
KnotRP
at 1:48 am "Senator Gore: And in 1929 the turnover [monetary velocity] was 45 times? Mr. Eccles:
Yes. Senator Gore: But in New York City the turnover was over 150 times."
They note, in the discussion, that turnover dropped from the "norm" of 26-32 times per year,
and the high of 45, down to 16 by the last quarter of 1932, and was still dropping.
KnotRP
at 1:50 am Senator Gore: But currency alone is about 25 or 30 per cent more. Mr. Eccles: Yes;
but it is not working.
KnotRP
at 1:57 am More: (sorry, but this is fascinating….)
"Several factors to-day stand in the way of increasing our money velocity. I repeat there is
plenty of money to-day to bring about a restoration of prices, but the chief trouble is that it
is in the wrong place; it is concerntrated in the larger financial centers of the country, the
creditor sections, leaving a great portion of the back country, or debtor sections, drained dry
and making it appear that there is a great shortage of money and that it is, therefor, necessary
for the Government to print more. This maldistribution of our money supply is the result of the
relationship between debtor and creditor sections - just the same as the relation between this
as a creditor nation and another nation as a debtor nation - and the development of our industries
into vast systems concentrated in the larger centers. During the period of the depression the
creditor sections have acted on our system like a great suction pump, drawing a large portion
of the available income and deposits in payment of interests, debts, insurance and dividends as
well as in the transfer of balances by the larger corporations normally carried throughout the
country."
KnotRP
at 2:03 am "Point No 1. Unemployment relief. …..(plan laid out, worthwhile to read itself, but
ends with the following)…..We shall either adopt a plan which will meet this situation under capitalism,
or a plan will be adopted for us which will operate without capitalism".
KnotRP
at 2:07 am Senator Gore: Where does the Federal Government get this money to give [ed: gift] to
the States. Mr. Eccles: Where did it get $27,000,000,000 during the war to waste? Senator Gore:
A very different situation
So this was all in 1933, and it still went on until WWII, despite such clear and thoughful
testimony….and all we have now is knuckleheads….we're screwed.
Calgacus
at 8:35 pm Aaaargh. "Gift" is a weird, recent neologism up with which I will not put. "Give" here
is still standard written & spoken English.
and all we have now is knuckleheads Yup. You can't overestimate the insanity & stupidity of
the last 4 decades of economic "thought" & politics. MMT/PostKeynesians & other practitioners
of non-insane economics have a ways to go to get the general level of understanding of economics
back to the level of the 40 years after 1933. Or even before. Around 1920, "loans create deposits",
say was the standard, mainstream, belief.
KnotRP
at 5:49 am Eccles used the term "gift" elswhere in the testimony, to distinguish it from "loan"….apparently
"give" left room for interpretation in the Senators' minds….
KnotRP
at 2:16 am The testimony spirals into an argument with the Senators about the practical problems
with directing so much money at the targets Eccles desires….all the usual corruption/skimming
concerns. No wonder it's called the Great Depression now…we lacked the will to do the only thing
that would actually work….cut every citizen a check each month until price levels and employment
returned to stable levels. Not. Gonna. Happen. GDII.
KnotRP
at 2:35 am Senator Walsh: When do you think prosperity will come back? Mr. Eccles: It depends
entirely on what the Government does. It will not come back unless action is taken by the Federal
Government, in my judgement. Senator Walsh: Do you think there is anything to the claim that this
period now is more or less a period of normalcy? Mr. Eccles: No; we cannot stay at this level.
If you can not raise the price structure [edit: and also grow employment through direct action,
as he mentioned earlier] you will go into a condition of collapse and you will get into a chaotic
condition far worse than we are in to-day. Senator Walsh: We have been slipping for three and
a half years. When is the slipping going to stop? Mr. Eccles: I have said when the Government
takes the necessary action to stop it. Senator Wlash: In other words, we have done nothing in
the last three and a half years to stop this? Mr. Eccles: I think not. Senator Gore: All our efforts
have come to naught? Mr. Eccles: That is what I think. I think nothing has been done except to
extend credit, and credit is the second line of defense and not a primary line of defense.
KnotRP
at 2:39 am "….we have destroyed the ability to buy at the source through the operation of our
capitalistic system, which has brought about such a maldistribution of wealth production that
it has gravitated and gravitated into the hands of - well, comparatively few. Maybe several millions
of people. We have still got the unemployment and have got no buying power as a result"
KnotRP
at 3:08 am Senator Gore: Let me ask you this. I do not mean for you to dilate on it. But you say
our credit structure is in danger. And I think it is. I think our mischief results largely from
overstraining credit. Your proposals seem to be that for the excessive use of credit we use more
credit. Is that not true? Mr. Eccles: No; that is not true. Senator Gore: It seems like every
scheme you suggest was for the Government to advance money to somebody. Mr. Eccles: You have got
to take care of the unemployed or you are going to have a revolution in this country. …….. Mr.
Eccles: When you get enough unemployed they will control the Government and change our present
political, social, and economic system. Senator Gore: There is the trouble And that is the danger
here. They brough pressure to bear in the House to get tabacco, butter-fat, and goobers included
in this domestic allotment. you get enough unemployed in this country organized and there are
no brakes you can put on your scheme. That is the history of Rome. The dole destroyed Rome. It
is going to destroy England and France and Germany and this country. The Chairman (Reed Smoot):
We thank you for your statement, Mr. Eccles.
So….we can't be having a dole, so all that remains as an outlet is social disruption, followed
by war.
KnotRP
at 3:17 am Of course, Mr. Eccles wasn't suggesting a dole at all. He was suggesting the government
become the employer of last resort and deploy the productive capacity on necessary production
and services in exchange for pay, to prime the economy, instead of doling out money to unemployed
wasted resources as they sit around picking navel lint.
Maju
at 6:00 am You don't need to go into debt to print money: you just print it by decree. Forcing
the state to accept debt in order to print the money that the economy needs is a nefarious devaluation
of the sovereign power of the state, one that harms the economy.
As long as you do not devalue so much that others do not accept it, the state can print all
the money the national economy (or, in the US case, the imperial economy) needs.
There's a problem if all countries devalue simultaneously but, even in that case, the injection
of money into consumers' pockets (via salaries and welfare, not via lending to banks as the central
banks do) should dynamize the economy.
joebhed
at 8:36 am Awesomely correct. And here is exactly how to do that. http://kucinich.house.gov/UploadedFiles/NEED_Act_FINAL_112th.pdf
And as contained in the Mission Statement of the "Monetative" movement throughout Europe today.
http://www.monetative.de/?page_id=71
Taking money-creation back into public hands.
The times, they are, indeed, a-changin'. For the Money System Common.
Philip Pilkington
at 7:31 am Yes. Other reasons internal devaluation won't work:
From Chapter 19 of Keynes: If you reduce wages et all, then tax revenues will fall further
exacerbating public debt-to-GDP ratios (because income taxes and VATs will fall). If the object
is to bring these public debt-to-GDP ratios down this is a paradoxical strategy.
From a conversation between me and Rob (!): We must assume quite a lot of price stickiness
in consumption driven economies like Ireland etc. Businesses will defend prices even at the expense
of layoffs. So, when (if?) wages fall the price stickiness will lead to pro-cyclical effects (more
unemployment, lower wages etc.). Hence: downward spiral.
jake chase
at 7:43 am If the authorities are interested in solving demand stagnation the solution is quite
simple. A one time distribution of $50-100k per US adult. This would get the debt carrousel moving
again with minimum inequity.
If this sounds ridiculous, imagine that they have already distributed $23 trillion to the banks
and the top .002 of the population without any effect except to make everything worse.
ArkansasAngie
at 7:44 am Then you have the case of the globals. They don't care
about no stinkin sovereign this, that, or the other. Especially since the central banks are using
them as their macro locks and dams.
Moneta
at 8:43 am There is income inequality in the US but it also exists
at the global level.
I don't see more equality coming to America unless we see huge
changes. What I see is more equality across the planet… i.e. engineering wages
in China and other emerging markets jumping up to match those in developed markets. And the more
debt America sells to foreigners, the bigger chance this will happen, unless it defaults on its
obligations.
And if America truly fights this global phenomenon by becoming protectionist, inflation will
be huge.
JP Hochbaum
at 8:52 am Considering we have the unlimited capacity to pay off sovereign debt, I fail to see
how we could ever have a soveriegn debt crisis.
Devaluing our currency is a decent policy choice because it makes our debt cheaper to pay off
and will increase our exports, which will increase wages and jobs here.
Moneta
at 1:13 pm The issue is that since the US has the reserve currency, most countries are set to
export. Every time the US dollar wekens, they will also devalue making it hard for the US to export.
Furthermore, since their economies are built around exports, it will take some time before
they can purchase US exports.
In my mind the US will be able to increase exports only id they lose the reserve currency status
or if emerging makets gain important purchasing power which will only increase the fight for resource
domination.
The force behind the status quo is huge.
Paul Tioxon
at 10:33 am While the Fed sped into action to prevent asset price deflation, wage deflation has
gone on, unabated. During the landmark New Deal legislation, minimum wage levels were established.
While seemingly idealistic or progressive at face value, they also serve to protect the higher
wage paying industrialists of the era and spread enough money, in the form of a floor on wages,
that would guarantee a predictable level of demand.
However, the main beneficiaries of the new wage mandates, were Southern industrial workers,
not agricultural workers and share croppers who were waived, to this day, from minimum wage legislation.
By setting a wage floor that was already well established in the North, it raised the much lower
levels of wages and income primarily in the South. This created a national labor market where
there was a level playing field and Northern industries did not have to fear for being undercut
by low cost Southern competition.
The main point is, increasing wages and income was as much a priority as stabilizing collapsing
farm produce prices. Corporations around the world, taking advantage of this crisis as a good
time to discipline the work force, suppress wage demands and even lower compensation or get rid
of high cost older workers and replace them with cheaper, new, younger hires, who don't remember
the higher wages and benefits, is all contributing to the squeeze on economic recovery.
You can't stabilize asset prices, and collapsing commodity prices without commensurate stabilization
of salaries, wages and benefits. If prices stay the same, and wages go down, it is inflation by
another name, it produces the same result, the erosion of purchasing power. Prices and wages are
in relation to one another. You can't work to save one and work to destroy the other and expect
anything but disastrous consequences.
No Know
at 11:28 am "You can't work to save one and work to destroy the other and expect anything but
disastrous consequences."
IMHO, you have summarized precisely why we are where we are!
KnotRP
at 11:30 am minimum wage requirements are not equivalent to deploying the unemployed in public
works projects for pay. The first only says "IF I hire you, I have to pay you X"…that's a big
IF.
We have water issues (crumbling dikes, floods, droughts, power generation), we have power issues
(old distribution plant, R&D on new energy production methods, power consumptive home equipment),
we have transportation problems (the 99 percent commutes from the area they can afford to buy
a home in, to the more expensive area where their jobs are). Plenty of useful targets from which
to pick a big (moon in 10 years) fish to fry….with subsequent benefits to our nation.
Too bad we're a bunch of dumbasses with 2 second attention spans….we can't do anything that
requires organization and persistence beyond one business quarter or election cycle, unless our
lives are directly threatened. I guess we'll have to wait for that…
reslez
at 7:20 pm Too bad we're a bunch of dumbasses with 2 second attention spans….we can't do anything
that requires organization and persistence beyond one business quarter or election cycle, unless
our lives are directly threatened. I guess we'll have to wait for that…
To quote Lambert Strether, who's "we"? The 99% see the problems and want them fixed. It's the
1% who stymie everything so they can loot.
KnotRP
at 6:00 am The looting has been going on for a while (literally years), and "we" (royal) haven't
managed to do much as a population, until recently…..and yet the looting actually continues unabated
even today. But lives are being deconstructed by the "suction pump" (to quote the Eccles Testimony),
so I expect after many years of the 99% sleeping though this (as long as free credit was available)
that enough people's lives have become threatened to bring this to a boil…
decora
at 11:14 pm well according to some people, the Commodities Index Funds and the electronic 'dark
market' of commodities trading have caused mass inflation in food and fuel. (and indirectly the
food riots of 2008, and the melamine baby milk scandal in China)
sooo how you gonna deal with that? the New Deal hired a big crook to go after the other big
crooks, but now who do we have?
Obama can assassinate American citizens without trial, but if he tries to break up a bank his
own aides disobey his direct orders and others call him a communist
(nevermind Bush's direct question to Paulson, about how it came to pass that a company could
get so big its failure would take down the whole system. I guess that makes Bush a commie too.
but i digress. )
Heron
at 12:04 pm So, if I'm reading you right, doesn't your theory suggest that a more successful strategy
would require something like, say, Central governments paying off citizen debt to private industry?
Or is it less a direct debt issue, and more a "we need higher wages to service debt" issue?
VietnamVet
at 12:45 pm Excellent Comments.
Several posts mentioned "Price Stickiness". What is really sticky
is the wealthy holding on to their assets. Two steps are needed: 1) The wealthy
have to take a haircut on their bad debt and casino bets. No more taxpayer bailouts. 2) Government
has to hire workers until unemployment reaches 6%. Simple. The alternative is the Second American
Revolution.
No Know
at 8:42 pm You're on the right track Vet. As a fellow Vietnam Vet (11 Bravo), we both know how
to solve the problem that baffles all of the econ geniuses out there - pay every body with MPC
like we got paid. No banks, no debt…just good old spendable cash for our fine services. Might
have to make the printing presses work a little harder because I doubt anyone would even show
up for what they paid us (and that included combat pay!). Either way, I think you nailed what
the alternative scenario will be.
Today's must read MSM piece is the
WSJ discussion of Inflation:
"The pace of consumer price increases in the U.S. is quickening after being dormant for months.
But a tug of war between the prices of goods and the prices of services, playing out beneath the
surface, could keep inflation from becoming the worry it is in China, Europe and many emerging
markets."
Prices rose 1.6% in January 2011 vs 2010 - the biggest increase in eight months. The key has been
commodities - gasoline, cotton, wheat, coffee, and oil are all higher.
Labor, on the other hand is not. Wages are flat, unemployment is stubbornly high, and hence, prices
for Services are flat to lower. That is keeping a lid on inflation.
Hence, the dueling deflation versus hyper-inflation commentaries:
"Soaring commodities costs world-wide are pushing up prices for many goods, while a slowly
recuperating U.S. economy, soft housing market and a persistently high unemployment rate are holding
down prices for U.S. services.
Goods prices were up 2.2% from a year earlier, paced by jumps in food and energy prices, according
to the Labor Department's January consumer-price index, and are rising faster than they did before
the recession. But services prices were up only 1.2% from a year earlier, far below the 3.4% inflation
rate registered for services between 2000 and 2008.
The opposing pull of prices for goods and services could have a big effect on the course of
U.S. inflation. Federal Reserve Chairman Ben Bernanke is betting that rising prices for goods
like gas and food will not spread into the broader economy. He and many private forecasters do
not expect the U.S. to see the kind of rising inflation now plaguing China, India and other parts
of the world.
Goods inflation has outstripped services inflation for long stretches since mid-2007, something
that hadn't happened since the 1970s. For most of the last 30 years, goods prices had been held
down, in part, by cheap imports from low-wage countries like China. But recently, China and other
developing markets have become huge consumers of commodities, which is putting upward pressure
on American prices for many globally traded goods."
Well worth reading in its entirety.
Ted Kavadas:
RE: 1. Equity markets power higher still…
By a variety of measures the strength of this stock market rally is historically unique. While
I think it will go higher still, it appears to be entering the "parabolic" stage with accompanying
dynamics.
Of great importance is whether the stock market has become an asset bubble, which would have
vast future implications. I am of the belief that the stock market
is in a bubble, albeit one that may not appear clearly obvious.
A while back I wrote of the dynamics of "bubble investing", which I think is highly relevant
now… here is the post for those interested:
9:06 am Maybe we should finally give in and re-define inflation to what it actually is. Inflation
is not rising money supply, it is rising wages. What we are currently going through has nothing
to do with rising wages and in the long run is NOT SUSTAINABLE. So, here is my definition of inflation:
Sustained rising prices brought about by rising wages which are produced by the consumers bothi
WILLINGNESS and ABILITY to pay.
What we are seeing now is not INFLATION, but price spikes brought about by speculation. There
are no supply and demand issues that are currently being created by production needs. When 60%
of all demand for copper is by hedge funds, where is the Demand in that????? I am sorry, I call
bullshit on the inflation arguement. Yes, the price increases are killing us…..we are even deciding
what to buy, what we need vs. what we want. If you want to talk about inflation, go back and look
at 1995-2005. That was true inflation, but no one cared because everyone thought they were doing
better. No one saw rising wages, but we had redefined wages as we mistook wealth for wages.
Everyone started measuring their income based on "expected" growth
in assets, mostly housing assets. Everyone SPENT like they were future millionaires.
No one cared that the prices of houses went up FOR NO GODDAM REASON, no one cared that
the price of cars doubled, no one cared that asset prices went up and everyone needed to have
a better car in their drive way. Everyone needed to have 5 flat screens. No one cared and everyone
was willing, and assumed they were able topay higher prices. That is inflation.
Trust me…..when these bubbles pop we will see where pricing should be. I predict somewhere
about 40% lower than where things are now. Even the correction will probably not be brought about
by supply and demand, it will be brought about by margin calls as people race to get out of trades
before they lose money. No one seems to remember as far back as 2008. Yeah I know, "It's differnet
this time"
No its not. Its the same shit, same people, same game.
b_thunder Says
9:07 am Yes, 80% of the wage earners and most people on fixed income are getting screwed. no wage
increases, no COLA increases, no interest on your savings. WSJ correctly poins out that this is
not 1970s, the wages will not keep up with inflation. At the same time, Obummer touts his "double
the exports" theme, and the Helicopter Ben is 100% lock-step with the administration. The easiest
way to achieve 50% gain in exports is, by the way, to devalue the USD by 50%. And Ben is hard
at work to accomplish exactly that.
This is an attack on the middle class from 2 fronts. Will people continue sit on their a$$es
or will we have our own "Egypt" moment? Or will the GOP sweep 2012 elections and finish what Reagan
and GW Bush started, i.e. deregulation, tax cuts for millionaires, union busting and privatization
of social security – in other words the extermination of the middle class?
I'm with Hugh Hendrey – he recommends that you panic.
mark
9:16 am So what's one to do? Send the PIIGS to the slaughterhouse:
Bini Smaghi Says ECB May Raise Rates on Price Risks
9:17 am No inflation in services even though medical services are probably up double digits. The
artificial calculation of rents distorts the core index too.
mark
9:28 am @rktbrkr
1. If one strips out owner equivalent rent the result is a number little different from all
the other measures of core inflation. 2. Higher demand is causing rents to begin to rise and this
is also being captured in the reported inflation numbers as one would expect.
mark
9:48 am This seems like a reasonable attempt to get at the issue of the influence of housing on
recent official measures of underlying inflation pressure
9:54 am Wage increases in the countries that make a lot of the stuff that Americans buy are running
at 5% to 15% (I've seen estimates for China's major cities between 7% and 10% for 2011). Companies
in these markets don't have the margins to absorb these increases and will need to pass price
increases through.
While it is convenient to blame speculators for commodity price increases, rising prices in
commodities that are not so easy to speculate in (e.g., coal, iron ore, potash) have generally
been trending higher for the last few quarters. Asia is the marginal bulk buyer for many agricultural
commodities and basic materials. If Asia has severe inflation, it may be unduly optimistic to
think that we can avoid some derivative of their problem.
SivBum
9:55 am curbyourrisk is right on…
Just this morning, the Bloomberg talking heads continue to
press on that material cost amounts to 15% of goods while 50% of COG is labor with the rest marketing,
sales and below the line blah-blahs.
Well, news to the pundits is that the cost of material is fixed (except when they replace 24oz
loafs for 20oz loafs, 11oz Fritos for 14oz bags etc).
So is the food and gas costs for middle class households.
curbyourrisk
10:06 am SivBum: Becareful. Anyone who agrees with me on here is usually lambasted by a few of
the everyday commentors.
Irwin Fletcher Says
10:14 am I have never understood why gas and food prices are excluded from inflation calculations.
Can someone explain this to me?
Sechel
10:23 am Great piece! But I do wonder with the globalization of the world economy, how does a
soft labor market keep the price down of a product that could just as easily be sold to a non-American
as an American consumer(With all due consideration to shipping costs, etc)
epupo
10:25 am "I have never understood why gas and food prices are excluded from inflation calculations.
Can someone explain this to me?"
Long story short, the prices of gas and food were considered extremely volatile in the 1970′s
and they decided to change the methodology in the late 70′s to account for this.
General opinion is they did this to "mask" the true inflationary picture. I.E. if you dont
like the result, change the equation.
cswake
10:27 am Irwin, official explanation for the removal of food and energy have to do with their
volatility and screwing up future inflation forecasts for policy decisions.
epupo
10:27 am Great article, but then the bigger problem is
If wages are stagnant, but the prices of goods and services are rising, how in the heck is
this good for the economy? Where does the consumer find the money to save and invest?
I can understand consumers spending; they may fear their stagnant wages and weakening dollar
wont be enough to buy the rising prices of goods and services, but I cant see how this type of
policy helps consumers bottom lines or company profit margins
curbyourrisk
10:32 am Irwin: despite what cswake said, "Irwin, official explanation for the removal of food
and energy have to do with their volatility and screwing up future inflation forecasts for policy
decisions."
The real answer is so they can always control everything. They need to be able to control the
cost of living increases that are required in government spending. THey could never be able to
afford the increases if they actually included what people pay in order to live. They manipulate
the rent input accordingly….minimize the effect in boom times and multiply the effect in decling
asset periods. It is a ll a game, a rigged game. YOU WILL ALWAYS lose. Don;t try to understnd
it, by time you do they change the rules again.
curbyourrisk
10:33 am By the way…the claim of stagnant wages is not really ture. They are declining and have
been for 10 years. On top of that, our wages buy less and we are alos paying LOTS more into the
system further reducing our real wage.
I wish we could all earn Wall Street salaries, but then again…that is when we would have to
deal with REAL inflation.
epupo
10:38 am Barry I am surprised you didnt also mention the WSJ editorial today on "deflation"
Even they took a shot at Bernanke – I hadn't seen that coming
"Once again the Fed seems to have worried about deflation long after the threat had passed
and even as price pressures from its easier policy were preparing to build. Let's hope it turns
out better than it did the last time."
~~~
BR: I am surprised you are surprised.
I prefer reality based data to the dementia of those drunken blatherings.
Robespierre
10:43 am "Prices rose 1.6% in January 2011 vs 2010 - the biggest increase in eight months. The
key has been commodities - gasoline, cotton, wheat, coffee, and oil are all higher."
"Labor, on the other hand is not. Wages are flat, unemployment is stubbornly high, and hence,
prices for Services are flat to lower"
"Federal Reserve Chairman Ben Bernanke is betting that rising prices for goods like gas and
food will not spread into the broader economy."
So to summarize: Things that the poor and middle class must buy: Food and Gas are all increasing
in price at a very fast pace. At the same time their wages (the money they need to pay for those
things) is stagnant.
Therefore, according to Bernanke all is well. The amount of BS spread around by the "experts"
has reached biblical proportions. In the mean time our communist president has decided to eliminate
poverty by well killing the poor (reduction of electricity subsides for the poor). Very soon between
food inflation + freezing temperatures we will be able to reduce the number of poor people leaching
from us taxpayers. Wasn't that called in the past "the final solution?"
ironman
10:52 am Speaking of inflation expectations:
… There's another angle to consider as well. If the U.S. Federal Reserve is indeed using stock
prices to assess how well their Quantitative Easing 2.0 program is going in setting future inflation
expectations, stock prices running hot as they are today would be a signal to them that they need
to take their foot of the QE pedal.
That may also have a negative effect on stock prices in the current economic situation, especially
if future inflation expectations fall as they did in the interval between the Fed's QE 1.0 program
and the current QE 2.0 program to near deflationary levels.
Unless, that is, they've finally been successful in convincing everyone that inflation is here
to stay.
the bohemian Says
11:13 am there appears to be a lot of inflation in silver lately- lol
How the Common Man Sees It Says
11:15 am ….and God gave them over to reprobate minds….
Greg0658
11:44 am Robespierre – points taken – but Hope must prevail starvation will push the mother of
invention for the masters to capture and propel growth or age old mechanisms take over ie destroy
then things must be rebuilt with current techs I Hope NOT
ashpelham2
11:47 am Once again, everyone here seems to "get it", while the people on the street walking past
us, heading to their TV's at home to watch TMZ just seem to want to bury their heads in the sand
about. Had a lunch with a very wealthy couple yesterday in Huntsville, AL, who are looking to
invest some money with me and perhaps allow me to broker their retirement plan at the company
they own as well. Their thoughts on where all of this is headed were DEAD ON to what I said on
here a couple of days ago: this isn't some bubble or short-term event. America is going through
a seminal change right now, from the ONLY world power to less of a player. We are becoming not
the market maker, but more of a participant in the market now. We don't get to call the shots;
we work with the rest of the world in lockstep, and we suffer when they suffer.
This is globalization. Of course America isn't going to benefit financially from this. We were
at one time, a very short time ago, at the top of the food chain. Everyone else in the world saw
us as the enemy and the milk-teet, at once. Globalization means bringing down our standard
of living in line with the teeming billions of starving people...
Except they still hate us, still call us zionists, and still want our money. Who's winning
this thing?
anonymous
12:00 pm "Had a lunch with a very wealthy couple yesterday in Huntsville, AL, who are looking
to invest some money with me and perhaps allow me to broker their retirement plan at the company
they own as well. Their thoughts on where all of this is headed were DEAD ON to what I said on
here a couple of days ago"
so…I have to ask . . .based on what you said- what is their investment plan?
precious metals, farmland?
wunsacon
12:02 pm Since the internet meant knowledge work could (in theory) be done anywhere, my investment
thesis since 2000 has been "short American labor, long everything else".
How the Common Man Sees It Says
12:10 pm This is globalization. Of course America isn't going to benefit financially from this.
===================================
The power brokers will. I guess that is the point that John Q. Public hasn't clued into yet.
…or maybe they are waiting for tangible evidence to surface
rip
1:36 pm What is going on right now is virtually identical to what happened during the "Great Depression".
Then, people with money were living the good life. Those without were having to compete with
all the others for table scraps.
Today, why hire someone for $8/ hr with benefits when you can hire someone for $7 and no benefits?
Outside of that, the choice of words: depression, recession, recovery, wage stagnation, GDP
growth, are pretty much irrelevant to what's going on.
The rich elites are feeling the wind at their backs and seeking the final conclusion of making
labor and services cheaper for them than ever before.
And their government servants are working mightily to renege on all the promises made, and
pension contributions promised.
The bloom is off the rose.
The Curmudgeon Says
2:28 pm This is sort of a dog bites man story. Of course there's inflation. That's what Bernanke
and Co. have been aiming for, and like he says, he can print as many dollars as he likes.
What people also don't get is that Bernanke and Co know full well that the best means of lowering
the unemployment rate is lowering the cost of labor, i.e., reducing the wage rate. Guess what
happens when "goods" increase in price and "services" don't? The cost of labor/wage rates goes
down as relative matter, thereby juicing employment rates. They can't say that this is their strategy,
but they fully well understand that lowering wage rates can be accomplished through outright cuts
or through inflation. They are betting that people are too stupid to understand that if their
wages stay the same yet everything else gets more expensive, then their wages, and thereby standard
of living, have declined.
Lower real wage rates will result in higher employment rates. That's their aim. It seems to
be working, and without the political fallout that would result if nominal wage rates declined.
highside
2:54 pm I am surprised that people are surprised by all this but I guess it is easy to forget
the global context when one is unemployed .
Something around 2bn people have genuinely
entered the global work force in the last 15 years and they have done so at wage rates far below
those existing in the developed world. Furthermore these new entrants have a very high
savings rate. Real wages need to fall significantly to for demand for labour in the developed
world to return to historic levels where that labour competes with the emerging labour. In the
absence of government policy broadly one would expect very very high unemployment in these areas
to lead to falling wage rates in the developed world, significant compensation should come from
large falls in the price of goods and services. However nominal wages are notoriously sticky and
declines have a tendency to lead to social unrest so governments inevitable try to generate inflation
so that real wages fall whilst nominal wages at worst remain stable. Unfortunately this denies
people the benefits of the falling prices in goods and services. People are notoriously subject
to money illusion.
Of course one problem in the background is whilst we in the West talk about deficient demand
and the need to pump up spending it probably fair to say that on a global basis
a greater percentage of the worlds population is in productive employment
than at any other time in modern history its just that for the first time we are the ones who
are not competitive in a wide range of industries.
These are of course broad generalisations, I am well aware there are many areas where the West
has leading positions and skills, although this is not that much compensation to those not exposed
to those areas.
Robespierre
3:56 pm @The Curmudgeon Says
"Lower real wage rates will result in higher employment rates."
Sure that is why underdeveloped countries have such a great rate of employment… Go out of the
country much?
Frwip
5:56 pm Is this at long last this ill-defined, quasi-mystical beast they call biflation ?
I was starting to shift my outlook from mild deflation to mild to moderate inflation. But I
may be wrong, then.
This biflation would prove that there is no transmission belt from prices to income for inflation
to take hold. I can clearly see how this situation can end up affecting credit worthiness (strongly
non-linear) then credit creation. Then, hello deflation again. And, given the structure of debt
and international trade in the US, I would even start to believe in the possibility of an even
more bizarre animal : deflation-depreciation.
Wow. Interesting times, really …
The Curmudgeon Says
6:02 pm "Sure that is why underdeveloped countries have such a great rate of employment… Go out
of the country much?"
That is why, exactly as I said, employment rates in developing countries
(e.g., China, Brazil, India) are increasing, while employment rates in developed countries are
stagnant or in decline–because labor is cheaper there than in developed countries.
Would you like to argue the opposite premise–that employment rates increase in lock-step with
wage rates? That the demand curve for labor, but for nothing else in the world, slopes upward"?
Assuming you go abroad often, do you pay any attention to trends when you do? Then you should
see the teeming legions of peasants leaving subsistence agriculture for jobs in the cities. That
migration represents an increase in the employment rate in case you were unaware.
Robespierre
8:51 pm I guess I didn't elaborated enough. In your comment you implied that to lower employment
salaries needed to go lower. If that was the case then it would be Africa the one taking jobs
from the US (labor is cheaper there). That is not the case. China took jobs from the US (just
like Japan did at its time) because government policies implemented there not just because cheaper
labor. The countries that you mention have tow things: Very strong trade barriers and Large populations.
Most companies didn't go there because cheap labor. They went there
to address the size of those markets without having to be penalized by the trade barriers that
those countries impose. Once there, they realized that production could be shifted
and the export the products to USA and Europe. You are wrong if you think that once the workers
in the US get paid slave wages production will move back to the US. At this time I get the feeling
that the unemployed in the US is being pushed to the said to be soon forgotten. Also, everyone
thinks that the world needs the US consumer for the world to prosper. Was there always a US consumer?
I think that just like jobs have migrated to other countries so have the addressable market
wally
9:25 pm "prices for Services are flat to lower. That is keeping a lid on inflation"
When the price of food goes up and wages go down an equal amount, that is technically not inflation.
That pretty much sums up a lot of things about our present condition.
budhak0n
February 19th, 2011 at 6:38 am This is globalization. Of course America isn't going to benefit
financially from this.
That depends upon your definition of "America".
For me, her greatest strength has never been in a strict adherence to some calculated sense
of overblown capitalistic priniciples ( although they exist in the heart of the matter) but in
her ability to continue to adapt in the face of every overwhelming global wave of change.
The "boomers" are hellbent on their way out to tear down those who they have to hand over their
hard fought gains, and thus a short era of the inevitable wailing about how those who come next
are not worthy, and shall sink the ship is in order.
Pay no mind. We never have :-)
Leave a Reply You must be logged in to post a comment.
"The American Republic will endure until the day Congress discovers that it can bribe the public
with the public's money." -Alexis de Tocqueville
Macro Notes Other central banks try to fight the Fed Peter Boockvar
It's interesting to watch the Fed try to blow up the inflation
bubble at the same time other countries around the world are trying to deflate it.
Last night Chile raised interest rates by 25 bps to 3.5%, the highest since Mar '09 and China
this morning raised reserve requirements again by 50 bps. The Yuan also appreciated to a new high
vs the US$. In their decision, the Chilean central bank said "private inflation expectations are
showing increases, particularly in the short term." ECB member Smaghi hinted that they would have
to raise interest rates if inflation becomes more...
Here's good news for investors in popular bond ETFs such as the iShares Barclays 20+ Year
Treasury Bond (TLT)
and the Vanguard Total Bond Market ETF (BND).
Goldman Sachs (GS)
has a note out this morning forecasting benign inflation this year through 2012.
"In 2011, the perceived risk to US equity prices from inflation vastly overestimates the actual
risk, in our view," wrote GS's strategists.
They write:
"Unlike China where home prices continue to surge, most Americans would not use housing and inflation
in the same sentence. Housing is critical to the consumer inflation outlook because it accounts for
41% of the basket of goods used to measure headline CPI and 49% of the core CPI. High unemployment
means labor inflation pressures are also likely to remain low."
Goldman Sachs is forecasting that:
The Producer Price Index for finished goods will fall on an annual basis
from 4.3% in 2010 to 3.7% in 2011 and 1.3% in 2012.
The Core Consumer Price Index will fall from 1% to 0.7% to 0.5%.
The Personal Consumption Expenditures Index will drop from 1.7% in 2010 to
1.1% in 2011 to 0.9% in 2012.
The report notes that the only significant signs of inflation by a major index has come from the
Producer Price Index for crude materials. It shot up by 16% in January from a year
ago.
Worried about inflation? Neither Federal Reserve Chairman Ben Bernanke nor all those traders
currently dumping gold seem to be, but that may be the best time to make sure you're covered if
prices go haywire.
Some people think the combination of an expansive Fed policy and an expansive fiscal policy
make that inevitable. Oh, and as I'm writing this, the United Nations is announcing that world
food prices are at an all-time high.
The last time consumer prices went crazy, it happened pretty fast: They rose roughly 3 percent
in 1971, 6 percent in 1972, and 12 percent in 1973, according to the Labor Department's Consumer
Price Index data. Back then, it took almost a decade and a deep recession to get that genie back
in the bottle.
"The rapidity with which that ... changes is actually pretty astonishing," says Hans Olsen,
chief investment officer for J.P. Morgan Private Wealth Management.
Olsen's clients already have roughly 25 percent of their portfolios in inflation hedging assets.
"You want to skate to where the puck will be, not to where it is," he said in a recent interview.
But not everyone thinks inflation is looming, or that typical inflation-fighters, such as gold,
are a good place to keep money right now.
"I'm concerned with investors making big bets on gold" and other traditional inflation hedges,
says Dave Loeper of Wealthcare Capital Management in Richmond, Virginia.
Loeper, a former adviser to the Virginia Retirement System, recently studied the behavior of
anti-inflation assets during inflationary periods. He concluded that
the payoffs for hedging inflation might not be worth the extra trading and holding costs.
"Adding gold and real estate to a 60/40 (60 percent stocks, 40 percent bonds) portfolio looks
pretty similar to a 50/50 balanced portfolio," he wrote. "Those extra positions... are certain
to add cost... and do not appear to be worth much unless we do have that perfect storm" of an
unusual and severe double-spike in inflation.
Loeper looked at the most recent three major periods of inflation and observed that there was
not one asset class that produced positive real returns in all three periods. Because gold, in
particular, has been bid up as a safety plan during recent low-inflation years, he's concerned
that it may not perform its typical anti-inflation role when prices rise.
The yes-it's-coming/no-it-isn't debate about inflation can be seen in market prices and consumer
expectations, too. Both bond market swaps and inflation-protected securities seem priced with
an expectation that prices will rise a modest 1.5 percent or so, says Olsen.
But consumers responding to the Conference Board's last survey had a different view: They expect
prices to rise about 5.3 percent in the next 12 months.
So, what's an investor to do? Here are some tips for preparing for a run-up in prices, which
may or may not materialize.
* Let some investments do double duty. Loeper and Olsen agree on this: Some investments
already in your portfolio might protect against inflation without being strictly anti-inflation
plays. For example, if you own a large-cap stock fund, you probably already own shares of Exxon
Mobil Corp. or Weyerhaeuser, two traditional inflation-fighters.
Similarly, Olsen's clients own foreign stocks; they'll be some protection if runaway prices
hurt the U.S. dollar more than other currencies.
* Go long on items you'll use. Not all investments happen in your brokerage account.
If you're a year or two away from buying a new car, lawnmower or retirement house, think about
buying now while prices and interest rates are comparatively low. You can stockpile canned goods
and paper towels, too, but not to the extent that you end up on A&E TV's reality show, "Hoarders."
* Keep carrying-costs low. There are now many inexpensive exchange-traded funds which
focus on commodities and other anti-inflation strategies. Many are available for an annual expense
charge well below 0.8 percent.
* Stay safe. You may lose purchasing power, but you won't lose money by buying individual
Treasury inflation-protected bonds and holding them to maturity. Yields are low, but guaranteed
to rise as the CPI does. The big risk there? If interest rates rise faster than prices, you could
find yourself losing ground to better-yielding short-term securities.
Is inflation the real threat going forward? The answer is nobody really knows for sure.
Inflation is already present in China and emerging markets, but it has
not picked up significantly in the US and Europe. We are likely to see higher energy
prices, but even this is not enough to kick start a severe inflationary episode. Only wage inflation
can do this, and to compare what is going on now with the 1970s is simply wrong. Despite
December job gains, unemployment remains stubbornly high, unions are not as strong as they used
to be, and the structure of the global economy has changed significantly in the last three decades.
Demographics, global competition, the internet, deleveraging, are all factors weighing down inflation.
It is possible that we start importing inflation, but even this is debatable. Bottom line: the great
inflation debate will continue for quite some time, and while you should hedge against all scenarios,
be careful not to jump on any inflation bandwagon. Deflation hasn't died; it might just be hibernating.
My Austrian-minded friend is correct. I should have been
more explicit. However, I did state that the idea of cost-push inflation is "silly" once before in
"Money's Already Quite Cheap"
Cost-Push Inflation?
Someone sent me an email stating that I do not understand push-through inflation
and that is why I don't understand hyperinflation.
Well for starters hyperinflation is not caused by rising prices, hyperinflation is a loss of faith
of currency (typically caused by some political event). The result (not the cause of hyperinflation)
is rising prices. For a further discussion of hyperinflation please see
"Straight Talk" with Economic Bloggers
By the way, there is a subtle error in what "HB" said. Did you catch it?
"Economy-wide , a rise in general prices is only possible if the money supply increases."
An increase in money supply is by far the most likely way there is a general price rise, but it
is not the "only" way, even if we assume that "money supply" includes credit.
Prices Affected by the "Demand for Money"
In a general sense, if the demand for money drops for any reason, prices will rise. Conversely,
if the demand for money rises for any reason, prices will fall.
The demand for money (the desire to hold on to it vs. consume) can change as consumer preferences
change. Demographics is one such reason consumer preferences may change.
For example, someone at retirement age and barely scraping by has a far greater demand for money
than a young person at age 30 with a decent job.
Here is another way of phrasing the same thing: A person aged 30 with a good job is far more likely
to have high demand for the latest and greatest electronic gadget than someone aged 62 scared half-to-death
about running out of money in the near future.
Changing demographics is a very powerful "price deflationary" card at this stage of the game.
Indeed, Bernanke is doing his best to counteract the increased demand for money associated with boomer
dynamics by pumping up actual money supply.
The result so far has not been the expansion of credit that Bernanke wants, but rather a massive
increase in the amount of "excess reserves" held with Fed. (Please see
Fictional Reserve Lending for further discussion).
In short, banks have no real desire to lend except to a small pool of creditworthy borrowers who
have no desire to borrow.
In the real economy, demand for money is high (as evidenced by unprecedented drops in consumer
credit). However, Bernanke (with much help from the Bank of China) did manage to ignite more recklessness
in numerous speculative ventures including equities, leveraged buyouts, and commodities.
Thus, the Fed can increase money supply, but it cannot easily dictate where that money goes or
even if it goes anywhere at all.
Frugality Revisited
The "Demand for Money" construct forms the basis for many "frugality
arguments" I have presented over the years.
It is a topic much in need of discussion and understanding, especially by various inflationistas
calling for hyperinflation later this year. The good news is we only have 11 more months to see them
proven wrong. The bad news is they will simply bump up their target by a year or two.
Cliff Event In Japan
Meanwhile, Japan is the perfect example of strong demand for money in spite of amazingly low interest
rates and in spite of all efforts by the Japanese central bank to cause inflation.
Nonetheless, Japan is at a state in its economy where it has consumed all of its savings and then
some just as its retirees need to drawn down on savings that the government spent building bridges
to nowhere in foolish attempts to fight deflation.
As a result of that "cliff event", strongly rising import prices in conjunction with a rapidly
falling currency will likely hit Japan before the same thing hits the US.
Biflation (sometimes mixflation) is a state of the
economy where the processes of
inflation and
deflation occur simultaneously.[1]
The term was first introduced by Dr. F. Osborne Brown, a Senior Financial Analyst for the Phoenix
Investment Group.[2] During Biflation, there's a rise in the
price of commodity/earnings-based
assets (inflation) and a simultaneous fall in the price of debt-based assets (deflation).[3]
The price of all assets
are based on the demand for them versus the volume of money in circulation to buy them.
With biflation on the one hand, the economy is fueled by an over-abundance of
money injected into the economy
by central banks. Since
most essential commodity-based assets (food, energy, clothing) remain in high demand, the price for
them rises due to the increased volume of money chasing them. The increasing costs to purchase these
essential assets is the price-inflationary arm of Biflation.[4]
With biflation on the other hand, the economy is tempered by increasing
unemployment and decreasing
purchasing power. As
a result, a greater amount of money is directed toward buying essential items and directed away from
buying non-essential items. Debt-based assets (mega-houses, high-end automobiles and stocks) become
less essential and increasingly fall into lower demand. As a result, the prices for them fall due
to the decreased volume of money chasing them. The decreasing costs to purchase these non-essential
assets is the price-deflationary arm of biflation.
I guess now we know that the Fed has the tools to prevent deflation.
Recent research by
Ke Tang and Wei Xiong
documents that the correlation between the price changes of different commodities has been increasing
over time. Here for example is the correlation between the changes in oil and copper prices. These
two prices were essentially uncorrelated in 2001. Back then, in a week when oil prices went up, the
price of copper was just as likely to go up as down. Over the last few years, however, the two prices
have been much more likely to move together.
Rolling-window correlation between oil prices and copper prices. Graph plots correlation between
(1) change in natural log of dollar price of West Texas Intermediate over previous 5 business days
and (2) change in natural log of the dollar price of copper cathodes over previous 5 business days,
as estimated from the most recent 200 business days as of each indicated date, Oct 28, 1999 to Nov
5, 2010.
The recent positive correlation of course does not mean that an increase in the price of oil
is what's causing the price of copper to go up. Instead, it just signifies that there are some common
factors affecting the two markets in a similar way.
Another changing correlation over time is that between commodity prices and the exchange rate.
Here for example is the correlation between the weekly change in the dollar price of oil and the
weekly change in the number of dollars you'd need to buy one euro. In 2001, the correlation was actually
negative for a while, because news of a weakening U.S. economy would cause both the dollar to depreciate
and the dollar price of oil to fall. In recent years, however, the correlation is positive and quite
strong. In the year ended September 1, a 1% depreciation of the dollar would typically be associated
with a 1.3% increase in the dollar price of oil or copper.
Rolling-window correlation between oil prices and exchange rate. Graph plots correlation between
(1) change in natural log of dollar price of West Texas Intermediate over previous 5 business days
and (2) change in natural log of the dollar/euro exchange rate over previous 5 business days, as
estimated from the most recent 200 business days as of each indicated date, Oct 28, 1999 to Nov 5,
2010.
The dollar strengthened against the euro with last spring's sovereign debt concerns, but has
slid back dramatically since this summer. My view is that the
anticipation of the Fed's latest quantitative easing measures has been a key factor in that slide.
It's interesting to look at how big an increase in commodity prices we would have expected given
the size of the dollar depreciation and given the size of the recent correlation. It turns out that
the recent run-up in oil prices is no mystery, given the magnitude of the dollar depreciation.
Actual and predicted oil prices. Solid line: actual price of West Texas Intermediate (in dollars
per barrel), Sep 1, 2010 to Nov 5, 2010. Dashed line: Sept 1 price times exp(1.3 times change in
natural logarithm of exchange rate since Sep 1).
Ditto for copper prices. Note that the path for "predicted prices" in these two graphs is identical,
since both are driven by the same realized exchange rate path.
Actual and predicted copper prices. Solid line: actual price of copper cathodes (in cents per
pound), Sep 1, 2010 to Nov 5, 2010. Dashed line: Sept 1 price times exp(1.3 times change in natural
logarithm of exchange rate since Sep 1).
I feel that there is a pretty strong case for interpreting the recent surge in commodity prices
as a monetary phenomenon. Now that we know there's a response when the Fed pushes the QE pedal, the
question is how far to go.
My view has been that the Fed needs to
prevent
a repeat of Japan's deflationary experience of the 1990s, but that it also needs to
watch
commodity prices as an early indicator that it's gone far enough in that objective. In terms
of concrete advice, I would worry about the potential for the policy to do more harm than good if
it results in the price of oil moving above $90 a barrel.
And we're uncomfortably close to that point already.
Crude Oil
$84.73
▼0.15
0.18%
23:12 PM EST - 2010.11.12
Posted by James Hamilton at November 10, 2010 07:29 AM
Comments
We see the same thing in
stock prices - the decline in prices from April 2010 up to September 2010 corresponds is very
much correlated with the timing of the end of QE1 (in March-April 2010) with the credible expectation
that the Fed would initiate QE 2 beginning at the end of August 2010.
Oil over $90/bbl would be normal considering the current value of our currency. Expect oil in
the $90 range before the end of next year and if QE2 is not offset by tax cuts or other supply side
policy changes expect oil to be pushing (or above $100 by the end of next year).
Posted by: Ricardo at November 10, 2010 07:59 AM
I suppose this means that you diagree with Prof. Krugman on this question then.
The Fed can "watch commodity prices," but it is unlikely to do anything about them as long as
unemployment remains high.
Exit from stimulus requires success in creating sustained real growth. Are you suggesting the
Fed might scale back or abandon QE2 at a 9.5% unemployment rate? This seems highly unlikely. How
would markets react? I suspect they would be quite upset indeed...
The point is that once Bernanke starts writing editorials extolling the virtues of the wealth
effect, he is "on the hook" for the market's direction. Any large decline in stock prices, and ensuing
rise in unemployment, would be blamed on a Fed policy "error".
Posted by: David Pearson at November 10, 2010 08:41 AM
JDH: I'm wondering what you think of this research on forex rates and commodity prices in the
context of current commodity price run-ups.
http://www.voxeu.org/index.php?q=node/1631
I am not sure whether the series are cointegrated or whether there is a causal or merely forecasting
effect, but presumably there is some transmission mechanism at work here.
Posted by: Robert Bell at November 10, 2010 08:43
AM
Where does the $90 a barrel comes from? Is it derived from some sort of model on the impact of
oil price on consumption or investment?
Robert Bell: Regardless of whether the series are cointegrated, the correlation between
changes over a given fixed time interval is always a well defined concept and is what all of the
analysis above uses.
Posted by: JDH at November 10, 2010 08:58 AM
I have never understood the logic behind core CPI as a measure of inflation. It excludes food
and fuel from the index because they are volatile.
Isn't that precisely the wrong reason. Shouldn't the most volatile sectors of the economy be the
first to feel pressure from inflation?
If I were looking for signs of inflation I would look in food fuel. And there they are. It worries
me that Bernanke has not acknowledged their existence.
Check out Billion Prices Project. It is real time data of prices for different countries including
USA that are...
Statistics updated every day
-5 million individual items
-70 countries
-Started in October of 2007
-Supermarkets, electronics, apparel, furniture, real estate, and more
As you can see Ricardo, the fluctuations in the price of oil over the past year (move your cursor
over the "1y" button) make your predictions (hunches or calculations) seem a little tame.
No question oil is an important commodity, but I wonder if there aren't others that are overlooked
here.
Food prices, (like oil, too volatile to count in the CPI we are told), seem to be moving up and the
commodities associated with non-discretionary consumer good?
With inflating (but of course unrecognized) food prices we get declining discretionary spending...so
a step over that little deflationary hurdle, "the price will be lower tomorrow, so wait." to "no
price will be low enough, so forget it." This splains why I am not shopping for the Bugatti.
Hard to believe that the current compilation, ~1-2% inflation, in an economy that is 70% consumer
spending, spending tied to house prices, prices now falling...is tied to reality.
On the ground, it feels (and appears...and sounds and smells) like deflation, you know?
Tis a variant of NoHousingBubbleHere maybe...or maybe the continuing denial.
The FED can indeed generate some extra inflation in the price of scarce resources. What it can't
do is trigger inflation in resources that are not scarce: mainly real estate, and labor.
Surely you have to take some interest, James, in the pronounced changes observed in extraction
rates for both Copper and Oil the past 10 years. Correlation between price and those rates is both
strong, and sustained. Correlation is even further enhanced when one introduces declining resource
quality, in particular declining ore grades of copper, and the notable introduction of non-conventional
oil into the broader supply of conventional oil.
No question that reflationary policy in the current phase (Q3 2007 - Q3 2010) has enhanced USD
denominated prices for commodities. But, how successful would this have been without the geological
constraints for both copper and oil which are, by the way, quite well established now in the data.
If the Fin Mins of of 2nd tier nations make direct purchases of dollars on the forex exchange,
as they are threatening to do, this will drive the value of the dollar back up. Consequently, assuming
that the oil producers continue to manipulate supply, the price of oil should go back down, and the
oil producers have been clear about what they see as a fair price, a price which was at $70. per
barrel when the dollar was about 10% (?) higher than it is now.
So, inflation concerns would thereby shift to currency monetization from 2nd tier currencies.
Guido Mantega has said that Brazil will do whatever is necessary to keep the real from further appreciation.
And similar statements are coming out of Asia daily. It would seem then, that a more interesting
question might have to do with whether Bernanke & Co. are planning to spread the reserve currency
responsibilities across a wider range of currencies. This because dollars would need to be removed
from the global economy to accommodate the influx of reals, wons, bahts, ruppees, yuans and etc.
Gold is a good proxy for commodity prices. A rule of thumb for oil to gold that has been true
for about 100 years is that an ounce of gold will run roughly 15 times a bbl of oil. The ratio right
now is about 16:1 because gold has run up faster than oil. Oil demand is also dragging the price
down slightly. Demand will not have a lasting effect because the producers will adjust their supply.
A gold price of $1,350 in a perfect world would imply an oil price of $90/bbl. Gold is around $1,400
and climbing so there is significant monetary pressure for oil to be above $90/bbl.
Oil at $100 next year is dependent on whether the FED controls the money supply. Indications are
that the FED will continue to expand the money supply driving gold toward $1,500 and oil toward $100/bbl.
Posted by: Ricardo at November 10, 2010 10:42 AM
i have to say, in spite of my respect for your erudition, prof. hamilton, i disagree entirely
with your conclusion.
that *anticipation* of QE might have fueled a speculative rally which predominantly flows into
commodities thanks to reflexivity -- that i think we can agree on.
that QE *itself* is an inflationary phenomena remains totally unevidenced -- to the contrary,
observe core inflation readings in the context of QE1 and QE lite, please!
you're taking a speculative leveraged flows into notoriously volatile raw inputs and end-of-the-capital-structure
financial instruments and from that construing that a fed measure *that hasn't begun yet* causes
inflation? color me bemused.
i think it far closer to the truth to say that the fed plans to exchange some very-cash-like assets
out of the private sector and replace them with cash itself. that very minimally alters the character
of net private sector financial assets, and should not be expected to do much of anything -- as indeed
QE has in the past rarely if ever accomplished much of note outside of a liquidity crisis. if wall
street wants to take the anticipation of QE as an excuse to flood speculators with call money, taking
advantage of popular misconceptions of what QE is and what it can do to create standard-issue speculative
demand for assets, that's another thing entirely.
Posted by: gaius marius at November 10, 2010 10:56 AM
Were you also confident that $150 oil was inflationary? Wages lead inflation. Not speculative
bets in markets.
Posted by: MarkS at November 10, 2010 11:04 AM
Adjust commodities prices for the US$, as well as adjust the US$ for the US$- and CPI-adjusted
price of gold.
You will find that (1) basis '73, the US$-adjusted CRB Index is near the lows of the past 25-35
years; and (2) since the nominal price bottom in gold in '99 and '01, the US$ has fallen 80%+ in
adjusted gold price terms, which is a bit short of the similar decline in the fiat digital debt-money
US$ at the nominal gold price peak in '80. A currency depreciation of this scale is about as bad
as it gets in relative purchasing power terms to the historic yellow relic.
Moreover, take a look at the trade-weighted broad US$ index, which is trending around par after
having been ~30% above par at the early '00s high. There has been, nor will there occur a "US$ crash";
it has already happened, and gold is spectacularly overpriced and levered to the Moon.
Similarly, and not coincidentally, the trade-weighted US$ index of other trading partners is 27-28%
above par, or approximately the level below par for the US$ index for major currencies (with the
broad index splitting the difference, by definition).
The trade-weighted US$ is above par for countries where US supranational firms are investing tens
of billions of US$'s in their subsidiaries and contract producers to produce goods for the US market
and intra-Asia and the rest of the world; therefore, trade and capital flows and the demand for US$'s
is relatively high versus the Eurozone and Japan where comparative trade flows have fallen over time
(Japanese and European auto and parts production having moved to the US, for example).
Moreover, the US firm-induced faster growth of Asia means faster growth of demand for US$-denominated
commodities, which require Asian firms and central banks to accumulate US$'s to buy commodities.
Additionally, the massive tens of billions of US$'s invested and deposited in Chinese banks by
US firms over the past 10-15 years necessarily requires the PBoC to accumulate US gov't and agency
paper against reserves on behalf of supranational US firms that are unable to directly convert US$'s
to Yuan to shift US$'s elsewhere throughout Asia, back to the US, or elsewhere.
And given that China's money supply is growing at more than 2 and as much as 3 times real GDP
growth, creating the greatest credit and fixed investment bubble to GDP in world history, were the
Yuan to be convertible it would be collapsing from the flood gates of credit having been opened by
Chinese state-run banks in the past 2-3 years.
Given the virtual GDP PPP, global peak oil production having occurred in '05-'08, and oil consumption
and import parity between the three major global trading blocs, the long-term trend is for major
fiat currencies to trend around par with one another.
As debt deflation continues and global trade slows inexorably hereafter from structural resource
constraints and limit bounds from heavy debt service vs. trend GDP growth rates, the trade-weighted
US$ index for major currencies will trend toward par (from 72-73 today), the broad index continue
to trend around par, and the other trading partners index will decline to par, with US$ repatriation
by large US firms occurring with falling commodities prices coincident with global deflationary recession
and stock bear markets.
The central bank cannot print abundant supplies of scarce resources, particularly cheap oil. Neither
can central banks encourage the creation of more fiat digital debt-money bank deposits at infinite
terms and compounding interest in perpetuity to resolve the burden on the private sector of excessive
existing levels of debt and debt service costs on the bottom 80-90% of households.
Only one solution ever exists at the debt-deflationary Schumpeterian depression phase of the Long
Wave Trough: a reduction in public and private debt to a level that can be supported by a sustained
level of net energy per capita, which in turn can support a sustainable level of labor product, production,
and capital replacement; but that level is far below the 3-3.5% real growth and 5-7% nominal growth
we have come to perceive as "normal" with the abundance of cheap liquid fossil fuels since the mid-
to late 19th century.
Plentiful supplies of cheap liquid fossil fuels over the past 100-150 years have conditioned us
to delude ourselves into believing that Nature is a subset of the economy when the precise converse
is the inescapable fact. Fiat debt-money can only grow in excess of wages, production, and physical
plant and equipment only as long as available net energy allows it; we passed this critical point
in the mid- to late '00s, and hereafter private real growth per capita is impossible, and any nation-state
or regional growth will occur at the expense of other areas.
Therefore, the growth of the Anglo-American imperial trade regime, i.e., "globalization", is over,
although most of us do not yet know it. China-Asia's growth is largely derivative of massive US FDI
and trade and capital flows to and within Asia. Once global growth again resumes its decline and
a deflationary trajectory, China-Asia will crash.
Stock prices are discounting 4-5% nominal growth and 2-3% real growth; but 0-0.5% growth is likely
the best that will occur, requiring a scale of asset deflation/liquidation and wealth consumption
over the next 2-3 to 6-9 years few of us can imagine possible.
I am confident that $4.00/gal gas was inflationary. Falling back to $2.33 was deflationary.
Posted by: Right Wing-nut at November 10, 2010 12:04 PM
gaius marius, and others: My concern is not so much inflation as Fed-induced changes in
relative prices.
Posted by: JDH at November 10, 2010 12:33 PM
What government, in the entirety of human history has ever failed to inflate a paper currency.
I'll give you a hint, the answer is Z-E-R-O.
Every single paper currency in the history of the human race has ended in hyperinflation. There
are ZERO, absolutely ZERO exceptions. Every single one in the history of the entire human race.
Commidities are priced in dollars. Starting around 2001 our Fed, Treasury and gov't took on a
weak dollar policy. Thus, of course QE and any other weak dollar policy will lead to increases in
commidity prices as the dollar, for which its priced in, falls. Furthermore, weak dollar policy shifts
captial into inflation safe-havens like gold and oil thus creating demand/supply disequilbrium and
further increasing commodity value.
Posted by: idgafkurt at November 10, 2010 01:56 PM
(First visit, very nice post).
I think that the Fed making it easier to change prices in the recent "unexpected" inflation is
actually an advantage.
Those that go up relatively more clearly indicate the areas where additional productive investment
can lead to higher ROI, and more sustainable jobs. In fact, it's not knowing or being able to guess
where the future "above average" demand growth is going to come from that is a major factor is stopping
businesses from investing or employing more folks in that unknown area.
What other way can the nominal price of housing rise so that only an "acceptable" number of homebuyer
mortgages go into default?
Yet to be seen. As people see non-discretionary prices rise and feel priced out of adequate returns
on investments, they'll need to save more. They reduce consumption and switch to inferior goods.
There'll be Giffen behavior and further drive for liquidity.
"I suppose this means that you diagree with Prof. Krugman on this question then."
I thought Krugman's point was that global QE, with little change in exchange rates, would not
raise the relative price of commodities. To see who is right, we may need to wait until the euro
collapses under pressure of under-priced Chimerican traded goods.
If we look at rising commodity prices alongside dollar depreciation (since last summer), isn't
the simplest explanation strong demand from developing nations?
Also, you said that you were worried about "Fed-induced changes in relative prices." Doesn't this
concern implicitly assume that the market currently has the relative distribution of prices right
and that any deviation would distort output? I suppose it's possible that the current distribution
of relative prices has it about right, but quite honestly I'm not sure I'd want to bet the recovery
on it. Afterall, misleading price signals in the housing market are what got us into this mess, so
I'm a bit leery of assuming the market always gets relative prices right. I think a better gauge
of when the Fed's gone far enough would be to wait and see when further Fed loosening results in
inflation, but no measurable increase in output. I really don't care if inflation surges to 8% if
it's accompanied by 5% real GDP growth. We can deal with 8% inflation later. That's a problem we
know how to fix. The only value that I see in looking at commodity prices is if those prices are
also signals that additional inflation will not result in increased output. That could be true, but
it's not an argument that I've seen fleshed out anywhere.
In other words, if commodity price rises are an early warning of another asset bubble, then it might
be time to take away the punch bowl. But if commodity prices are rising because of strong demand
from developing countries, then this ought to be a good news story. Nice post. Gets the old gears
grinding.
Posted by: 2slugbaits at November 10, 2010 02:52 PM
"The point is that once Bernanke starts writing editorials extolling the virtues of the wealth
effect, he is "on the hook" for the market's direction. Any large decline in stock prices, and ensuing
rise in unemployment, would be blamed on a Fed policy 'error'."
It seems clear a major goal of the Fed is to hold up overvalued asset prices. That was especially
evident from Ben's response to the SocGen scandal.
That would be the same 'wealth effect' that helped induce U.S. consumers to profligacy that was
reduced only when the apparent wealth was deflated to more realistic values. This policy of doing
what pleases the people temporarily, rather than what benefits them longer term is getting old. Ben
voted with Alan 100% of the time when a similar strategy was employed after the dotcom bust. Of course,
in the long run, we are all dead, but unfortunately, many of us are still alive and now reapng the
consequences of those earlier policies.
Posted by: don at November 10, 2010 03:00 PM
"we know there's a response when the Fed pushes the QE pedal"
Several researchers have published on the subject of QE and concluded that it has no impact. The
researchers include: the Bank of Japan, Galbraith, Bezemer & Gardiner, Congdon, Ritholtz, and others.
So JDH, where is your data and your analysis - or are you just an apologist and cheerleader for the
Fed? If you are an apologist, you should inform your university and your students that your comments
on monetary policy are not based on fact, and you don't bother to compare your statements to other
economic researchers. In short, inform them that you don't follow the scientific method in the area
of monetary policy.
Then there's your statement that "the Fed has the tools to prevent deflation". Since you may not
follow the scientific method in the area of monetary policy, let me inform you that deflation is
defined as a decline in the general price level. Your information on copper, oil, and Euro$ has nothing
to do with general price levels. Or is this another example of monetary comments that are not based
on fact?
Posted by: Mike Laird at November 10, 2010 04:28 PM
JDH: I meant the relationship of forex rates and commodity prices, not the relationship between
commodity prices, and whether or not the recent action in such prices is also distorting exchange
rates as well, and whether or not that matters.
Posted by: Robert Bell at November 10, 2010 06:29
PM
Funny, I thought QE was ineffective in a liquidity trap. :P
Posted by:
Carl Lumma at November 10, 2010 07:29 PM
Well said JDH. It isn't possible for the FED to buy $600 billion in bonds without distorting relative
prices. They are essentially creating the fiction that there exists $600 billion more savings--that
IS what bonds should be bought with--than actually exists.
They are rendering the co-ordination of investment & savings impossible. They are causing over-investment
(relative to actual savings), reflected by inflated prices of investment goods such as raw material.
They are also fostering speculation in those inflating goods by destroying low risks investment alternatives
like CDs.
In regards to this: "I really don't care if inflation surges to 8% if it's accompanied by 5% real
GDP growth. We can deal with 8% inflation later."
Are you suggesting here, in this national period of wishful-thinking, that you can envision sustained
real GDP growth of 5% from our service-based economy. Is there a precedent that suggests any such
possibility?
And I don't understand how so many smart people can repeatedly use the term 'inflation', without
making a distinction between 'price' inflation, and 'wage' inflation. There is currently a paradox
involved where wage inflation comes in conflict with the necessity of increasing exports. How does
a nation with less than competitive labor costs, that have already been stagnant for decades, have
wage inflation while becoming more competitive globally. I don't mean to single you out on this,
but it does get a little astray at times.
The rise in the dollar price of internationally traded commodities is best understood as a fall
in the relative value of domestic production inputs. What is happening to the dollar price of Chinese
labor and Indian real estate? Capital is fleeing the US economy and flooding into developing countries.
The dollar-based global economy is experiencing a high rate of inflation.
But the fed targets core CPI which is heavily weighted towards goods and services with a high
domestic content - specifically excluding food and energy which are largely traded internationally.
Hard to see how higher commodity prices are a good thing for the economy. Higher input prices means
lower profit margins and reduced sales (except for commodity producers). Great, that's really going
to help.
Posted by: John Smith at November 11, 2010 04:18 AM
Don't just look at commodities, look at stock prices. Same story - stock prices up since QE2 was
signalled.
QE leads to asset-price inflation. Bernanke's justification for QE2 was that, by increasing asset
prices, the rest of the economy would benefit. This is trickle-down economics at its worst. Why would
a progressive economist believe in trickle-down economics?
Macro, by looking at aggregates, can implitly make an assumption of uniformity when such is not
the case. Inflation does not have to uniformly affect all prices. Inflation in commodities does not
mean that there is or will be inflation in wages. With QE, asset prices are going up, not wages;
there is inflation in assets, none in wages. The rich, who own assets, are doing well, by QE; everyone
else is not.
Why on Earth would a progressive economist support QE? I just don't get it.
Professor,
One week... and the evidence is in on the relationship between QE2 and commodity prices?? One week
and we can draw our economic conclusion between on the relationship between QE2 and inflation?? You
can't be serious...
Beside, this post completely miss the point when it says the Fed wants to "create" inflation".
The Fed wants to increase economic growth, which may lead to a "trend" level of inflation, but the
FEd does not want to increase inflation everything else remaining the same as this would be an absolute
disaster for the economy. Imagine paying way more for gasoline, food, utility etc while your personnal
income stays the same. How would you feel about that? Not so great I think. And yes, the Fed knows
it quite well. Framing the debate in term of the "Fed wants to create inflation" completely miss
the point.
Finally, do you see a contradiction between your previous posts indicating that QE could have
a small decreasing effect on longer term interest rates and your current assessment to the effect
that the Fed is creating inflation? How could longer term treasury yields decrease if the Fed is
creating huge inflation with QE? Am I missing something or there is a flagrant contradiction in your
logic?
Posted by: Qc at November 11, 2010 05:08 AM
Qc: You refer to one week of evidence, yet the graphs above you compare two months actual
with predicted. You say "this post entirely misses the point when it says the Fed wants to 'create
inflation'" (quotation marks yours). The word "create" and the word "inflation" appear nowhere in
the text. I discussed nominal versus real interest rates at length
here
Your style of argumentation gets a little old.
Posted by: JDH at November 11, 2010 06:08 AM
They are essentially creating the fiction that there exists $600 billion more savings--that
IS what bonds should be bought with--than actually exists.
i disagree! those bonds are both a debt and an asset -- they represent the government's obligation
and private sector savings. so does cash. the difference is minimal (particularly in a market with
a healthy repo mechanism.) that's why there is no inflationary impact and precious little distortion.
again, don't confuse a speculative balance sheet expansion in stocks, junk debt and commodities
with something the fed does. if QE distorted prices much, the japanese would have discovered as much.
Posted by: gaius marius at November 11, 2010 06:39 AM
The rise in the dollar price of internationally traded commodities is best understood as a
fall in the relative value of domestic production inputs. What is happening to the dollar price of
Chinese labor and Indian real estate? Capital is fleeing the US economy and flooding into developing
countries. The dollar-based global economy is experiencing a high rate of inflation.
i would argue, mr williams, that it is ZIRP and not QE that we're seeing the effects of here --
that is, the united states has become the home of global carry trade trade funding. as it's become
cheaper to fund in the US, the yen has come under persistent upward pressure as yen-funded trades
are unwound and dollar-funded trades are put on, weakening USD.
in other words, this is a standard-issue carry-trade-funded speculative inflation cycle. and it
will come a cropper as all do, indifferently to QE.
Posted by: gaius marius at November 11, 2010 06:44 AM
I agree re: oil and industrial metals.
However, recent increases in grains and softs have been more driven by supply issues.
On oil understand that it is pulled out of the ground and does not really have a shelf life. While
it is consumed, it is not like food that is both subject to the elements and to spoiling. This makes
it more stable than such commodities as food.
But oil is not as stable as gold for example because gold is not destroyed in its use. Almost
all the gold ever mined is still in circulation in some form. But that said both react to changes
in currency. Becuase of the nature of oil production it has a slight lag behind gold in price changes.
For this reason you can use the price of gold to make judgements about the direction the oil price
will move. You cannot get right down to the minute or day but you can develop trends.
But our monetary authorities would have you believe that the value of the currency has no impact
on oil prices. Professor Hamilton has done a good job of demonstrating that there is a connection
between the currency value and the price of oil.
Posted by: Ricardo at November 11, 2010 07:40 AM
Professor,
You are right, I should have used your direct quotation: "I feel that there is a pretty strong case for interpreting the recent
surge in commodity prices as a monetary phenomenon."
So the Fed "creating inflation" is not a direct quote, but would you argue that it was totally
misleading relative to what you said in your post?
I do not dispute that my style of argumentation may get a little old... I might just be afterall
an old guy because I refuse to live in a gold standard economic framework of "crowding out", "money
printing", "currency dabasement", "precious capital leaving the country through the current account
deficit", "US Government running out of money", etc.
Almost everything we learned in economics in Universities is gold-standard era economic thinking...
and it took me a while to unlearn these things. I would urge you to read stuff coming out from the
Department of Economics of the University of Missouri-Kansas City (Wray, Kelton, Black, Forstarter)
to learn more about non-gold standard macroeconomics.
Posted by: gaius marius at November 11, 2010 08:00 AM
Let me see, cost of eating, shelter, clothing, electricity, oil and gas is up big. Hmmm? Discretionary
spending? With what? The Fed is good at electing Republicans! We might say the Fed has caused a deflationary
spiral in terms of Dems left in D.C. and Statehouse! LOL
This far out after the oil shock, the economy, especially its commodity planners, have a fairly
direct connect between oil flows and American consumer constraints. The core rate excludes the very
thing that the economy is intensely focused on, gas lines! So the economy is training itself to contract
in synchrony upon restrictions in energy flows. What is normally a two step process has become a
one step process, but the Fed is unaware of this.
Posted by: Matt Young at November 11, 2010 10:11 AM
Based on what I see from the specs open interest this rise in commodity prices is no different
than in the summer of 2008. The illusion of of something happening due to QE2 has led to huge speculation
in commodity prices. After implementing higher margin requirement (which they did not do in 2008
for some strange reason) prices fall....if this was real demand lead prices would not have fallen.
This is pure speculation whichs leads to higher risk in extrapolating higher prices in the future
when actual demand outside of speculation is not rising.
Qc -- "So the Fed 'creating inflation' is not a direct quote, but would you argue that it was
totally misleading relative to what you said in your post?"
Your quote above misses the point. Increasing prices for commodities
appears to be a result of QE2. However, it is not correct to call this "inflation".
As I understand it, the professor's point here is that we have some evidence that QE2 impacts
RELATIVE prices. Clearly wages are not up, housing costs are down, etc.
Inflation is not the only bad thing that can come from QE2 or other forms of monetary expansion.
And one bad thing would be increasing relative prices of commodities. At some point, even if inflation,
broadly measured, does not appear, distortions in the economy in the form of changing relative prices
may be the signal that further monetary expansion will be more harmful than helpful. And that seems
to be the case right now.
Posted by: Anon at November 12, 2010 09:13 AM
anon It's possible that anticipation of QE2 helped push up copper prices; but it's also
possible that Chinese demand over the last 3 months pushed it up as well. And today we read that
prices for copper, lead, zinc, nickel, aluminum and tin all plunged today on concerns about a falling
off in Chinese demand.
JDH's chart begins 1 September, which presumably corresponds to the time when the Fed started
to talk seriously about the prospect of a QE2 action. The problem is that by early September copper
prices were already 2 months into a rather steady price increase. So if QE2 explains the rise after
1 September, what explains the rise that began in mid-summer? Well, one obvious candidate might be
the dollar depreciation, which also began in mid-summer. In other words, I don't have a problem with
the claim that dollar depreciation explains the price rise in commodities like copper; but what's
less convincing is anything suggesting that the dollar depreciation that began in July is the result
of QE2 speculation. I think you could make that case if the dollar depreciation and commodity price
rises both began in (say) October; but the turning point was in July. That just seems too early to
be plausibly explained by QE2 speculation.
BTW, it might just be a coincidence, but Obama's in South Korea for a trade talk that's going
badly. Meanwhile the Pentagon gets a Wednesday morning briefing from the industrial base analysts
outlining strategic concerns across the US industrial base about not
being able to meet production targets because suppliers are unable to procure key commodities because
China has been gobbling up every contract in sight. And it's not just metals contracts.
Then the next day China hints at a drop in future demand.
Posted by: 2slugbaits at November 12, 2010 11:42 AM
Anon,
But if QE increase commodity prices and does not have any other effect, why would we ever want QE
in the first place? Paying less for gasolines and food would be much better than paying more everything
else remaining the same.
I know mainstream economists would respond that the goal of QE is not to increase commodity prices
per se, but rather to decrease real interest rates -through its effect on inflation- so to encourage
people to consume. I am sorry but no consumers think this way. Inflation expectations run currently
at close to 3% according to suvey making expected real interest rate extremely low, but consumers
are still in debt repayment mode, not in leveraging mode. This is a good thing at the invidiual level,
but it has a disastrous effect at the macro level. This is precisely why the government has to offset
debt reduction by the private sector through deficit spending (mostly done anyway through the automatic
stabilisers).
As for my view about QE, you can safely hit the snooze button. QE
is just like swapping T-Bills for longer term bonds. Would anyone make a big fuss
if the Government would decide to replace longer term bonds in circulation with T-Bills? Likely not.
In fact, we would likely not even heard of it. We should welcome QE exactly the same way.
Posted by: Qc at November 12, 2010 12:18 PM
gaius marius,
What you state is clearly wrong. There is tremendous inflation in the
price of investment goods: stocks, bonds, raw materials. Ask yourself why these things are so inflated
in price relative to consumer goods.
You are remarkably confused to imply that when the gov't borrows money that the Fed creates out
of thin air private savings are created.
Right now, we are in the middle of deflation. The Global Depression we are experiencing
has squeezed both aggregate demand levels and aggregate asset prices as never before. Since the credit
crunch of September 2008, the U.S. and world economies have been slowly circling the deflationary
drain.
To counter this, the U.S. government has been running massive deficits, as it seeks to prop up aggregate
demand levels by way of fiscal "stimulus" spending-the classic Keynesian move, the same old prescription
since donkey's ears.
But the stimulus, apart from being slow and inefficient, has simply not been
enough to offset the fall in consumer spending.
For its part, the Federal Reserve has been busy propping up all assets-including Treasuries-by
way of "quantitative easing".
The Fed is terrified of the U.S. economy falling into a deflationary death-spiral: Lack of liquidity,
leading to lower prices, leading to unemployment, leading to lower consumption, leading to still
lower prices, the entire economy grinding down to a halt. So the Fed has bought up assets of all
kinds, in order to inject liquidity into the system, and bouy asset price levels so as to prevent
this deflationary deep-freeze-and will continue to do so. After all, when your only tool is a hammer,
every problem looks like a nail.
But this Fed policy-call it "money-printing", call it "liquidity injections", call it "asset price
stabilization"-has been overwhelmed by the credit contraction. Just as the Federal government has
been unable to fill in the fall in aggregate demand by way of stimulus, the Fed has expanded its
balance sheet from some $900 billion in the Fall of '08, to about $2.3 trillion today-but that additional
$1.4 trillion has been no match for the loss of credit. At best, the Fed has been able to alleviate
the worst effects of the deflation-it certainly has not turned the deflationary environment into
anything resembling inflation.
Yields are low, unemployment up, CPI numbers are down (and under some metrics, negative)-in short,
everything screams "deflation".
Therefore, the notion of talking about hyperinflation now, in this current macro-economic
environment, would seem . . . well . . . crazy. Right?
Wrong: I would argue that the next step down in this world-historical Global Depression which
we are experiencing will be hyperinflation.
Most people dismiss the very notion of hyperinflation occurring in the United States as something
only tin-foil hatters, gold-bugs, and Right-wing survivalists drool about. In fact, most sensible
people don't even bother arguing the issue at all-everyone knows that only fools bother arguing with
a bigger fool.
A minority, though-and God bless 'em-actually do go ahead and go through the motions of talking
to the crazies ranting about hyperinflation. These amiable souls diligently point out that in a deflationary
environment-where commodity prices are more or less stable, there are downward pressures on wages,
asset prices are falling, and credit markets are shrinking-inflation is impossible. Therefore, hyperinflation
is even more impossible.
This outlook seems sensible-if we fall for the trap of thinking that hyperinflation is an extention
of inflation. If we think that hyperinflation is simply inflation on steroids-inflation-plus-inflation
with balls-then it would seem to be the case that, in our current deflationary economic environment,
hyperinflation is not simply a long way off, but flat-out ridiculous.
But hyperinflation is not an extension or amplification of inflation. Inflation and hyperinflation
are two very distinct animals. They look the same-because in both cases, the currency loses
its purchasing power-but they are not the same.
Inflation is when the economy overheats: It's when an economy's consumables (labor and
commodities) are so in-demand because of economic growth, coupled with an expansionist credit environment,
that the consumables rise in price. This forces all goods and services to rise in price as well,
so that producers can keep up with costs. It is essentially a demand-driven phenomena.
Hyperinflation is the loss of faith in the currency. Prices rise in a hyperinflationary
environment just like in an inflationary environment, but they rise not because people want more
money for their labor or for commodities, but because people are trying to get out of the currency.
It's not that they want more money-they want less of the currency: So they will pay
anything for a good which is not the currency.
Right now, the U.S. government is indebted to about 100% of GDP, with a yearly fiscal deficit
of about 10% of GDP, and no end in sight. For its part, the Federal Reserve is purchasing Treasuries,
in order to finance the fiscal shortfall, both directly (the recently unveiled QE-lite) and
indirectly (through the Too Big To Fail banks). The Fed is satisfying two objectives: One, supporting
the government in its efforts to maintain aggregate demand levels, and two, supporting asset prices,
and thereby prevent further deflationary erosion. The Fed is calculating that either path-increase
in aggregate demand levels or increase in aggregate asset values-leads to the same thing: A recovery
in the economy.
This recovery is not going to happen-that's the news we've been getting as of late. Amid all this
hopeful talk about "avoiding a double-dip", it turns out that we didn't avoid a double-dip-we
never really managed to claw our way out of the first dip. No matter all the stimulus, no
matter all the alphabet-soup liquidity windows over the past 2 years, the inescapable fact is that
the economy has been-and is headed-down.
But both the Federal government and the Federal
Reserve are hell-bent on using the same old tired tools to "fix the economy"-stimulus on the one
hand, liquidity injections on the other. (See my discussion of The Deficit
here.)
It's those very fixes that are pulling us closer to the edge. Why? Because the economy is in no
better shape than it was in September 2008-and both the Federal Reserve and the Federal government
have shot their wad. They got nothin' left, after trillions in stimulus and trillions more in balance
sheet expansion-
-but they have accomplished one thing: They have undermined Treasuries. These policies
have turned Treasuries into the spit-and-baling wire of the U.S. financial system-they are literally
the only things holding the whole economy together.
In other words, Treasuries are now the New and Improved Toxic Asset. Everyone knows that they
are overvalued, everyone knows their yields are absurd-yet everyone tiptoes around that truth as
delicately as if it were a bomb. Which is actually what it is.
So this is how hyperinflation will happen:
One day-when nothing much is going on in the markets, but general nervousness is running like
a low-grade fever (as has been the case for a while now)-there will be a commodities burp: A slight
but sudden rise in the price of a necessary commodity, such as oil.
This will jiggle Treasury yields, as asset managers will reduce their Treasury allocations, and
go into the pressured commodity, in order to catch a profit. (Actually it won't even be the asset
managers-it will be their programmed trades.) These asset managers will sell Treasuries because,
effectively, it's become the principal asset they have to sell.
It won't be the volume of the sell-off that will pique Bernanke and the drones at the Fed-it
will be the timing. It'll happen right before a largish Treasury auction. So Bernanke and the Fed
will buy Treasuries, in an effort to counteract the sell-off and maintain low yields-they want to
maintain low yields in order to discourage deflation. But they'll also want to keep the Treasury
cheaply funded. QE-lite has already set the stage for direct Fed buys of Treasuries. The world
didn't end. So the Fed will feel confident as it moves forward and nips this Treasury yield jiggle
in the bud.
The Fed's buying of Treasuries will occur in such a way that it will encourage asset managers
to dump even more Treasuries into the Fed's waiting arms. This dumping of Treasuries won't be out
of fear, at least not initially. Most likely, in the first 15 minutes or so of this event, the sell-off
in Treasuries will be orderly, and carried out with the idea (at the time) of picking up those selfsame
Treasuries a bit cheaper down the line.
However, the Fed will interpret this sell-off as a run on Treasuries. The Fed is already attuned
to the bond markets' fear that there's a "Treasury bubble". So the Fed will open its liquidity windows,
and buy up every Treasury in sight, precisely so as to maintain "asset price stability" and "calm
the markets".
The Too Big To Fail banks will play a crucial part in this game. See, the problem with the American
Zombies is, they weren't nationalized. They got the best bits of nationalization-total liquidity,
suspension of accounting and regulatory rules-but they still get to act under their own volition,
and in their own best interest. Hence their obscene bonuses, paid out in the teeth of their practical
bankruptcy. Hence their lack of lending into the weakened economy. Hence their hoarding of bailout
monies, and predatory business practices. They've understood that, to get that sweet bail-out money
(and those yummy bonuses), they have had to play the Fed's game and buy up Treasuries, and thereby
help disguise the monetization of the fiscal debt that has been going on since the Fed began purchasing
the toxic assets from their balance sheets in 2008.
But they don't have to do what the Fed tells them, much less what the Treasury tells them. Since
they weren't really nationalized, they're not under anyone's thumb. They can do as they please-and
they have boatloads of Treasuries on their balance sheets.
So the TBTF banks, on seeing this run on Treasuries, will add to the panic by acting in their
own best interests: They will be among the first to step off Treasuries. They will be the bleeding
edge of the wave.
Here the panic phase of the event begins: Asset managers-on seeing this massive Fed buy of Treasuries,
and the American Zombies selling Treasuries, all of this happening within days of a largish Treasury
auction-will dump their own Treasuries en masse. They will be aware how precarious the U.S.
economy is, how over-indebted the government is, how U.S. Treasuries look a lot like Greek debt.
They're not stupid: Everyone is aware of the idea of a "Treasury bubble" making the rounds. A lot
of people-myself included-think that the Fed, the Treasury and the American Zombies are colluding
in a triangular trade in Treasury bonds, carrying out a de facto Stealth Monetization: The
Treasury issues the debt to finance fiscal spending, the TBTF banks buy them, with money provided
to them by the Fed.
Whether it's true or not is actually beside the point-there is the widespread perception
that that is what's going on. In a panic, widespread perception is your trading strategy.
So when the Fed begins buying Treasuries full-blast to prop up their prices, these asset managers
will all decide, "Time to get out of Dodge-now."
Note how it will not be China or Japan who all of a sudden decide to get out of Treasuries-those
two countries will actually be left holding the bag. Rather, it will be American and (depending on
the time of day when the event happens) European asset managers who get out of Treasuries first.
It will be a flash panic-much like the flash-crash of last May. The events I describe above will
happen in a very short span of time-less than an hour, probably. But unlike the event in May, there
will be no rebound.
Notice, too, that Treasuries will maintain their yields in the face of this sell-off, at least
initially. Why? Because the Fed, so determined to maintain "price stability", will at first prevent
yields from widening-which is precisely why so many will decide to sell into the panic: The Bernanke
Backstop won't soothe the markets-rather, it will make it too tempting not to sell.
The
first of the asset managers or TBTF banks who are out of Treasuries will look for a place to park
their cash-obviously. Where will all this ready cash go?
Commodities.
By the end of that terrible day, commodites of all stripes-precious and industrial metals, oil,
foodstuffs-will shoot the moon. But it will not be because ordinary citizens have lost faith in the
dollar (that will happen in the days and weeks ahead)-it will happen because once Treasuries are
not the sure store of value, where are all those money managers supposed to stick all these dollars?
In a big old vault? Under the mattress? In euros?
Commodities: At the time of the panic, commodities will be perceived as the only sure store
of value, if Treasuries are suddenly anathema to the market-just as Treasuries were perceived
as the only sure store of value, once so many of the MBS's and CMBS's went sour in 2007 and 2008.
It won't be commodity ETF's, or derivatives-those will be dismissed (rightfully) as being even
less safe than Treasuries. Unlike before the Fall of '08, this go-around, people will pay attention
to counterparty risk. So the run on commodities will be for actual, feel-it-'cause-it's-there commodities.
By the end of the day of this panic, commodities will have risen between 50% and 100%. By week's
end, we're talking 150% to 250%. (My private guess is gold will be finessed, but silver will shoot
up the most-to $100 an ounce within the week.)
Of course, once commodities start to balloon, that's when ordinary citizens will get their first
taste of hyperinflation. They'll see it at the gas pumps.
If oil spikes from $74 to $150 in a day, and then to $300 in a matter of a week-perfectly possible,
in the midst of a panic-the gallon of gasoline will go to, what: $10? $15? $20?
So what happens then? People-regular Main Street people-will be crazy to buy up commodities (heating
oil, food, gasoline, whatever) and buy them now while they are still more-or-less affordable,
rather than later, when that $15 gallon of gas shoots to $30 per gallon.
If everyone decides at roughly the same time to exchange one good-currency-for another good-commodities-what
happens to the relative price of one and the relative value of the other? Easy: One soars, the other
collapses.
When people freak out and begin panic-buying basic commodities, their ordinary financial assets-equities,
bonds, etc.-will collapse: Everyone will be rushing to get cash, so as to turn around and buy commodities.
So immediately after the Treasury markets tank, equities will fall catastrophically, probably
within the next few days following the Treasury panic. This collapse in equity prices will bring
an equivalent burst in commodity prices-the second leg up, if you will.
This sell-off of assets in pursuit of commodities will be self-reinforcing:
There won't be anything to stop it. As it spills over into the everyday economy, regular people will
panic and start unloading hard assets-durable goods, cars and trucks, houses-in order to get commodities,
principally heating oil, gas and foodstuffs. In other words, real-world assets will not appreciate
or even hold their value, when the hyperinflation comes.
This is something hyperinflationist-skeptics never quite seem to grasp: In hyperinflation, asset
prices don't skyrocket-they collapse, both nominally and in relation to consumable commodities. A
$300,000 house falls to $60,000 or less, or better yet, 50 ounces of silver-because in a hyperinflationist
episode, a house is worthless, whereas 50 bits of silver can actually buy you stuff you might need.
Right now, I'm guessing that sensible people who've read this far are dismissing me as being full
of shit-or at least victim of my own imagination. These sensible people, if they deign to engage
in the scenario I've outlined above, will argue that the government-be it the Fed or the Treasury
or a combination thereof-will find a way to stem the panic in Treasuries (if there ever is one),
and put a stop to hyperinflation (if such a foolish and outlandish notion ever came to pass in America).
Uh-huh: So the Government will save us, is that it? Okay, so then my question is, How?
Let's take the Fed: How could they stop a run on Treasuries? Answer: They can't. See, the
Fed has already been shoring up Treasuries-that was their strategy in 2008-'09: Buy up toxic
assets from the TBTF banks, and have them turn around and buy Treasuries instead, all the while carefully
monitoring Treasuries for signs of weakness. If Treasuries now turn toxic, what's the Fed
supposed to do? Bernanke long ago ran out of ammo: He's just waving an empty gun around. If there's
a run on Treasuries, and he starts buying them to prop them up, it'll only give incentive to other
Treasury holders to get out now while the getting's still good. If everyone decides to get
out of Treasuries, then Bernanke and the Fed can do absolutely nothing effective. They're at the
mercy of events-in fact, they have been for quite a while already. They just haven't realized it.
Well if the Fed can't stop this, how about the Federal government-surely they can stop this, right?
In a word, no. They certainly lack the means to prevent a run on Treasuries. And as to hyperinflation,
what exactly would the Federal government do to stop it? Implement price controls? That will only
give rise to a rampant black market. Put soldiers out on the street? America is too big. Squirt out
more "stimulus"? Sure, pump even more currency into a rapidly hyperinflating everyday economy-right
. . .
(BTW, I actually think that this last option is something the Federal government might be foolish
enough to try. Some moron like Palin or Biden might well advocate this idea of helter-skelter money-printing
so as to "help all hard-working Americans". And if they carried it out, this would bring us American-made
images of people using bundles of dollars to feed their chimneys. I actually don't think that politicians
are so stupid as to actually start printing money to "fight rising prices"-but hey, when it comes
to stupidity, you never know how far they can go.)
In fact, the only way the Federal government might be able to ameliorate the situation
is if it decided to seize control of major supermarkets and gas stations, and hand out cupon cards
of some sort, for basic staples-in other words, food rationing. This might prevent riots and
protect the poor, the infirm and the old-it certainly won't change the underlying problem, which
will be hyperinflation.
"This is all bloody ridiculous," I can practically hear the hyperinflation skeptics fume.
"We're just going through what the Japanese experienced: Just like the U.S., they went into massive
government stimulus-hell, they invented quantitative easing-and look what's happened to them:
Stagnation, yes-hyperinflation, no."
That's right: The parallels with Japan are remarkably similar-except for one key difference. Japanese
sovereign debt is infinitely more stable than America's, because in Japan, the people are savers-they
own the Japanese debt. In America, the people are broke, and the Nervous Nelly banks own the debt.
That's why Japanese sovereign debt is solid, whereas American Treasuries are soap-bubble-fragile.
That's why I think there'll be hyperinflation in America-that bubble's soon to pop. I'm guessing
if it doesn't happen this fall, it'll happen next fall, without question before the end of 2011.
The question for us now-ad portas to this hyperinflationary event-is, what to do?
Neanderthal survivalists spend all their time thinking about post-Apocalypse America. The real
trick, however, is to prepare for after the end of the Apocalypse.
The first thing to realize, of course, is that hyperinflation might well happen-but it will end.
It won't be a never-ending situation-America won't end up like in some post-Apocalyptic, Mad Max:
Beyond Thuderdome industrial wasteland/playground. Admittedly, that would be cool, but it's not
gonna happen-that's just survivalist daydreams.
Instead, after a spell of hyperinflation, America will end up pretty much like it is today-only with
a bad hangover. Actually, a hyperinflationist spell might be a good thing: It would finally clean
out all the bad debts in the economy, the crap that the Fed and the Federal government refused to
clean out when they had the chance in 2007–'09. It would break down and reset asset prices to more
realistic levels-no more $12 million one-bedroom co-ops on the UES. And all in all, a hyperinflationist
catastrophe might in the long run be better for the health of the U.S. economy and the morale of
the American people, as opposed to a long drawn-out stagnation. Ask the Japanese if they would have
preferred a couple-three really bad years, instead of Two Lost Decades, and the answer won't be surprising.
But I digress.
Like Rothschild said, "Buy when there's blood on the streets." The thing to do to prepare for
hyperinflation would be to invest in a diversified hard-metal basket before the event-no equities,
no ETF's, no derivatives. If and when hyperinflation happens, and things get bad (and I mean really
bad), take that hard-metal basket and-right in the teeth of the crisis-buy residential property,
as well as equities in long-lasting industries; mining, pharma and chemicals especially, but no value-added
companies, like tech, aerospace or industrials. The reason is, at the peak of hyperinflation, the
most valuable assets will be dirt-cheap-especially equities-especially real estate.
I have no idea what will happen after we reach the point where $100 is no longer enough to buy
a cup of coffee-but I do know that, after such a hyperinflationist period, there'll be a "new dollar"
or some such, with a few zeroes knocked off the old dollar, and things will slowly get back to a
new normal. I have no idea the shape of that new normal. I wouldn't be surprised if that new normal
has a quasi or de facto dictatorship, and certainly some form of wage-and-price controls-I'd say
it's likely, but for now that's not relevant.
What is relevant is, the current situation cannot long continue. The Global Depression we are
in is being exacerbated by the very measures being used to fix it-stimulus is putting pressure on
Treasuries, which are being shored up by the Fed. This obviously cannot have a happy ending. Therefore,
the smart money prepares for what it believes is going to happen next.
I think we're going to have hyperinflation. I hope I have managed to explain why.
Gonzalo is a pretty smart cat, but he's not all that experienced in markets. For one, he tends
to base his predictions onexperiences and historical references with which he is familiar. (and gets
quite far with this methodology). But his lack of real world market experience leads him to make
a few mistakes. In Gonzalo's view, there is some scenario on the horizon In which foreign nations
stop buying US debt, and the US (for some as yet, unclarified reason) witnesses this happening and
does nothing. This makes no sense. Why wouldn't the US just raise rates? This is a fundamental problem
with the inflationist point of view. The bond market is what sets US rates - not policy, contrary
to propaganda. In many cases, policy follows markets and does not lead. Yes, the US will try to inflate.
But at the Shazam moment, the US will raise in order to keep borrowing. Higher rates will curtail
inflation. This is what Michael Pento was trying to say when they booted him. The powers that be
know that deflation is possible ...but they don't want you knowing that.
But at the Shazam moment, the US will raise in order to keep borrowing. Higher rates will
curtail inflation.
Ok, so the US raises rates to keep borrowing... Now take your argument, which is valid,
one step further, what happens? The first sentence is correct, the second is incorrect when
you step back and recognize why the first statement is correct.
You just reinforced the hyperinflation argument without knowing it! thanks.
Mish does suffer from solipsism and is wildly uninformed and is an ideologue with huge blind
spots in his thinking but so is the author of this article. His primary premise of what will cause
hyperinflation is absolutely ridiculous and shows his ignorance. It simply is not possible as he
describes it. His lengthy bloviating is akin to the Johnny Cochran defense of OJ. Pull shit out of
your ass if it sounds good. Unfortunately, the courts were not supposed to allow such a defense.
And in this case, it is no different. The zombie banks are all primary dealers of the Federal Reserve
of the United States of America. They MUST eat the garbage the Fed offers to the market. It is law.
That is why they were not nationalized. So the Fed could continue to ease and be guaranteed a buyer.
All of the other hogwash following his thesis that they will tilt the balance unknowingly one day
is asinine. He doesn't even understand basic concepts of central banking.
It's funny how, in recent years, the cost of domestic services such as college tuition and health
care – services that can't be outsourced or purchased from abroad – have been two of the few items
in the consumer price index that have risen relentlessly. The Economist looked at how college costs
stack up with inflation and wages in this
story the
other day.
They note that college fees have been rising far faster than incomes. Perhaps if all higher education
could be conducted somewhere in Asia where salaries are lower and benefits are not so generous, a
college degree wouldn't be so expensive.
notjonathon
I was a professor at a small liberal arts college in Japan for sixteen years. We had about
two thousand students overall, a faculty of a hundred or so and administrative staff of less than
fifty. We received some government support, but tuition and fees for our students are less than
ten thousand a year (higher for the new nursing school).
A bubble lesson: After attrition and pay cuts amounting to about 20% of our salaries, the personnel
costs for faculty were cut by almost 50%. However, mismanagement, deflation and low birth rates
meant that we were forced to eat another concession; retirement age was cut by two years (another
feature of Japanese employment lets a faculty member retire once and be rehired at half pay–second
retirement was moved up three years, as well).
Savings to the school were enormous–I calculated my total loss (real vs. originally promised
income) at somewhere around four hundred thousand dollars. Multiply that by a hundred!
Salaries were also pegged to the pay scale of public employees. This was great during the boom
years; as the CPI rose, so did salaries. Came the budget crunch and salaries began to fall. Soon
after I retired, there was a 10% across the board salary cut for public employees in the Prefecture,
so my former college peers took another hit. For some of the younger faculty, the lifetime losses
will easily amount to seven figures (that's ten figures in Yen).
Is this the future for the US?
The capture of the universities by administrators is another feature of US higher education
that needs to be addressed. Even as more and more faculty are reduced to adjunct status, administrators
proliferate. This non-educational burden will eventually sink the entire system.
The idea of for-profit education might have shown initial promise, but these school corporations
were founded on a flawed premise: profits first, education second. Their growth was in turn fueled
by the insane student loan bubble (a part of the mess that Greenspan made) that transformed them
into mini financial institutions (or should I say casinos). Instead of lowering costs and providing
better education, they proved to be just another method of putting the already disadvantaged further
in debt.
Also remember that the public sector has gotten itself into huge trouble, which is just starting
to take effect with austerity measures in Europe and pending bankruptcies in US municipalities.
US states are also broke and will have to finally deal with their union problems. Shrinking government
worker salaries, if not payrolls, will put further pressure on demand for goods and leave banks
with more bad loans. None of this is inflationary. Remember, in the '70s private debt was low
and growing, and companies were increasing their revenues and profits so that by '82 Dow 1000
was a bargain. Now we're in a generational de-leveraging, frugality-restoring mode, Kondratieff
winter for lack of a better term.
The last couple of years should give deflationists confidence
that we're able to correctly assess the situation. Where is that dollar crash? What about
$200 oil? What, in 2010 China still owns trillions in treasuries? Bernanke has tripled the US
base money supply but a dozen eggs is still $1.50 and the long bond yields 4%? Obama spent how
much, and unemployment is 17% ?
It be a bit early for you deflationistas to be declaring victory; you may well be correct in
the short term, but perhaps not in the long term, it remains to be seen. Here's something to consider
that seems to be surprisingly absent from almost all commentary on the subject: In deflation,
as prices decline due to the deflation, wages necessarily fall (to zero for those workers unwilling
to face reality), government revenues fall as well, yet the nominal denominations of the government
debt remains the same, even as the value of each currency unit increases, making already mathematically
unsupportable debt levels absolutely unpayable and the subject government goes poof! So, do you
really think Chopper Ben will let the US government go under due collapse by debt, or would he
rather dump unlimited money into the economy even though that will destroy the citizens wealth
a la Weimar? I think I know where his priorities lie and I'll keep my inflation hedges, thank
you.
'What most people call reason is really rationalization. Given a new set of data, most people
will search through it only for those examples that support their existing beliefs. Their beliefs
are really opinions, a tenuous collection of myths, anecdotes, slogans, and prejudices based largely
on justifying personal fear and greed. This is what makes modern propaganda so powerful; people
do not bother to think critically and objectively and act for the greatest good. And in their
ignorance they can find the will to do increasingly monstrous things, and rationalize them.' Jesse
In a purely fiat regime, the question of a general (monetary) deflation
and inflation is a policy decision. Anyone who does not understand this does not understand the modern
mechanism of money creation. As the pundit said, "The mind rebels..."
But rather
than engage in the usual facile intramurals about the topic, let's consider something more important.
How does one 'play this' which is really what all these discussions are about: self interest.
The champion of deflation is the Treasury Bond (and the Dollar), and of the inflationists, Gold.
There are extremes on both sides, and probably more sense in the middle, since life rarely sustains
the extreme unless there are people messing about with it. The only naturally efficient markets are
in ... nature, and that only as measured over the long term.
Anyone who doesn't think Treasuries have been in a long bull market are blind fools.
But the same is true of gold.
I will leave the dollar aside for now to simplify the discussion, but it hardly lends itself to
the deflationary theory.
People who have taken positions and held them in both Treasuries and Gold over the past ten years
have made money, a very nice return. When one has a theory that consistently and reasonably encompasses
that, you might have something worthwhile.
The deflationists will say that gold is a bubble fueled by mistaken speculators, and the inflationists
will say that the Treasuries are being supported and manipulated by the Fed. Neither is able to look
out from their deep wells of subjectivity.
You may wish to consider that the great part of this discussion, inflation versus deflation, is
a diversion. But that is a discussion for another time.
The question for all failing theories is, as always, what next. What is the alternate count.
Oh boy oh boy, [our desired outcome] is finally coming and when it gets here its going to be
good. We are finally turning [Japanese / Weimar].
Things are in bull markets, or bear markets, until they are not. The undeniable trend break is
the best indication of change in momentum.
But things in the world of complexity are rarely as simple or straightforward as the average mind
will allow, or can accept.
Anyone who thinks the Fed is impotent has not been paying attention to the last one hundred years.
The Fed is not impotent, merely constrained. Their constraint is the policy arm of the government,
the dollar, and the bond, in the absence of some external standards including external force.
Until one understands that, nothing can or will make sense. That is why the current discussion
is so nasty and propaganda-like. It is not about what will happen, but rather about a public policy
decision, about what people want to happen.
Consider that these debates are merely diversions, to distract people away from the most significant
factors in their troubles, which are exploitation and fraud, and a military-industrial complex that
is largely unproductive in terms of organic growth, and is quite simply no longer sustainable.
Paid professionals who were arguing the virtue of credit expansion as the bubbles blossomed are
now arguing just as strenuously for austerity now that the bubbles are collapsing, their masters
having taken their spoils. They will say for pay, without regard for the solutions that are
in the best interest of the country. Few are thinking of their country anymore, as the individual
is conditioned to think of themselves as globalized abstractions.
As always, be careful what you wish for, because you may get it. In this current climate, this
class warfare, the American nation is a house divided. And you know what happens to those.
And the winners may inherit the wreckage, a pyrrhic victory indeed, but they can console themselves
with the satisfaction that they have won the irrelevant debate.
Currently, the United States is conducting one of the most remarkable experiments in fiscal finances
in world history.
The American economy is in a severe recession. Coupled with that-as both partial cause and partial
effect of the recession-the United States' banking system crashed in the Fall of '08, a crash which
in many ways is still ongoing as I write this, nearly two years later.
What the recession and the
concomitant banking crisis have caused are, essentially, a fall in aggregate demand levels, as well
as a fall in aggregate asset value. In other words, the population is spending less, and asset values
have deteriorated, both nominally and as compared to any basket of hard commodities.
These are the two metrics which the two principal camps of current American macroeconomic thought
consider vital. "Saltwater" economists look to aggregate demand levels, while "freshwater" economists
look to aggregate asset value-each of these camps view their fetish-object as the cornerstone for
economic growth, development and prosperity. Naturally, when either of these camps see their juju
slide, they freak out. They declare the economy to be "in crisis"-and further declare that "something
must be done".
Something has been done: It's called The Deficit.
To combat the fall in aggregate demand levels, the Federal Government has embarked on a massive
spending program. This spending program has been financed by debt issued by the Treasury. The way
things are looking, another big spending package is in the offing some time soon-that should keep
the "saltwaters" happy.
On the other hand, to combat the fall in aggregate asset value-and keep the "freshwaters" happy-the
Federal Reserve Board has embarked on an asset purchase program that is also massive and unprecedented.
Through a fairly complex scheme that seems to be deliberately opaque, the Fed has relieved the
Too Big To Fail banks of their deteriorated assets, and given them cash, in an ongoing process. The
Too Big To Fail banks have turned around and used that cash to purchase Treasury bonds-which are
being used to finance this massive Federal Government spending. Whether there has been collusion
between the Treasury, the Fed and the TBTF banks is for the courts and the historians to decide-but
prima facie, it would certainly look so.
This two-sided scheme-more Federal Government spending on the one hand, and more propping up of
asset values on the other-adds up to The Deficit.
When I refer to it as The Deficit (it is too majestic for the lowercase), I am not referring to
a mere fiscal shortfall-I am referring to a policy mentality. This policy mentality-shared by both
"saltwater" and "freshwater" economists-effectively amounts to a suspension of the notion of opportunity
cost. In the realm of The Deficit, the macroeconomic policy questions cease to be "either/or"-they
become "both/and". All policy options can be achieved because-according to the macroeconomic policy
known as The Deficit-the American fiscal shortfall can never bring the United States to bankruptcy.
As Dick Cheney so memorably phrased it, deficits don't matter-so The Deficit as a macroeconomic policy
can continue indefinitely.
In a historical sense, The Deficit is unprecedented...
Krugman still thinks like a neo-classical economist...
Nobel laureate and New York Times columnist Paul Krugman
laments all the wasted energy
spent worrying over a potential rise in consumer prices somewhere down the road.
It's important to realize that there's no hint of inflationary pressures in the economy right now. Consumer prices are lower now
than they were a year ago, and wage increases have stalled in the face of high unemployment.
Deflation, not inflation, is the clear and present danger.
So if prices aren't rising, why the inflation worries? Some claim that the Federal Reserve is printing lots of money, which
must be inflationary, while others claim that budget deficits will eventually force the U.S. government to inflate away its debt.
The first story is just wrong. The second could be right, but isn't.
Here's where it gets kind of interesting.
It is as if, after the worst economic contraction since the Great Depression, once banks get the "all clear" from who knows
where that the system has righted itself and it's back to business as usual, all those excess reserves will just vanish. Now,
it's true that the Fed has taken unprecedented actions lately. More specifically, it has been buying lots of debt both from the
government and from the private sector, and paying for these purchases by crediting banks with extra reserves. And in ordinary
times, this would be highly inflationary: banks, flush with reserves, would increase loans, which would drive up demand, which
would push up prices.
But these aren't ordinary times. Banks aren't lending out their extra reserves. They're just sitting
on them - in effect, they're sending the money right back to the Fed. So the Fed isn't really printing money after all.
Still, don't such actions have to be inflationary sooner or later?
Apparently not.
And don't worry too much about the large and growing U.S. debt and the potential for foreign creditors to eventually
tire of being our sugar daddy.
It's all gonna be OK. In fact, "the only thing we have to fear is inflation fear itself".
... though not downgrading the danger of deflation, I believe policymakers are ignoring other factors regarding this economic
and financial condition. Furthermore, the U.S. government and Federal Reserve in particular, are taking steps to "cure" deflation
that will inevitably lead to hyperinflation, which in the long-term may prove far more destructive to the long-term health of
the U.S. economy.
History demonstrates that deflation is not a permanent condition. Market forces, unencumbered by fiscal and monetary intervention,
eventually restore pricing equilibrium. At a certain point prices of major durables such as homes are low enough to encourage
new categories of consumers to enter the marketplace. As demand is restored, prices stabilize and then resume their upward ascent.
It is all a question of time. However, key decision-makers in the United States are not paragons of patience. They want deflation
cured immediately, which explains why the U.S. Treasury and Federal Reserve are hell-bent on policies that are guaranteed to be
inflationary. The question is how bad will inflation ultimately be.
Massive quantitative easing by the Fed is pouring trillions of U.S. dollars into the money supply, essentially conjured out
of thin air. This is being done without transparency, the rationale being that frozen credit markets require a vast expansion
of the money supply in an attempt to get the arteries of commerce flowing again. Similarly, the U.S. government is spending vast
amounts of money it does not have, with the Treasury Department selling unprecedented levels of government debt in a frantic effort
to fund the wildly expanding U.S. deficit. These two forces, quantitative easing and multi-trillion dollar deficits, are the core
ingredients of an explosive fiscal cocktail that I believe will ultimately lead to hyperinflation.
What exactly is hyperinflation? Economists disagree on a common definition, so I will offer one myself. Double-digit inflation
extending over a period of at least two years would arguably be a hyperinflationary period. It can get much worse, witness Weimar
Germany in the early 1920's and Zimbabwe at present. The most recent experience the United States had with this unstable economic
condition was in 1981, when the annual CPI rate exceeded 13%. The cure was draconian; Federal Reserve Chairman Paul Volcker engineered
a severe economic recession that created the highest level of U.S. unemployment since the Great Depression -- until now. The federal
funds rate, currently near zero, rose to above 20% under Volcker's harsh discipline. Eventually high inflation was purged out
of the system and economic growth was restored, however the monetary regimen was punitive for several years.
The current monetary and fiscal policies being enacted by the key economic decision-makers in the United States are laying
the groundwork for a far more dangerous inflationary environment than anything encountered by Paul Volcker.
The explosive growth in the money supply and government debt is simply unsustainable without
severe inflation. It must be kept in mind that the Federal government is not the only public authority engaged in massive deficit
spending.
Throughout America, state, county and municipal governments are faced with imploding tax revenues and lack the ability or political
flexibility to cut services to a level commensurate with revenue flows. Both the Fed and the public sector are engaging in a reckless
gamble; borrow like crazy in the hope that this overdose of economic stimulation will restore growth to the economy and normal
tax revenues, leading to a decreased and sustainable level of public sector indebtedness.
If one believes that the policymakers running the Federal Reserve, Treasury and Federal government,
the same architects of the Global Economic Crisis, are smart enough to now get everything right, perhaps we may escape the worst
consequences of their turbo-charged fiscal and monetary policies. However, there are growing indications that global investors
and the broader market are beginning to reach a far more sobering assessment.
In an interview with Bloomberg News, Bill Gross, co-chief investment officer of PIMCO (Pacific Investment Management Company)
suggested that the coveted AAA credit rating U.S. government debt now benefits from will eventually be downgraded. "The markets
are beginning to anticipate the possibility of a downgrade," Gross said.
China, the major purchaser of Treasuries and holder of $1 trillion of U.S. government debt, is already on record as expressing
concern for the integrity of its American investments, and has begun actively exploring alternatives to the U.S. dollar as the
primary global reserve currency. These moves by China are not based on fears of expropriation of its U.S. assets, but focuses
on the specter of hyperinflation destroying much of the value of assets denominated in U.S. dollars. No doubt China's economic
experts are well aware of the growing number of economists who are convinced that the U.S. will be unable to service its rapidly
expanding debt burden without significant inflation. Inflation in monetary terms means the erosion of the intrinsic value of the
American dollar.
What is most frightening about the policy moves being enacted by the Fed and Treasury is that their actions may not be a reckless
gamble after all. They may have come to the conclusion that only hyperinflation will enable the United Sates to avoid national
insolvency. In effect, they may be pursuing the exact opposite course undertaken by Paul Volcker in the early 1980's. If that
is their prescription for the dire economic crisis confronting the U.S., then one must conclude that Ben Bernanke, Timothy Geithner
and Larry Summers have learned nothing from history. Once the spigot of hyperinflation is tuned on, it becomes a cascading torrent
that is almost impossible to switch off, and which in its wake inflicts inconceivable levels of economic, political and social
devastation. Before it is too late, President Obama should put the brakes on his economic team's dangerous gamble with the haunting
specter of hyperinflation. If he fails to act in time, a hellish prospect may be his economic and political legacy.
On Tuesday, the Telegraph's Ambrose Evans-Pritchard reports that China has warned a top member of the US Federal Reserve that
it is increasingly disturbed by the
Fed's direct purchase of US Treasury bonds:
Richard Fisher, president of the Dallas Federal Reserve Bank, said: "Senior officials of the Chinese government grilled me
about whether or not we are going to monetise the actions of our legislature."
"I must have been asked about that a hundred times in China. I was asked at every single meeting about our purchases of
Treasuries. That seemed to be the principal preoccupation of those that were invested with their surpluses mostly in the United
States," he told the Wall Street Journal.
His recent trip to the Far East appears to have been a stark reminder that Asia's "Confucian" culture of right action does
not look kindly on the insouciant policy of printing money by Anglo-Saxons.
Mr Fisher, the Fed's leading hawk, was a fierce opponent of the original decision to buy Treasury
debt, fearing that it would lead to a blurring of the line between fiscal and monetary policy – and could all too easily degenerate
into Argentine-style financing of uncontrolled spending.
However, he agreed that the Fed was forced to take emergency action after the financial system "literally fell apart".
Nor, he added was there much risk of inflation taking off yet. The Dallas Fed uses a "trim mean" method based on 180 prices
that excludes extreme moves and is widely admired for accuracy.
"You've got some mild deflation here," he said.
The Oxford-educated Mr Fisher, an outspoken free-marketer and believer in the Schumpeterian
process of "creative destruction", has been running a fervent campaign to alert Americans to the "very big hole" in unfunded pension
and health-care liabilities built up by a careless political class over the years.
"We at the Dallas Fed believe the total is over $99 trillion," he said in February.
"This situation is of your own creation. When you berate your representatives or senators or presidents for the mess we are
in, you are really berating yourself. You elect them," he said.
His warning comes amid growing fears that America could lose its AAA sovereign rating.
I doubt America will lose its AAA sovereign rating, but $99 trillion of unfunded liabilities can bring the world's biggest economy
closer to that day of reckoning.
But not all Fed presidents fear inflation. Last Thursday, Boston Federal Reserve Bank President Eric Rosengren said the risk of
deflation is currently more of a concern
than inflation:
Between inflation and deflation, my concerns are currently more weighted toward deflation," Rosengren said in response to audience
questions after giving a speech to the Worcester Economic Club.
He added that the size of the Fed's balance sheet -- which has more than doubled in the financial
crisis -- was "not a situation we want to be in, it's a situation we need to be in" given the severity of the crisis.
Answering a separate question, Rosengren said that due to the global nature of the crisis "in the short-run it will be hard
to have export-led growth."
Rosengren is not a voter in 2009 on the Federal Open Market Committee, the Fed's policy-setting panel.
Indeed, if you look around the world, you see that
Japan, the
U.K.,
and other countries are grappling with deflation.
"There isn't enough capital in the world to buy the new sovereign issuance required to finance the giant fiscal deficits that
countries are so intent on running. There is simply not enough money out there," -Kyle Bass
FN: Giddy talk of "green shoots" has completely drowned out a more sober and rational assessment of the global
situation. Random statistical noise in various minor economic indicators have over the past two months resulted in wild exclamations
of "the worst is definitely over".
It most certainly is not.
With every major economy in the world attempting to solve this economic crisis with both loose monetary and fiscal policy, it
was only a matter of time before the global credit markets would reach their limits.
These limits have almost been reached.
The long end of every curve of every major economy has been steadily climbing. The rate of change has now accelerated and interest
rates on these important benchmarks have now reached "pre-crisis" levels. In a
ZIRP world this is definitely a bad sign. Formerly respectable
governments from the US to the UK have gone the "banana republic" route and started
monetizing their debts in a desperate attempt to prevent long
rates from rising, to no avail. A veritable tsunami of debit issuance now sits just over the horizon, waiting to dumped on a crippled
and saturated global debt market.
The UK will eventually lose it's coveted triple 'AAA' rating and the US cannot be far behind. Rising rates will drag everything
from mortgage rates to credit card rates higher. Everything from residential and commercial real estate to businesses will feel
the pain of higher borrowing costs. The central banks of the world have no more real options left. They've lowered the rates they
control to zero and have flooded the financial system with liquidity. Their balance sheets are now swollen with toxic assets and
outright debt monetization won't bring rates down.
Thus, the concern I have is that inflation won't be driven through via wage increases (where at least workers salaries are keeping
up), but by a spike in the price of commodities. If inflation concerns = dollar concerns
= commodity spike, then that impossible stagflation may be possible once again.
We may be in the early stages of asset inflation in stocks and commodities. It's too early to tell, but it is worth keeping in
mind that asset inflation can transpire as liquidity makes its way through the financial system.
The conventional terms of inflation and deflation are no longer adequate for describing the overall monetary effect of excess
liquidity recently released by the US Federal Reserve, the nation's central bank, to deal with the year-long credit crunch.
This is because the approach adopted by the Treasury and the Fed to deal with a financial crisis of
unsustainable debt created by excess liquidity is to inject more liquidity in the form of both new public debt and newly created
money into the economy and to channel it to debt-laden institutions to reflate a burst debt-driven asset price bubble.
The Treasury does not have any power to create new money. It has to borrow from the credit market, thus shifting private debt
into public debt. The Fed has the authority to create new money. Unfortunately, the Fed's new money has not been going to consumers
in the form of full employment with rising wages to restore fallen demand, but instead is going only to debt-infested distressed
institutions to allow them to deleverage from toxic debt. Thus deflation in the equity market (falling share prices) has been
cushioned by newly issued money, while aggregate wage income continues to fall to further reduce aggregate demand.
Falling demand deflates commodity prices, but not enough to restore demand because aggregate wages
are falling faster. When financial institutions deleverage with free money from the central bank, the creditors
receive the money while the Fed assumes the toxic liability by expanding its balance sheet. Deleverage reduces financial costs
while increasing cash flow to allow zombie financial institutions to return to nominal profitability with unearned income and
while laying off workers to cut operational cost. Thus we have financial profit inflation with price
deflation in a shrinking economy.
What we will have going forward is not Weimar Republic-type price hyperinflation, but a financial
profit inflation in which zombie financial institutions turn nominally profitable in a collapsing economy. The danger is that this unearned nominal financial profit is mistaken as a sign of economic recovery,
inducing the public to invest what remaining wealth they still hold, only to lose more of it at the next market meltdown, which
will come when the profit bubble bursts.
Hyperinflation is fatal because hedging against it causes market failures to destroy wealth. Normally, when markets are functioning,
unhedged inflation favors debtors by reducing the value of liabilities they owe to creditors. Instead of destroying wealth, unhedged
inflation merely transfers wealth from creditors to debtors. But with government interventionin the financial market, both debtors and creditors are the taxpayers. In such circumstances,
even moderate inflation destroys wealth because there are no winning parties.
Debt denominated in fiat currency is borrowed wealth to be repaid later with wealth stored in money protected by monetary policy.
Bank deleveraging with Fed new money cancels private debt at full face value with money that has not been earned by anyone, that
is with no stored wealth. That kind of money is toxic in that the more valuable it is (with increased purchasing power to buy
more as prices deflate), the more it degrades wealth because no wealth has been put into the money to be stored, thus negating
the fundamental prerequisite of money as a storer of value.
This is not demand destruction because decline in demand is temporarily slowed by the new money. Rather, it is money destruction
as a restorer of value while it produces a misleading and confusing effect on aggregate demand.
Thinking about the value of any real asset (gold, oil, and so forth) in money (dollar) terms is misleading. The correct way is
to think about the value of the money (dollars) in asset (gold, oil) terms, because assets (gold, oil, and so on) are wealth.
The Fed can create money, but it cannot create wealth.
Central bankers are savvy enough to know that while they can create money, they cannot create
wealth. To bind money to wealth, central bankers must fight inflation as if it were a financial plague. But the first law of growth
economics states that to create wealth through growth, some inflation needs to be tolerated.
The solution then is to make the working poor pay for the pain of inflation by giving the rich a bigger share of the monetized
wealth created via inflation, so that the loss of purchasing power from inflation is mostly borne by the low-wage working poor
and not by the owners of capital, the monetary value of which is protected from inflation through low wages. Thus the working
poor loses in both boom times and bust times.
Inflation is deemed benign by monetarism as long as wages rise at a slower pace than asset prices.
The monetarist iron law of wages worked in the industrial age, with the resultant excess capacity absorbed by conspicuous consumption
of the moneyed class, although it eventually heralded in the age of revolutions. But the iron law of wages no longer
works in the post-industrial age in which growth can only come from mass demand management because overcapacity has grown beyond the ability of conspicuous consumption of a few to absorb in an economic democracy.
That has been the basic problem of the global economy for the past three decades. Low wages even in
boom times have landed the world in its current sorry state of overcapacity masked by unsustainable demand created by a debt bubble
that finally imploded in July 2007. The whole world is now producing goods and services made by low-wage workers
who cannot afford to buy what they make except by taking on debt on which they eventually will default because their low income
cannot service it.
All the stimulus spending by all governments perpetuates this dysfunctionality. There will be
no recovery from this dysfunctional financial system. Only reform toward full employment with rising wages will save this severely
impaired economy.
How can that be done? Simple. Make the cost of wage increases deductible from corporate income tax and make the savings from layoffs
taxable as corporate income.
I agree with Henry Liu, unless we get wage increases across all OECD nations, I wouldn't count on a sustained global economic recovery,
or on the hyperinflation we've seen in the past. But asset bubbles and another market meltdown look inevitable as excess liquidity
finds its way into the global financial system. When this happens, don't say nobody predicted it. You've been warned.
Submitted by Leo Kolivakis, publisher of Pension Pulse.
I want to follow-up on my last comment on the
"W" recovery
because it is absolutely critical for policymakers and investors to understand the arguments on both sides of the inflation/ deflation
debate. I will make this post considerably shorter than the previous one, but there is plenty to cover.
First, we begin by looking at the
latest quarterly review
by Van R. Hoisington and Lacy H. Hunt of Hoisington Investment Management.
[Note: Click
here to
view all previous comments and
here for a profile of Hoisington Investment Management.]
Hoisington Investment Management offers one of the best quarterly economic reviews on the internet. Their latest quarterly comment
focuses on inflation/ deflation. They begin by stating:
Over the next decade, the critical element in any investment portfolio will be the correct call regarding inflation or its antipode,
deflation. Despite near term deflation risks, the overwhelming consensus view is that "sooner
or later" inflation will inevitably return, probably with great momentum.
This inflationist view of the world seems to rely on two general propositions. First, the unprecedented increases in the Fed's
balance sheet are, by definition, inflationary. The Fed has to print money to restore health to the economy, but ultimately this
process will result in a substantially higher general price level. Second, an unparalleled surge in federal government spending
and massive deficits will stimulate economic activity. This will serve to reinforce the reflationary efforts of the Fed and lead
to inflation.
These propositions are intuitively attractive. However, they are beguiling and do not stand the test of history or economic theory.
As a consequence, betting on inflation as a portfolio strategy will be as bad a bet in the next
decade as it has been over the disinflationary period of the past twenty years when Treasury bonds produced a higher total return
than common stocks. This is a reminder that both stock and Treasury bond returns are sensitive to inflation, albeit with
inverse results.
Does this get your attention? It certainly got mine. Let's read on:
..., let's assume for the moment that inflation rises immediately. With unemployment widespread, wages would seriously lag inflation.
Thus, real household income would decline and truncate any potential gain in consumer spending.
....
Inflation will not commence until the Aggregate Demand (AD) Curve shifts outward sufficiently to reach the part of the Aggregate
Supply (AS) curve that is upward sloping. The AS curve is perfectly elastic or horizontal when substantial excess capacity exists.
Excess capacity causes firms to cut staff, wages and other costs. Since wage and benefit costs comprise about 70% of the cost
of production, the AS curve will shift outward, meaning that prices will be lower at every level of AD.
Therefore, multiple outward shifts in the Aggregate Demand curve will be required before the economy encounters an upward sloping
Aggregate Supply Curve thus creating higher price levels. In our opinion such a process will take well over a decade.
And on the record expansion of the Fed's balance sheet:
In the past year, the Fed's balance sheet, as measured by the monetary base, has nearly doubled from $826 billion last March to
$1.64 trillion, and potentially larger increases are indicated for the future. The increases already posted are far above the
range of historical experience. Many observers believe that this is the equivalent to printing money, and that it is only a matter
of time until significant inflation erupts. They recall Milton Friedman's famous quote that "inflation is always and everywhere
a monetary phenomenon."
[Note: On that last point, read Alan Meltzer's New York Times op-ed article,
Inflation Nation.]
These gigantic increases in the monetary base (or the Fed's balance sheet) and M2, however, have not led to the creation of fresh
credit or economic growth. The reason is that M2 is not determined by the monetary base alone, and GDP is not solely determined
by M2. M2 is also determined by factors the Fed does not control. These include the public's preference for checking accounts
versus their preference for holding currency or time and saving deposits and the bank's needs for excess reserves.
These factors, beyond the Fed's control, determine what is known as the money multiplier. M2 is equal to the base times the money
multiplier. Over the past year total reserves, now 50% of the monetary base, increased by about $736 billion, but excess reserves
went up by nearly as much, or about $722 billion, causing the money multiplier to fall.
Thus, only $14 billion, or a paltry 1.9% of the massive increase of total reserves, was available
to make loans and investments. Not surprisingly, from December to March, bank loans fell 5.4% annualized. Moreover, in the three
months ended March, bank credit plus commercial paper posted a record decline.
On the surge of M2, Hoisington and Hunt write:
M2 has increased by over a 14% annual rate over the past six months, which is in the vicinity of past record growth rates. Liquidity
creation or destruction, in the broadest sense, has two components. The first is influenced by the Fed and its allies in the banking
system, and the second is outside the banking system in what is often referred to as the shadow banking system.
The equation of exchange (GDP equals M2 multiplied by the velocity of money or V) captures this relationship. The statement that
all the Fed has to do is print money in order to restore prosperity is not substantiated by history or theory.
An increase in the stock of money will only lead to a higher GDP if V, or velocity, is stable.
V should be thought of conceptually rather than mechanically. If the stock of money is $1 trillion and total spending is $2 trillion,
then V is 2. If spending rises to $3 trillion and M2 is unchanged, velocity then jumps to 3.
While V cannot be observed without utilizing GDP and M, this does not mean that the properties of V cannot be understood and analyzed.
The historical record indicates that V may be likened to a symbiotic relationship of two variables. One is financial innovation
and the other is the degree of leverage in the economy. Financial innovation and greater leverage go hand in hand, and during
those times velocity is generally above its long-term average of 1.67 (Chart 4, above, click to enlarge).
Velocity was generally below this average when there was a reversal of failed financial innovation and deleveraging occurred.
When innovation and increased leveraging transpired early in the 20th century, velocity was generally above the long term average.
After 1928 velocity collapsed, and remained below the average until the early 1950s as the economy deleveraged.
From the early 1950s through 1980 velocity was relatively stable and never far from 1.67 since leverage was generally stable in
an environment of tight financial regulation. Since 1980, velocity was well above 1.67, reflecting rapid financial innovation
and substantially greater leverage. With those innovations having failed miserably, and with the burdensome side of leverage (i.e.
falling asset prices and income streams, but debt remaining) so apparent, velocity is likely to fall well below 1.67 in the years
to come, compared with a still high 1.77 in the fourth quarter of 2008.
Thus, as the shadow banking system continues to collapse, velocity should move well below its
mean, greatly impairing the efficacy of monetary policy. This means that M2 growth will not necessarily be transferred
into higher GDP. For example, in Q4 of 2008 annualized GDP fell 5.8% while M2 expanded by 15.7%. The same pattern appears likely
in Q1 of this year
The highly ingenious monetary policy devices developed by the Bernanke Fed may prevent the calamitous events associated with the
debt deflation of the Great Depression, but they do not restore the economy to health quickly or easily.
The problem for the Fed is that it does not control velocity or the money created outside the
banking system.
Washington policy makers are now moving to increase regulation of the banks and nonbank entities as well. This is seen as necessary
as a result of the excessive and unwise innovations of the past ten or more years. Thus, the lesson of history offers a perverse
twist to the conventional wisdom. Regulation should be the tightest when leverage is increasing rapidly, but lax in the face of
deleveraging.
Hoisington and Hunt then discuss how massive increases in government debt will weaken the private economy,"thereby hindering rather
than speeding the recovery."
They end their quarterly review by stating that bonds still offer exceptional value:
Since the 1870s, three extended deflations have occurred--two in the U.S. from 1874-94 and from 1928 to 1941, and one in Japan
from 1988 to 2008. All these deflations occurred in the aftermath of an extended period of "extreme over indebtedness," a term
originally used by Irving Fisher in his famous 1933 article, "The Debt-Deflation Theory of Great Depressions."
Fisher argued that debt deflation controlled all, or nearly all, other economic variables. Although not mentioned by Fisher, the
historical record indicates that the risk premium (the difference between the total return on stocks and Treasury bonds) is also
apparently controlled by such circumstances. Since 1802, U.S. stocks returned 2.5% per annum more than Treasury bonds, but in
deflations the risk premium was negative.
In the U.S. from 1874-94 and 1928-41, Treasury bonds returned 0.9% and 7% per annum, respectively, more than common stocks. In
Japan's recession from 1988-2008, Treasury bond returns exceeded those on common stocks by an even greater 8.4%. Thus, historically,
risk taking has not been rewarded in deflation. The premier investment asset has been the long government bond (Table 1, below,
click to enlarge).
This
table also speaks to the impact of massive government deficit spending on stock and bond returns. In the U.S. from 1874-94, no
significant fiscal policy response occurred. The negative consequences of the extreme over indebtedness were allowed to simply
burn out over time. Discretionary monetary policy did not exist then since the U.S. was on the Gold Standard.
The risk premium was not nearly as negative in the late 19th century as it was in the U.S. from
1928-41 and in Japan from 1988-2008 when the government debt to GDP ratio more than tripled in both cases. In the U.S.
1874-94, at least stocks had a positive return of 4.4%. In the U.S. 1928-41 and in Japan in the past twenty years, stocks posted
compound annual returns of negative 2.4% and 2.3%, respectively.
Therefore on a historical basis, U.S. Treasury bonds should maintain its position as the premier
asset class as the U.S. economy struggles with declining asset prices, overindebtedness, declining income flows and slow growth.
There is a growing belief in financial markets that uncontrollable inflation is inevitable, but that view is wrong, argues
Dominic Konstam, interest rate strategist at Credit Suisse.
Nor are we heading towards a prolonged depression and deflation, he believes.
"A more plausible scenario is a mildly deflationary middle way with positive nominal growth. We can think of this as Grandma
Goldilocks," he says.
This is a reference to the late 1990s, when market conditions were deemed just right – not too hot and not too cold – because
real growth was high, but inflation low. "A decade later, Goldilocks may not be quite dead but just a lot older," he says.
Mr Konstam believes growth is likely to be relatively subdued in the next few years, driven by fiscal
stimulus, while real interest rates will remain high. He believes consumers will be spending less and saving more, exerting significant
downside pressure on inflation. There will be plenty of excess capacity in the economy. "The output gap is very large and forewarns
of downward pressure on prices to come," he says.
What does this mean for financial markets? "If we're right, [10-year Treasury] bond yields aren't going to zero, but they're
going to stay low for a while. We're not going to 4 per cent anytime soon. Stocks may not make new lows and they will surely be
capped to the upside."
My last two comments on the inflation/ deflation debate provide you with some of the forces shaping inflation expectations.
What will be the end result? Think about it as two huge tidal waves headed for each other. They might cancel each other out, but
chances are that one will dominate the other and after reading Hoisington's quarterly review, I have an eerie feeling deflation will
swamp inflation.
If deflation does prevail, that spells trouble for pension funds that are heavily exposed to stocks and inflation-sensitive assets.
They undertook a
giant experiment
that will likely end up costing future generations.
After reading this comment, do you still believe there is a
bubble in bonds?
It just goes to show that liquidity is not the limiting factor. Solvency, of both banks and their customers,
is the limiting factor now.
At the moment, they could probably increase the base money without limit. All that cash would just sit in the banks.
What they should do is print a lot of money, now that is seems to be possible to do so without adverse effects, and then set the
reserve requirements to a whole lot higher level. That way we would have the system, when it finally recovers, on a healthy liquidity-constrained
basis.
After that, they should let the
markets handle the price of money, and focus instead on keeping the money supply aligned with the overall size of the economy.
I would also point out that each time a recovery seems to appear oil moves right up ...I agree with
the entire post but with the added caveat that a peak oil scenario is in play as well ... If this scenario happens
sooner rather than later the world will be looking at stagflation and further economic contraction ... the exact consequences
related to the size and duration of the spike in oil prices ...
I think that at present inflation (upward spiraling increases in BOTH wages and prices) or deflation
is ultimately a political dilemma, as either one can be engineered. However, inflation, while not good for anyone, would eat away
the gains of the wealthy and asset holders that they have accumulated over the past several decades. The Fed and Treasury create
enough money to replace money that have been created and lost by the banks. The banks are expected to earn their way out of the
hole and presumably re-pay. But what does that mean "earn their way out"? It means extracting a pound of flesh from the population
through high interest rates, commodity speculation, forcing companies into bankruptcies to collect on CDS. At the same time, the
so-called "stimulus" amounted to roughly nothing: no investment in innovation and job creation and retention. On the latter point,
we are being constantly warned of the dangers of protectionism. The wealth holders will not allow inflation to occur, the brunt
of the recession will be born by the middle classes: the taxpayers, employees, borrowers, consumers and retirees. The next few
years will feel and look like a twilight zone, like being a can.
The Fed could induce inflation by printing billions and giving each American 1 million dollars. They
will not and they will be extremely tentative with their QE because they are relying on creditors of the US keeping their good
faith in the US bonds and currency. You can easily get out of control inflation by over doing the fiscal stimulus and racking
up too much debt so that other countries start to take a dim view of your currency. There is a very good reason why the bank of
England said to Gordon Brown, enough demonstrate how you are going to get your fiscal house in order and it is the same reason
that the IMF is saying the same thing to the US.
At the moment the US does look like going toward deflation and there is little that the FED can do about those things outside
of its control. There are however tipping points, triggered by either borrowing too much money or printing too much money that
can flip things into an inflationary environment. The mistake that Hoisington Investment seems to be making is of looking at the
US economy in isolation from the rest of the world. My worry is that the FED can not do enough to prevent deflation and congress
will force the FED and Treasury to ratchet up their actions to such an extent that one of the tipping points will occur.
Having a reserve currency means the US can do a lot more than other countries but the scope is not
unlimited and testing those limits would most likely be unwise.
"Therefore, on an historical basis, US Treasuries should maintain its position as the premier asset class..."
Was the writer channeling Ben Bernanke? Isn't US hubris stinking great?
Go right ahead, 'deflationistas', plough into US Treasuries while the market across the ocean in the UK mirrors the US failed
market. Gordon Brown and Obama would be proud! What's money? It will be worth more every day, right?
See Martin Hennecke, Tyche Investments, for some real commentary.
I agree with Brick. The US is not a closed system. If the dollar declines
against external currencies then commodity prices feed directly into price inflation. Oil is the primary consideration.
Be wary about the "can't have price inflation without wage inflation" argument. Zimbabwe recently printed their currency to destruction
with unemployment at 80%. Wages was not enough of a brake on inflation there.
What is the rational to use M2 in the equation of exchange in the analysis? I suspect M2 accounts only
for a fraction of all the credit money in the system. If using a much broader measure of money (What would be the right measure?
All the credit created?) is more adequate and we enter a period of strong debt deflation, i.e. the amount of money in the system
actually decreases, even if printed base money increases, a much larger increase in the velocity of money will be needed to compensate
for the decrease in money and to trigger inflation.
The Hoisington analysis seems to be based upon neo-classical economic thinking, which is not always valid.
For example, in 1934 the inflation rate was a positive 3.5%, yet there was probably
still substantial excess capacity. So comparing demand and supply does not always work.
The word velocity is defined in terms of two other variables. It is not an independent variable. All of that discussion section
is an attempt to find meaning in what is just a definition. Typical of the weaknesses of neo-classical economics.
Major inflation could easily occur if the dollar were to drop substantially in value. We do not live in a closed economic system.
There is no necessary conflict between inflation and unemployment and poverty. Consider events in
some third world countries in recent decades, and the German experience after WWII.
Some inflationists argue that the increase in money supply will eventually lead to inflation, with a time lag of a few years that
assumes some economic recovery first. The Hosington analysis also seems to ignore this time delay effect. Others have pointed
out that inflation is sometimes a psychological rather then money phenomenon; it happens when people believe it will happen.
I still do not really understand money. I still have no opinion on whether inflation or deflation will develop, and the neo-classical
analysis presented did not really help me.
The problem is that once deflation grips the U.S. and global economy, it is like a virus that constantly mutates and is very hard
to cure.
The Fed knows this. They also know that deflation will wreak havoc on the banking sytem which is why they will keep rates extremely
low for a very long time.
Importantly, the Fed would rather err on the side of inflation than risk getting mired in a deflationary spiral.
Some of you have commented that the U.S. is an open economy and that the U.S. dollar will tumble, thus causing inflation. Be careful
here because currency movements are all about expected shifts in growth and real interest rates.
If traders expect the U.S. to lead global economic growth and higher rates to start in the U.S., then the greenback will slowly
gain relative to other major currencies over the next few years.
Also, the Chinese will continue to fund the U.S. current account deficit as long as they have to. Their exports just plummeted
and they need U.S. consumers to start consuming again.
But watch developments in China very closely because if they decelerate further, they might devalue their currency and flood the
world with cheap goods again, which is deflationary.
Let's not forget there are powerful deflationary forces out there: high consumer indebtedness, banks and shadow banks that are
cutting leverage and lending, the internet, an ageing population in Europe and Japan and baby boomers in the U.S. who are increasingly
worried about their retirement (and hence saving more).
And then there are mature pension funds that are shifting their asset allocation to buy more bonds.
All this to say that I am not convinced that inflation is inevitable and maybe the big surprise of the next decade will be how
bonds outperform stocks.
Stay tuned, macroeconomics just got a whole lot more interesting!
Inflation helps stimulate growth and this is the heart of The Bernanke/Frankenstein Clone, i.e, if we
inflate and ramp up prices, we can stimulate production, which will cause employment to increase, and thus robots, I mean people
in our society will have jobs to help put food on their families.
As many will recall, output by producers increases when prices rise and thus it simply makes sense to help rocket gas prices back
towards $5.00 per gallon and to help wheat and other basic foods shoot as high as possible, because this will be good for the
global corporations that need to make profits to make up for the recent loss of several Trillions in bad bets they made at the
unregulated casino.
Once we get these corporate engines back up and running at high speed, we can then encourage robots, I mean production workers
to spend their capital on homes that will also need to increase in price, so that they will have places to park their new SUVs,
which allow them to buy $7.00 cups of coffee, and so on and so on.
I feel like Roubini here, but this too has passed, but I would like an opportunity to also add that in order for dividends to
be increased at financial institutions, fees will have to increase and greater profit margins will need to be engaged, which will
mean greater efficiency through the use of unregulated derivatives, i.e. global financial networks will have to pool resources
to create scale and leverage to take over the world and to thus make sure that our robots are burdened by another tsunami wave
of cheap and easy credit.
Therein lies the problem. History suggests that the FED will again be late to the game. Ask yourself,
what are the odds that they will be able to pull the money out of the system before
inflation gets out of
control? Damned if they do and damned if they don't but I believe they will take inflation over deflation any day of the week.
income velocity (Vi) is a contrived figure (Vi = Nominal GDP/M). The product of MVI is obviously nominal
GDP. So where does that leave us? In an economic sea without a rudder or an anchor.
the "monetary base" is not a base for the expansion of money & credit
is inflation coming???? it is mathematically impossible to miss and economic forecast
economics deserves to be called the dismal science
Given that the Fed's monetarist policies have failed, that quantitative easing
went nowhere, what relevance is there to the real economy in equations based on monetary models?
I think we are already in a period of deflation. Its speed would be even greater than it is if the government were not trying
insanely to re-inflate busted bubbles. BTW peak oil and supply-demand have nothing to do with the current rise in oil prices.
This is the same speculative game we saw last year funded by taxpayer dollars going to BINO banks,
like Goldman and Morgan Stanley.
I agree with those who say we need to look at the US economy as it fits into the world economy.
The article has a significant tell in that its only reference to indebtedness is to government debt. But it is really the overall
high debt load not just the government but the whole country has that is the real killer.
Debt deflation may be what is happening now in some sectors but it hard to see how inflation more generally down the road is not
going to be a significant part in how those debts are going to be dealt with.
Hugh,
I would be careful to claim outright that monetary policy and QE have totally failed. The effects typically show up with a lag
of 6 to 12 months. However, you are right, deflation has already arrived in some asset classes like
housing and the stock market, both way off their peaks.
Q1 foreclosures hit a record in the U.S., which is not supporting the thesis that housing has stabilized in any way, shape or
form.
We need to see housing stabilize and unemployment stop creeping up before we can claim things have truly stabilized.
Will the U.S. inflate away its debts? They are sure trying hard but this is not going to be easy.
Meanwhile, let's not forget that the shadow banking system is just a shell of what it used to be with significantly less leverage
as both investment banks and hedge funds trim it down.
Deflation will roil private equity and commercial real estate. The only true hedge against deflation is government bonds.
I will say it again, if inflation does eventually become the problem, it could be particularly nasty, because governments will
be far too slow and timid about taking the hard decisions needed to remove liquidity as aggressively as they are currently expanding
it.
the commodity index, adjusted for inflation is at a 200 year low. Let me say that again, the commodity
index adjusted for inflation is at a 200 year low. Do people really think it will go lower?
Finished goods start with commodities as the basic inputs in many goods. Mines that take commodities out of the ground are coming
up against cost constraints that the price isn't supportive of further mining operations going forward. Already in gold you see
declining mine production yearly due to the low price depressing exploration and development of new fields and the fields they
do know of generally do not support development at current prices. This is occurring in other types of mines as well.
Time will tell who's right on inflation. However, I do have my money where my belief is - 100% gold in etfs, miners, and physical.
2009-05-12. "I want to follow-up on my last comment on the "W" recovery because it is absolutely
critical for policymakers and investors to understand the arguments on both sides of the inflation/ deflation debate."
...
There was a time when I disagreed with the inflationistas and the gold bugs. In my view, they did not anticipate the deflationary flash
flood that would rip through the global economy once history's biggest credit bubble began to burst, and they failed to understand that
this was just the set-up needed to transform the last of the allegedly prudent policymakers into full-on Mugabes-in-the-making.
Now,
though, as some deflationistas grow ever more confident that we are set for a replay of what took place 80 years ago, I am in the process
of switching sides. As I see it, the combination of intellectual hubris and a relentless determination by central bankers and politicians
to beat the GD 2.0 rap, as well as an increasingly contagious urge to embrace all manner of fiscal insanity, suggest we are nearing
the point where people will begin to lose faith in those who control the pursestrings -- and the printing presses.
As that occurs, I believe the odds are good that we will see an inflationary episode like the one described in the following
321gold column,
"Cycle Revisited," by Howard Ruff, editor of
The Ruff Times.
John Williams publishes the Shadow Government Statistics newsletter (www.shadowstats.com).
He is an amazing professional economist with a great grasp of the real economy. He and I have arrived at the same conclusions about
almost everything in the economy, despite the fact that we approach it from totally different directions: me from the fundamentals,
and he from a real technical and numbers point of view.
I am now in John's home in Oakland, California, looking past the government numbers to get his views on the world as it really
is. Shadow Government Statistics reconstructs published government statistics the accurate way we used to do it that reflects reality,
rather than the way these numbers are now manipulated, and comes up with different conclusions about the economy, such as the Consumer
Price Index (CPI), and other revealing areas published by government.
I trust John's numbers because the government has been manipulating and restating these numbers for purely political purposes.
* * * * *
HJR: John is it necessary to recreate government statistics to show what you feel is reality, and how have you recreated them?
I'd like some examples.
JW: Howard, I've been a consulting economist for about 27 years. I found early on that to make meaningful forecasts I had to have
accurate information. It was evident early on that there were big inaccuracies in government reporting I surveyed at a convention
of the National Association of Business Economists. Some economists have to make real-world forecasts, as opposed to economists who
are employed by Wall Street to come to up with happy stories to encourage people to buy stocks and bonds.
I asked them what they considered the quality of government statistics to be. Most thought the numbers were very poor quality.
Political manipulation tends to increase in election years.
I talked to the chief economist for a large retail chain, and he told me that the retail sales reports were absolutely no good,
but he thought the money-supply numbers were pretty good.
Next was an economist for a major bank. He said the money-supply numbers were not very good, but he thought the retail-sales numbers
are pretty good. The more someone knew about a given statistic, the greater the problems there were with the numbers.
Over time public perceptions increasingly varied from what the government was reporting because government kept changing methodologies,
and usually tended to build an upside bias to the economic statistics of unemployment or the GDP – the broad measure of economies
– and a downside bias in the Consumer Price Index, a popular measure of inflation.
When it became popularly used in auto-union contracts after WWII, the concept of the Consumer Price Index was fairly simple. But
they wanted to measure changes in the cost of living, and they needed to maintain a constant standard of living. That was the traditional
definition; the way the CPI had been designed.
That held pretty much in place until we got into the 1990s when Alan Greenspan and Michael Boskin, the head of The Council of
Economic Advisors for the first Bush Administration, started talking about how the CPI really overstated inflation. The rationale
was that when steak goes up in price, people buy more hamburger instead of steak; therefore you should reflect the substitution in
the CPI.
That is not the concept of a constant standard of living; it is the concept of a declining standard of living that has no value
to anyone other than politicians in Washington. They succeeded in reducing the reported level of inflation, which reduced cost-of-living
adjustments in Social Security checks. Because of the changes in the 1990s, our Social Security checks are about half what they should
be!
There have been different definitions over time. The government itself publishes six levels of unemployment from what they call
"U-1" through "U-6." The popularly followed measure is called "U-3." Right now they say it is around 8.6 percent.
The broadest measure published by the government deletes "the discouraged workers" and people who are marginally attached to the
economy. This is close to 16 percent. The key there is the "discouraged workers," people who consider themselves to be unemployed.
They know whether or not they have jobs. The Discouraged Worker hasn't been out looking for work because there are no jobs to be
had in his area.
Up until 1994, those discouraged workers wouldn't have to specify how long they had been discouraged. After that, if they were
discouraged, the government wouldn't add them. I add them into my numbers, and it totals around 20 percent unemployment.
The popular number for the Great Depression is 25 percent unemployment rate and 34 percent among non-farm workers. We are mostly
a non-farm economy.
HJR: During the Bush Administration, we heard all the happy talk about how well the economy was doing because of the cuts in tax
rates. Is that really just happy talk or was the economy really doing well under Bush?
JW: We actually had a pretty bad recession in the early'90s, longer and deeper than popularly reported. Near the end of Bush's
first term at the time of the re-election race, a senior Commerce Department officer talked with a senior executive in the computer
industry and asked him to boost the reporting of computer sales to the Bureau of Economic Analysis, which prepares the GDP report.
They did; it boosted the GDP, the broad measure of the economy, and George Bush touted the strong economy. But some felt he was out
of touch with reality.
The average guy has a pretty good sense of reality and knows whether or not economic conditions are good, or if inflation is up
or down, which is why people have a difficult time accepting the government's numbers. They have gotten so far away from common experience
that people just don't find them credible.
In terms of the GDP, clearly retail sales and industrial production were showing us a deepening recession long before the government
reported it with the GDP. In fact, you didn't show a contraction in the GDP until the second quarter of 2008. Officially the recession,
according to the National Bureau of Economic Research, started back in December, 2007. If the GDP numbers accurately reflected what
was happening, it would have at least shown the contraction two or three quarters before that. Other indications show that the recession
really began in late 2006.
HJR: Let me get to a practical issue. What kind of economic activity should we support? For example, the conservatives will say
we should cut tax rates to boost the economy. What does your research show?
JW: Cutting taxes is always a good idea. The private sector can do more with the money than the government can. Right now we are
in a deep and deepening recession which will probably be called "a depression" before it ends. By depression, I mean a ten-percent
contraction in overall economic activity.
When the government is reasonably solid, it can cut taxes. It can even increase spending without disrupting the system.
Right now we have a system where with the money poured into the banking system, and the "stimulus" by way of spending and tax
cuts, is on top of record deficits.
If you look at the real numbers on the deficits, based on numbers published by the federal government, we really should look at
it how it used to be. In the late '70s, the ten biggest accounting firms and congress said they could design an accounting system
where the government will report its books the same way a company does. They finally got that into effect in 2000. Since then, instead
of running deficits in the range of a couple of billion dollars, on a Generally Accepted Accounting Principal (GAAP) basis, the deficit
has averaged $4 trillion a year. It was over $5 trillion in 2008 and will top $8 trillion this year.
This is unsustainable! You could not raise taxes enough to bring that into balance. If you wanted to bring it into balance, you'd
have to eliminate Social Security and Medicare payments. It can't be done.
HJR: Right now, Obama is spending money – I won't say like a drunken sailor, because a drunken sailor spends his own money – but
he is throwing trillions of dollars at the economic downturn, assuming it will stimulate us out. My personal opinion is that they
are only stimulating government growth, and some day the average person may get a job, but his employer will be Uncle Sam.
What is the end result of creating all this money and throwing it at the problem?
JW: It will not stimulate the economy. The cost of all this is inflation. We will see inflation levels not seen in our lifetime
by as early as the end of this year. Eventually we will see liabilities of $65 trillion – more than four times U.S. GDP, more than
global GDP. There will be a hyper inflation where the dollar becomes worthless, where the paper is worth more as wall paper than
as currency.
HJR: They couldn't even use the money as toilet paper because it is a bad absorber of water. So we will have hyper-inflation.
How can we protect the value of our assets, assuming that people have some discretionary money? Should they buy growth stocks because
they are cheap, assuming "buy low, sell high?" Or are there better alternatives?
JW: We are headed into a hyper-inflationary depression that will become a Great Depression. When hyper inflation hits, it will
disrupt the normal flow of commerce and turn it into a Great Depression.
What about paper assets based on the dollar? You want to get into something like gold or silver –physical gold or silver, not
paper. Perhaps get some assets outside the dollar. It's a time to preserve your wealth and assets, not to start speculating on the
stock market. There is a lot of volatility ahead. Over the long term, gold and silver are your best hedges.
HJR: That sounds like the familiar tune I've been singing for several years. I've been publishing for 33 years. About 11 of those
years I have been bullish on gold and silver as investments. When I abandoned gold in the early '80s, I was excommunicated from the
gold-bug church because I was supposed to stay faithful to gold, but then the metals weren't the right place to put your money. As
a financial adviser, if I don't have subscribers in the right investments, they will lose money and not renew their subscription
to The Ruff Times. So I have a financial interest in being right. Yogi Berra said, "It's déjà vu all over again." the same thing
is happening that I saw in the '70s that drove the prices of gold and silver to unprecedented highs – only more so now. They are
creating more money than they ever thought of creating back then. We are using words like "trillions," which we never used before.
I'm not just looking at it as an investment and a place to make money. I am looking at it as a possible way to preserve the real
value of your assets so you are not left destitute with a pile of worthless paper.
You showed me a display of Zimbabwe currency, where multi-billion dollar notes started out as $2-bill notes. We could face the
same thing. The world is littered with worthless dead-paper currencies with an average life span of about 75 years. It's always the
same: we make too much of it ever since we created paper currency with the printing press, and creating too much of it to buy votes,
diminishing its value.
A subscriber who wrote to me recently asking me that if the government and the bankers can manipulate the price of gold and silver,
so couldn't they do that for many years and gold and silver would go nowhere?
History doesn't record a single example when a society inflated the dominant currency even near the quantities we are creating
dollars now without destroying its value. Gold and silver, not being anyone's debt or obligation, is where people ought to put their
money.
I have been watching your work now for more than two years. I am amazed that you and I have arrived at the same conclusions from
different sides of the street. I've learned a lot from your view of the numbers, and I'm a fundamentalist.
One reason I like you is because you agree with me. We like people who agree with us. Thanks so much for sharing your time and
expertise with us.
JW: Thank you very much, Howard. I greatly appreciate the interview. I also appreciate your work. Indeed, we are in very broad
and general agreement on where things are headed here. I have followed your work for many years; in fact, your writings back in the
1970s were part of my education as to the nature of the real world. Again, thank you, sir!
If there's any chance we'll avoid a painful bout of rising prices, it won't be the Federal Reserve that saves us. Also: Chipping
away at tech forecasts. [Related content: stocks,
Intel,
Federal Reserve,
gold,
Bill Fleckenstein]
If there were any doubts of the inflationary determination of the Federal Reserve the minutes of its Federal Open Market Committee
meeting on March 17-18 should have put them to rest.
Not only did certain Federal Reserve heads think that inflation was "below desirable levels," they also had this to say:
"Even without a continuation of outright price declines, falling expectations of inflation would raise the real rate of interest
and thus increase the burden of debt and further restrain the economy."
Behold the power of folks' expectations
That is really mind-boggling: the idea that even if prices don't decline, people's expectations that they might will somehow actually
increase real interest rates. It is just nonsense on the part of the money printers who created all this carnage in the first place.
In fact, despite all the headlines that read "Worst crisis since the Depression," there seems to be very little deflation, other
than in prices for assets such as homes and stocks (which don't constitute deflation to begin
with).
Twin data points Wednesday offered examples:
Capacity utilization
registered its lowest level in 40 years.
The Consumer Price Index declined only 0.4%, and, excluding
food and energy, it actually rose 1.8%.
So, if inflation, excepting food and energy, is not less than zero -- with the collapse in everything we have seen, and with capacity
utilization where it is -- when will consumers see the benefit of the price deflation so many expect?
Obviously, that's a rhetorical question. Anyone who believes that the Fed is really going to take away the punch bowl at the right
time and stop inflation anywhere down the road has not been paying attention for the past 20 years, at a minimum. (For more on this,
read "If
there's no inflation, why do we fight it?")
What lies beyond the Fed's meddling is gold. A recent article in the
Financial
Times summed up the bull case (though it wasn't the intent) as follows: "UBS, for example, calculates that the U.S. reserves
of gold are so small, relative to the monetary base, that a price above $6,000 an ounce would be needed to reintroduce a gold standard.
To implement that standard in Japan, China and the U.S., the price would be more than $9,000.
Moreover, right now few Western governments have any motive to even entertain the debate, given that inflation may soon seem the
least bad way to tackle the current overhang of debt."
Inflation is looming on America's
horizon, by Martin Feldstein, Commentary, Financial Times: ...The unprecedented explosion of the US fiscal deficit raises
the spectre of high future inflation. According to the Congressional Budget Office, the president's budget implies a fiscal deficit
of 13 per cent of gross domestic product in 2009 and nearly 10 per cent in 2010. Even with a strong economic recovery, the ratio
of government debt to GDP would double to 80 per cent in the next 10 years.
There is ample historic evidence of the link between fiscal profligacy and subsequent inflation.
But historic evidence and economic analysis also show that the inflationary effects can be avoided if the fiscal deficits are
not accompanied by a sustained increase in the money supply and, more generally, by an easing of monetary conditions. ...
A fiscal deficit raises demand when the government increases its purchase of goods and services or, by lowering taxes, induces
households to increase their spending. ... If the fiscal deficit is not accompanied by an increase in the money supply, the fiscal
stimulus will raise short-term interest rates, blocking the increase in demand and preventing a sustained rise in inflation.
So the potential inflationary danger is that the large US fiscal deficit will lead to an increase
in the supply of money. This inevitably happens in developing countries that do not have the ability to issue interest-bearing
debt and must therefore finance their deficits by printing money. ...
[T]he large US fiscal deficits are being accompanied by rapid increases in the money supply and by even more ominous increases
in commercial bank reserves that could later be converted into faster money growth. ...
The link between fiscal deficits and money growth is about to be exacerbated by "quantitative easing", in which the Fed will
buy long-dated government bonds. While this may look like just a modified form of the Fed's traditional open market operations,
it cannot be distinguished from a policy of directly monetising some of the government's newly created debt. Fortunately, the
amount of debt being purchased in this way is still small relative to the total government borrowing.
The Fed is also creating a massive increase in liquidity by its policy of supplying credit directly to private borrowers. Although
these credit transactions do not add to the measured fiscal deficit, the unprecedented Fed purchases of more than $1,000bn of
private securities have led to the enormous $700bn increase in the excess reserves of the commercial banks. The banks now hold
these as interest-bearing deposits at the Fed. But when the economy begins to recover, these reserves can be converted into new
loans and faster money growth.
The deep recession means that there is no immediate risk of inflation. ... But when the economy
begins to recover, the Fed will have to reduce the excessive stock of money and, more critically, prevent the large volume of
excess reserves in the banks from causing an inflationary explosion of money and credit.
This will not be an easy task since the commercial banks may not want to exchange their reserves for the mountain of private
debt that the Fed is holding and the Fed lacks enough Treasury bonds with which to conduct ordinary open market operations.
It is surprising that the long-term interest rates do not yet reflect the resulting risk of future
inflation.
The government budget constraint is:
(Government spending including interest on the debt) - (Taxes) =
(Change in the Money supply) + (Change in the Bond supply)
Or, more simply:
G - T = ΔM + ΔB
The left-hand side, government spending (G) - taxes (T), is the government deficit (surplus if the value is negative). The right-hand
side shows the two ways of paying for the deficit, printing new money, ΔM, (the change in the money supply can raise prices) and
borrowing from the public by issuing new bonds, ΔB (the change in debt can raise interest rates and lower growth).
Let's start with Feldstein's comments about developing countries. Suppose you are a developing country and you want to improve
your country's growth rate, and you think the key is infrastructure spending. You run a deficit to accomplish this, fully intending
to pay it back out of higher future growth (which may not actually happen).
But how will you pay for that spending on new infrastructure? You, as the dictator, could raise taxes but you are a poor country
and the wealth and income base just isn't there to support a higher tax level. You could borrow the money, but once again the wealth
level in your own country isn't high enough to allow that, so if you borrow, it will have to be from foreigners. But, unfortunately,
there are some defaults in your country's recent past and the international community won't lend to you without restrictions that
you just aren't willing to take on.
So once international credit dries up, becomes prohibitively expensive, or comes with too many restrictions, and if taxes cannot
be raised enough, there is but one choice to pay for the infrastructure spending and the deficit it causes, print the money, and
it's a choice developing countries often find themselves making. The result of these persistent deficits, then, is persistent growth
in the money supply - month after month more money has to be printed to cover government operations - and the result is inflation.
Feldstein's point about quantitative easing monetizing debt can also be explained in terms of this equation. Under quantitative
easing, the Fed prints new money, and uses it to purchase long-term government bonds. Thus, the right-hand side of the equation above
is unchanged overall, but the money component gets larger while the bond component gets smaller as the Fed purchases government debt.
(Note that the money supply also goes up if the Fed purchases private sector bonds rather than government bonds since new money has
to be printed to pay for them, another one of Feldstein's points.)
Once we begin to recover, there are three ways to reduce the inflationary pressures from the growing money supply.
First, we could simply reduce the money supply. How do you do that? By selling bonds to the public. Feldstein's worry is that
the Fed has bought so many private sector bonds (and traded for government bonds in the process) that it won't have enough government
bonds to reduce the money supply by as much as needed, and nobody will want to purchase the private sector bonds unless the price
is very low, or, saying the same thing, the interest rate is [excessively] high. But high interest rates are undesirable so reducing
the money supply may be difficult.
The second choice is to raise taxes. It might happen, but my inclination is to say good luck with that. But I hope I'm wrong,
and maybe we can make some headway here.
Third, we could reduce government spending. I don't know what the administration's goals are as to the size of government
over the long-term, so I can't say for sure how much of the stimulus spending is considered to be temporary, and how much is intended
to be permanent, e.g. for health care reform. But much of it was sold to the public as temporary, and I expect the administration
to make good on that commitment (though "good luck with that" comes to mind again, but I'm still hopeful). If it doesn't, other
goals such as health care reform could be compromised.
And speaking of health care reform, that's where the focus needs to be. The budget worries twenty years from now have little to
do with the temporary stimulus measures we are taking today, going forward health care costs are the most important issue by far
in terms of the budget, and everything else revolves around solving that problem.
So am I worried about inflation? Somewhat, particularly when I hear that the Fed's independence is likely to come under review
by congress. Whatever doubts you have about the Fed's commitment and ability to keep inflation low in the future, I have little doubt
that congress would choose to monetize the debt when faced with tough choices about how to solve a deficit problem (would congress
have done what Volcker did?). I still have faith in the Fed, but as you can see from the government budget constraint above, what
the Fed can do is dependent upon the actions of congress. If deficits persist, it could come down to a choice by the Fed to monetize
the deficit - and risk inflation - or allow government debt to pile up and risk high interest rates. Volcker chose low inflation
over high interest rates when confronted with a similar choice, but it's not completely clear to me at this point what this Fed will
do in the same situation, and how much cooperation they can expect from congress in terms of reducing the deficit.
... Shortly after joining the Fed in 2002, Bernanke gave a speech describing how the Fed could prevent deflation, i.e., a general
decline in prices. The key theme was that, in a pinch, the Fed could simply print more dollars -- for example, by buying long-term
bonds on the market -- which reduces the value of each dollar in circulation and therefore raises the dollar price of goods and
services. "Under a paper-money system," Bernanke explained, "a determined government can always generate higher spending and hence
positive inflation." In a time of economic overconfidence, the discussion seemed largely academic. But it is now clear that Bernanke
intends to follow through on it.
The implicit assumption is that the Fed is expanding the money supply via a policy of quantitative easing with the explicit goal
of raising inflation expectations. First off, as Bernanke
said once again today,
he does not describe policy as quantitative easing:
In pursuing our strategy, which I have called "credit easing," we have also taken care to design our programs so that they
can be unwound as markets and the economy revive. In particular, these activities must not constrain the exercise of monetary
policy as needed to meet our congressional mandate to foster maximum sustainable employment and stable prices.
Pay close attention to Bernanke's insistence that the Fed's liquidity programs are intended to be unwound. If policymakers truly
intend a policy of quantitative easing to boost inflation expectations, these are exactly the wrong words to say. Any successful
policy of quantitative easing would depend upon a credible commitment to a permanent increase in the money supply. Bernanke is
making the opposite commitment - a commitment to contract the money supply in the future. Is this any way to boost inflation expectations?
See also Paul Krugman:
In that case monetary policy can't get you there: once the interest rate hits zero, people will just hoard any additional cash
– we're in the liquidity trap. The only way to make monetary policy effective once you're in such a trap, at least in this
framework, is to credibly commit to raising future as well as current money supplies.
If Bernanke really intends to raise inflation expectations, he is making an elementary error by reiterating his intention to shrink
the Fed's balance sheet in the future. The current increase in money supply is thus transitory and should not affect future expectations
of inflation. I can't see him making such an elementary error, which suggests that Bernanke's word should be taken at face value;
he intends policy to be "credit easing," not the oft-cited "quantitative easing."
It would seem the bigger concern in the short term is deflation, and I've been assuming the Fed was trying to raise inflation expectations
- and I've been calling the Fed's policy "quantitative easing".
Dr. Duy writes:
Bottom line: I reiterate my concerns that the media and market participants are using the term "quantitative easing" too loosely.
I understand that this complaint falls on largely deaf ears. If Bernanke is using quantitative easing to boost inflation expectations,
then I think we need to seriously address the likely ineffectiveness of any such policy when Fed officials repeatedly promise
to shrink the balance sheet in the future.
This is, in essence, a question about whether inflation expectations are anchored or not, and that is also the key question is
this
discussion of the odds of deflation by John Williams of the SF Fed. He argues that the previous decades can be broken into
a recent time period in which expectations appear to be well-anchored, the time period 1993 through 2008 is cited in the linked
discussion, and a time period in the late 1960s and the 1970s when inflation expectations do not appear to be anchored (based
upon Orphanides and Williams 2005). The paper also notes that recent surveys of professional forecasters are consistent with anchored
expectations.
But past history shows us that expectations can move from one state to the other, from untethered to tethered, and there's no
reason that cannot happen again, but in the other direction. So here
I agree with Martin Wolf,
it's dependent upon the credibility of policymakers. So long as people believe that the Fed is committed to preventing an outburst
of inflation, and that they are capable of carrying through on that commitment, expectations will remain well-anchored. But if
people believe that that Fed's hands are tied because of the harm reducing inflation would bring to the real economy, an out of
control deficit, or due to political considerations that force them to accept inflation they could and would battle otherwise,
then we have a different situation and long-run inflation expectations will change accordingly.
I recommend the paper Professor Thoma linked to:
The Risk of Deflation
by John C. Williams, San Francisco Fed Director of Research
The evidence indicates that a substantial increase in slack can lead to deflation, but the depth and duration of the deflation
depends on how well anchored inflation expectations are. Two policy implications can be drawn from this and other research on
deflation. First, a central bank should take appropriate actions to stem the emergence of substantial slack in the economy and
thereby reduce the risk of deflation. Second, it should clearly communicate its commitment to low positive rates of inflation.
An example of such communication is the Federal Open Market Committee's recently released long-run inflation forecasts. Such words,
backed by appropriate actions, reinforce the anchoring of inflation expectations and reduce the chances of a deflationary spiral.
The
condensed wisdom of former Fed chairman Alan Greenspan from this Bloomberg
report on yesterday's gathering at the Economic Club of New York:
What we are currently going through is a once-in-a-century type of event. It will pass ... Given the Japanese experience of the
1990s, we need to assure that the repair of the financial system precedes the onset of any major fiscal stimulus.
To
stabilize the banking system and restore normal lending,
additional TARP funds will be required ... Banks
are not going to increase their lending until they feel comfortable with the amount of capital they hold. That's not going to
happen for a while.
Until we can stabilize the asset side of bank balance sheets, this crisis will not come to a close ...
Unfortunately, the prospect of stable home prices remains
many months in the future. Many forecasters project a decline in home prices of 10 percent or more from current levels.
Certainly, by any historical measure, world stock prices are cheap. But as history also counsels they could get a lot cheaper
before they turn ... A rise in equity prices could help offset the impact of falling house prices.
The recent rise of long-term interest rates appears
to be signaling market concerns about inflationary pressures. It could turn out to be the canary in the coal mine.
The regulatory structures, especially internationally, were way behind the curve ...
There is a general belief that somehow we can regulate very complex organizations, and we can't. What we've got to do is to try
to make them more efficient, to put far more capital into these organizations.
I wonder if he gets weird looks these days from other economists.
Before he was named chairman of the Federal Reserve Board, Ben Bernanke was one of the foremost scholars of the central bank's
response to the Great Depression. It tells us much about his state of high anxiety that the Fed is injecting another $1 trillion
into the economy by buying Treasuries and other government securities. Bernanke clearly believes this is not just another recession.
And he's mindful that the Fed's biggest mistake in the Depression was to tighten credit, which worsened deflation of the 1930s.
But it's a gamble. The Fed's purchasing power is not made in a tree by elves. It comes
from, essentially, printing more money. If the world's biggest danger is deflation, as Bernanke and a number of economists believe,
then this action is wise. The trick to price stability is "reflation" not tight-fisted central banks.
If conditions are different, however, it bakes serious inflation in the cake. Thus today's market gyrations, which
at the moment have the dollar down, gold and oil up and stocks falling. This is less a fear of raging inflation, than a fear of
uncertainty itself, to paraphrase FDR.
But the Fed is out of the conventional tools it has used in post-World War II recessions. Interest rates are virtually zero.
So now it's a step into a risky undiscovered country. Among the risks is how our overseas creditors react if they
believe this will dilute the value of their dollar-based assets, including Treasuries. Then there's the danger that Bernanke is
creating yet another Fed-made bubble, with an even worse crash to follow. If it works, however, it may finally get credit moving.
Stay tuned.
The Back Story: Moody's says it may
downgrade
$241 billion in securities backed by so-called jumbo mortgages. This is a pretty big deal because these are considered prime loans,
as opposed to the risky subprime mortgages that began the bubble burst. Jumbos, mortgages usually larger than $417,000, go to
borrowers with good credit, and they've been widely used in the Seattle area. The credit rating service obviously expects more
defaults -- not unreasonable given rising joblessness. And who knows what scary creatures are hiding in those tranches.
I can only imagine what will happen if Moody's does downgrade those jumbo mortgages. More financial pain
for everyone, including pension funds that are overexposed to alternative investments.
Christophe Bernard told French language financial daily L'Agefi that hedge fund assets, which data show peaked at more than
$2 trillion in early to mid 2008, could fall as low as $700 billion as investors seek out less risky climes amid continuing market
turmoil.
Bernard is responsible for investment strategy at UBP, which at end 2007 was the world's second-largest investor in hedge funds
with more than $53 billion invested in single funds and funds of funds. Data is not yet available for 2008.
Bernard also said UBP might cut about 10 percent of its staff of about 1,390, in line with the banking industry, through a
combination of layoffs and early retirement.
A spokesman from UBP said half of the layoffs would be in Switzerland and half in the rest of the world.
Bernard said UBP would reduce its own hedge fund exposure by two thirds, and would restructure its range of funds of funds
by the third quarter of 2009.
Last week, UBP said it would partially reimburse investors with exposure to Bernard Madoff's
$65 billion fraud. Many invested either directly through UBP or had exposure via its fund of hedge funds products.
UBP said in the future it would only invest in funds with independent custodians, who hold the fund assets, and administrators,
who calculate the value of those assets.
"The hedge fund bubble has popped and, unfortunately when any bubble pops, it's a painful process," said Ken Kinsey-Quick,
head of multi-manager of hedge fund firm Thames River Capital.
"If half were to close down, I wouldn't be surprised. But the nice thing about hedge fund land is that things move very very
quickly, it will probably be done and dusted by June," he continued
Hedge funds returns were a negative 19 percent last year, when investors pulled out a record $158.9
billion (113.86 billion pounds), according to data from Lipper.
Kinsey-Quick believes that only strong hedge fund models are likely to survive the financial meltdown.
"You will have only very robust models -- only the fittest will survive. But there is going to be
some collateral damage. There will be some good players taken out," he said.
And he noted that the hedge fund industry was already adapting to meet the calls for greater scrutiny.
"Transparency has gone through the roof. Liquidity terms are beginning to match the liquidity of
underlying assets," he said.
U.S. commercial real estate prices tumbled in January, Moody's said on Thursday, suggesting problems that began in housing
have spread well beyond that sector;
Commercial property values fell 5.5 percent, the biggest drop in since the ratings agency began compiling this index in 2000.
"Prices have nominally returned to the levels they were in the spring of 2005," Moody's said, adding that transaction volumes
were at their lowest levels since October 2003.
Speaking to investors in New York, executives said a stress test on its portfolio based on a Federal baseline assumption for the
economy implied the default rate could be 8%, rising as high as 10% if U.S. GDP and unemployment turn more negative. That would
result in a potential 2009 segment loss of $900 million, or $1 billion, respectively. For the fourth quarter, GE Real Estate said
its debt-default rate was just 1.2%, compared with a 5.4% rate seen at commercial banks, due to unit's avoidance of construction
and development loans, second mortgages, malls, and resorts, and having just 3% of its portfolio in subprime lending.
Now, let me ask you, if you are the Fed Chairman and you are seeing signs of deflation everywhere - soaring unemployment, a mortgage
mess, pension funds imploding, etc. - wouldn't you try to reflate your way out of this mess?
But the jury is still out on quantitative easing
and its effects on
pension funds. Today's stock market was clearly not a sign of confidence.
If successful, the road to reflation will be long and arduous. I remain skeptical, fearing the
age of deflation, knowing that you can't
reflate deflated balloons.
Anonymous said...
FDR,
1st inaugural address: "the money changers have fled from their high seats in the temple of our civilization. ... those unscrupulous
money changers stood indicted in the court of public opinion, rejected by the hearts and minds of men."
1st fire side chat, he promised to pursue a final reckoning with the illegitimate and overbearing financial aristocracy that had
shadowed the nation since at least the days of Andrew Jackson." the days of great promoter or the financial titan to whom we granted
everything, if he will only build or develop is over."
and also wrote 'The fundamental trouble with this whole stock exchange crowd is their complex lack of elementary education. I
do not mean lack of college diplomas, etc. but just inability to understand the country or public or their obligations to their
fellow men. Perhaps you can help them acquire a kindergarten knowledge of these subjects. More the power to you."
I not ready to declare the end of deflation risks. But I can easily make a story in which structural adjustment combined with
misdirected stimulus yielded a higher than expected inflation rate. As always, it is wise to consider the full range of risks
to your outlook.
Divergent Unemployment
Rates, by Tim Duy: It is common knowledge that educational achievement significantly impacts labor market outcomes.
Still, I was struck by the increase in that disparity as I prepared the following charts for a presentation last week. Consider
the year over year change in unemployment rates by educational achievement since 1993:
Note that the increase in unemployment rates for no high school and high school graduates are increasing at a very rapid rate
over the past year (note this also reflects rising labor force participation for the no high school group (Jan. 2008 - Jan. 2009),
in contrast to falling participation among other groups). In contrast, during the 2001 recession, increases in unemployment
rates were comparable. For a closer look at 2001:
And the current recession:
A few thoughts come to mind:
Rising structural unemployment. If the housing/consumer debt dynamic
led us into this downturn, and, as I think is reasonable to expect, will not lead us out of the downturn, then we can expect
that those persons unemployed as a result will continue to face relatively higher rates of unemployment in the future.
In essence, it is not clear to which sector these labor resources will be reallocated, especially given anticipated lethargic
rates of labor growth on the other side of this recession. I suspect that very strong growth will be required to revitalize
a labor market for these individuals (such as that experienced during the information technology boom). No such growth
forecast exists.
Hysteresis? That is a term that has not cross my mind for many years.
Suppose the economy is undergoing a structural adjustment that promises to deliver low growth rates for the next decade, with
cycles driven by the start-stop process of fiscal stimulus. Could each new "boom" end with an unemployment rate higher
than the low of the previous boom as structural unemployment edges up?
Stimulus may also have a differential impact on unemployment.
If the jobs generated by fiscal stimulus tend toward workers with higher education levels,
then stimulus will not alleviate the problem of rising structural unemployment. Note - this is NOT an
argument against stimulus. It highlights the importance of proper structure of the stimulus package.
Us versus them. I hate to say this, but certain political partisans
could turn this into a morality play...why should your tax dollars be wasted supporting the bottom end of the educational level?
They had their chance.
Inflation risk? If significant structural issues are in play, perhaps
we are fooling ourselves about the low risk of inflation. Consider
Jim Hamilton:
I have in my research instead stressed
technological
frictions. For example, when spending on cars abruptly falls, there is a physical, technological challenge with getting
the specialized labor and capital formerly employed in manufacturing cars into some alternative activity. In my mind, it
is a mistake to pretend that any federal program is capable of immediately re-employing those resources into an alternative,
equally productive enterprise.
More fundamentally, I have
suggested that our present situation is as if someone had quite successfully sabotaged the basic functionality of our
financial system. Until we once again have a financial sector that can successfully allocate credit to worthy projects,
we're not possibly going to be able to produce as much in the way or real goods and services, no matter what the level of
aggregate demand or stimulus package might be.
In terms of the textbook Keynesian models that people play with, I'm suggesting that "potential" GDP growth for 2009:Q1--
that growth rate which, if we try to exceed it by stimulating aggregate demand, we primarily
just get more inflation-- is in fact a negative number.
I not ready to declare the end of deflation risks. But I can easily make a story in which structural adjustment combined
with misdirected stimulus yielded a higher than expected inflation rate. As always, it is wise to consider the full range
of risks to your outlook.
Just as Mr. Obama has danced into the oval office, we've arrived at a moment when a lot of people have a hard time
imagining the future. This includes especially the mainstream media, which has reached a state of zombification parallel to that
of the banks. But even in the mighty blogosphere, with its thousands of voices unconstrained by craven advertisers or pandering managing
editors, the view forward dims as a dark and ominous fog rolls over the landscape of possibilities.
For at least a year several story-lines have been slugging it out inconclusively for supremacy of the Web-waves.
The main event has been the Deflationists versus the Inflationists. The first group basically says that so much "money" is being
welshed out of existence that it dwarfs the new "money" being shoveled into existence in the form of bail-outs, tarps, and office
re-decoration stipends. The Deflationists see the tattered remnants of the consumer credit economy auguring ever deeper into a hole
until it is buried so far down that all the back-hoes ever sold will not be able to dig it out. The competing Inflationists say that
the massive truckloads of shoveled-in "money" will soon overtake vanishing "wealth" and, in the process, make the US dollar worthless.
Some of us see both outcomes in sequence: the deflationary "work out" of bad debt currently
underway -- of loans that will will never be paid back, of acronymic paper securities revealed as frauds, of "non-performing" contracts
entering the swamps of foreclosure, of banks pretending to still exist, of hallucinated "wealth" rushing into the cosmic worm-hole
of oblivion -- can only go for so long before everyone who can go broke will go broke. Then, just as we find ourselves a nation of
empty pockets, the tsunami of shoveled-in "money" designed to "reboot the consumer" (created not from productive activity but just
printed recklessly), will start churning through the "economy," chasing products and commodities that became scarce during the deflationary
phase -- and the result is hyper-inflation, the eraser of debt, destroyer of fortunes, and suicide pill of feckless governments.
I guess the basic difference is that the hardcore Deflationists seem to think that their process can
go on forever. The society just gets poorer and poorer until we're back at something like a scene out of Pieter Bruegel the Elder.
The Inflationists see a fork in the road leading to more overt destruction, especially political turmoil as a lot of negative emotion
joins the work-out orgy and overwhelms government.
But in this moment, the week after a new president's inauguration, the deadly fog has rolled in and absolutely
everyone dreads what lurks on the other side of it, without being able to discern the path through it. For example, the "bail-out
fatigue" being reported suggests that congress may just call a halt to money-shoveling. Where would that leave Mr. Obama's urgent
call for "stimulus?" Not to mention further TARP injections for redecorating bank offices.
I've been skeptical of the "stimulus" as sketched out so far, aimed at refurbishing the infrastructure
of Happy Motoring. To me, this is the epitome of a campaign to sustain the unsustainable -- since car-dependency is absolutely the
last thing we need to shore up and promote. I haven't heard any talk so far about promoting walkable communities, or any meaningful
plan to get serious about fixing passenger rail and integral public transit. Has Mr. Obama's circle lost sight of the fact that we
import more than two-thirds of the oil we use, even during the current price hiatus? Or have they forgotten how vulnerable this leaves
us to the slightest geopolitical spasm in such stable oil-exporting nations as Nigeria, Mexico, Venezuela, Libya, Algeria, Columbia,
Iran, and the Middle East states? And we're going to rescue ourselves by driving cars?
I know it is difficult for Americans at every level to imagine a different way-of-life, but we'd better
start tuning up our imaginations, because endless motoring is not our destiny anymore. The message has not moved from the grassroots
up, and so at this perilous stage the message had better come from the top down. Mr. Obama needs to go on TV and tell the American
public that were done cruisin' for burgers. He could do that by drastically reviving his stimulus proposal as it currently stands.
Putting aside whether this "stimulus" represents reckless money-printing in an insolvent society, let's
just take it at face-value and ask where the "money" might be better directed:
-- We have to rehabilitate thousands of downtowns all over the nation to accommodate the new re-scaled edition
of local and regional trade that will follow the death of national chain-store retail of the WalMart ilk. Reactivated town centers
and Main Streets are indispensable features of walkable communities. The Congress for the New Urbanism (CNU.org)
ought to be consulted on the procedures for accomplishing this and for rehabilitating the traditional neighborhoods connected to
our Main Streets.
-- We have to reform food production (a.k.a. "farming"). Petro-dependent agri-biz will go the same way as the chain
stores. Its equations will fail, especially in a credit-strapped society. That piece of the picture is so dire right now, as we prepare
for the planting season, that many crops may not be put in for lack of front-money. This portends, at least, much higher food prices
at the end of the year, if not outright scarcities and shortages. And the new government wants to gold-plate highway off-ramps instead?
Earth to Rahm Emanuel: screw your head back on.
-- As mentioned above, we have to get passenger rail going again because the airlines are going to die the next
time there is an uptick in oil prices, or a spot shortage of oil. Let's not be too grandiose and attempt to build expensive high-speed
or mag-lev networks -- certainly not right now -- because they require entirely new track systems. Let's fix those regular tracks
already out there, rusting in the rain, or temporarily replaced by bike trails.
Those are three biggies for moment and enough to keep this society busy for a couple of
years. But more to the point of this blog, observers of all stripes are having trouble imagining any way out of our multiple predicaments.
All the possible actions tried so far have have seemed absurd. Why even try to prop up inflated house values when the single most
crucial need in this sector is for house prices to return to parity with incomes so the shrinking pool of ordinary people still employed
can begin to think about buying one? Well, the obvious explanation is that politicians can't bear the pain of watching mass foreclosures
and the ruination of families. This is pretty understandable, and it is tragic indeed. Frankly, I don't know of any political narcotic
that can mitigate the pain that results from having made poor choices in life -- even if those choices were promoted and reinforced
by the mighty ideology of "American Dreaming." Anyway, the foreclosures are well underway now, and perhaps the salient question is
how long will the public's fury remain constrained while they hear about Wall Street executives buying $80,000 area rugs? Surely
there is a tipping point of collective distress that is not too far from where we're at now.
In the realm of TARPS and other continued bail-outs aimed at the banks, the car-makers, and a host
of other corporate special pleaders, I wonder if we have already reached the saturation point. But opinion on the Web is starkly
divided and a prime manifestation is the debate over whether it was a terrible blunder or the right thing to let Lehman Brothers
sink into bankruptcy. Both sides make valid arguments, but virtually all the other super-banks right now have lurched to death's
door and we have no clear guidance on what we should do about them. Each one is touted as "too big to fail," as well as being interlocked
with the others on credit default swaps that would bring them all crashing down if one counter party truly failed. It seems to me
that this is what lies at the heart of the present situation. Nobody I've encountered in the sphere of opinion-and-comment thinks
that these banks will survive, and this outcome beats a short path to the conclusion that the entire banking system is fatally ill
-- leading directly to a super-major crisis of political economy in which the whole reeking, leaking system just crashes. I think
this is what lies behind Mr. Obama's appeals for very urgent action.
But then we're back to square one: nobody, including Mr. O himself, has really proposed a set of
actions that have not already been tried in the way of money-shoveling. So this will be a week in which, perhaps, some wise and intrepid
figures -- perhaps even the president -- will articulate something we haven't heard before, perhaps even something like bearing our
hardships bravely. It'll be a very interesting week, I'm sure.
____________________________________
My 2008 novel of the post-oil future, World Made By Hand, is available in paperback at all booksellers.
"Consensus has the recession ending in the middle of next year; I just don't see that," economist and investment adviser Gary Shilling
said. "We are in trouble; the recession is going to run at least through next year. We are at the onset of deflation, which will
reign during the rest of this recession."
We have worried out loud that the policy remedies being pursued by the US amount to trying to restore the status quo ante to as
great a degree as possible, particularly in trying to resturn US overconsumption to something approaching its former levels. Although
it may be difficult to work two agendas, crisis response and addressing the root causes of our economic mess in parallel, focusing
solely on the former runs the considerable risk of that we will see only a shallow recovery, with many of the elements of the crisis
soon reasserting themselves in more virulent form.
Similarly, the Chinese, who at least in theory had accepted that they needed to let their currency rise (and presumably over time
move to a more balanced, less export-dependent economy) have similarly gone into full reverse gear. The RMB has now been more or
less re-pegged to the dollar, and China is moving in other ways to shore up exporters (such as pressuring banks to lend).
Michael Pettis
points to a related, troubling development: other emerging economies are seeking to restore or increase trade surpluses. That
in turn means SOMEONE has to import. But the US wants to increase exports (and the move by the Fed to quantitative easing will have
the side benefit, from its perspective, of weakening the dollar). Euroland is neither keen nor able to step into the US role of importer
of the last (and first) resort (boldface ours):
One consequence of the financial crisis will inevitably be capital outflows from developing countries.
The necessary corollary of capital outflows is trade surpluses. Without running a trade surplus no country can consistently support
capital outflows, and as obvious as this is, it also seems to be a source of tremendous mystery to many experts and policymakers.
Keynes for example pointed this out in his fury at the way Germany was required to post war reparations in the 1920s while its
ability to generate export surpluses was all but eliminated by the victorious powers. Capital exports by definition require trade
surpluses.
This is just another way of saying that a lot of developing countries that had been running trade deficits will soon be, if they
aren't already, running trade surpluses. Instead of contributing their net demand to the world economy, as they had via their
trade deficits, they will now be contributing their net supply.
This will not help the world imbalances. The biggest contributors of net demand are the US and non-Germany Europe, and both of
these regions are seeing a rapid decline in their net demand contribution (i.e. their trade deficits are expected to shrink).
To adjust to this decline the world needs new sources of net demand or else global production must contract sharply via factory
closings and rising unemployment. But the largest net supply country, China, is increasing its export of net supply (its trade
surplus has been rising) while several trade deficit countries in Asian and elsewhere are switching to trade surplus or otherwise
trying to reduce their deficits.
This cannot be sustainable. We cannot expect production to rise while consumption declines except if it comes with a dangerous
rise in forced investment (also known as inventory). The crisis cannot even begin to be considered
in its final stages until this issue is resolved.
Pettis addresses another issue, namely, that China's interest rate cuts will do little for consumers, and will instead exacerbate
global imbalances:
For me, interest rate cuts in China will have very different effects than they might in the US. In the US, where a great deal
of credit goes to consumption, lowering interest rates can be seen as boosting consumption as much as boosting production. At
any rate the US, which contributes the largest amount of excess net consumption to the world and must bring it down, has every
reason to focus on production-boosting measures as well as consumption-boosting measures.
But China is different. First of all there is little to no consumer credit in China, so cutting interest rates won't do much to
boost consumption. It might do so indirectly by reducing mortgage payments (Chinese mortgages are all floating-rate mortgages)
and perhaps by slowing the decline in real estate prices, but it is not clear how big an effect that might have on increasing
consumption, especially since even lower interest rates aren't likely to create much buying interest for real estate. In fact
there is some evidence in China that households may actually contract spending when deposit rates are cut since they need to save
more to achieve their precautionary savings targets.
On the other hand with most credit going to investment, lowering interest rates definitely reduces further the cost of production.
I know that the idea of lowering interest rates in an economic contraction is firmly entrenched in economic wisdom, and I am taking
what may seem like an extremely opposite viewpoint, but I doubt that cutting interest rates is what China needs to do if it is
expecting to adjust to the global payments adjustment. Every domestic policy must be aimed at boosting demand, and anything that
increases China's "competitiveness" is a dangerous detour since it can only exacerbate global imbalances and increase the likelihood
of trade friction.
In down times, it's every man for himself. The interesting question is whether these conflicts come to the fore in 2009 or take a
bit longer to become acute.
Selected comments
Anonymous said...
It seems a little hypocritical for Uncle ZIRP to be blaming China on interest rate cuts.
The other assumption that always gets me is the notion that RMB has to rise. Now Chinese exports has contracted, so should capital
inflows into China. Logically the RMB will fall. Having China using reserves to defend a falling currency to the point of causing
it to rise smacks retarded to me.
What I see is a whole lot of hostage taking from America. And very little in the way of actually solving anything.
" In fact there is some evidence in China that households may actually contract spending when deposit
rates are cut since they need to save more to achieve their precautionary savings targets."
Kinda sounds like Fresno Dan.
The original goal of all the government hyperactivity was to rescue real estate and get mortgages happening
again... The results so far are more programs, more government and fewer loan programs.
Steve Higgins
Boulder Real Estate and Mortgages
www.BoulderLoanRanger.com
If you also assume that there is still a MAJOR worldwide problem with bad debt/insolvencies, and then
add this problem of excessive exports and currency depreciations, unfortunately Yves is right in that it is FAR too early to see
the end of these very trying times.
My wife is a paramedic, when they are called to a code one and the patient is obviously going to die.
They make a little show for the on lookers, to make the on-lookers feel good about it all. They tried and all, in the end they
just let them go. Kinda like the world economy eh.
"Every domestic policy must be aimed at boosting demand, and anything that increases China's "competitiveness"
is a dangerous detour since it can only exacerbate global imbalances and increase the likelihood of trade friction."
The qualifier is that Chinese domestic policy must be aimed at increasing Chinese demand. So far, they seem more focused on boosting
US demand through still lower prices. My mind cannot let go of the specter of world-wide deflation and job wars followed by ...
The perfessers, who created this monster from their tenured perches, are still ranting against "protectionism". They really haven't
factored in world war or worse, loss of their own jobs.
China, it seems, insists on maintaining and even expanding its trade balance with the US.
Doesn't that mean that the proper policy for the US in this situation - for our own benefit and for the benefit of the rest of
the world - is to erect trade barriers such as tariffs or quotas to reduce the trade imbalance?
lowering interest rates in China to lower the costs of production will only serve to lead to more over-investment
from the credit creation boom era that just won't die.
Policies like this that exacerbate the overinvestment and production capacity in China will only worsen the developing crisis.
How long is it going to take for the collective world to learn the music has stopped playing and that it is time to stop dancing?
The Chinese will claim a bigger and bigger piece of the market share as their prices tumble. This leads
to a rapid acceleration in job losses in the US. There are two alternative escape routes for the US, the first being protectionism
and the rest of the world slowly shunning the US, or currency devaluation and loss of reserve currency status.
Either way living standards in the US would drop.
Perhaps the best option would be an engineered gradual devaluation of the dollar before too many jobs are lost. Still I am not
entirely happy with the way that the money flows are described by Michael Pettis. Something tells me though that his basic premise
is not quite right and it has to do with the subtle difference between capital exports and investment. Investment is not really
an export as it can be pulled back.
certainly the US hasn't stopped believing that its economic model of the last 60 years of getting credit
into the hands of american consumers and supporting the real estate and paper asset markets should cease, so why blame the chinese
for continuing their production based model: the result of the FED's money printing would be more debt for americans, devaluation
of the US currency and eventually default of treasuries. It is a death spiral for everyone, americans chinese etc. But don't shift
the cause of the problem from the US to the rest of the world.
To play devil's advocate the relationship might work between America and China. What if China just said
screw it, they will fund the trade deficit of America and the federal government deficit up to basically any level.
Even if they had to fund a trillion dollars a year, it sounds like it would be impossible. But its only 1,000$ per Chinese person.
Reading Brad Setzer, it appears that is exactly what the Chinese are doing and intend to do, buy every
last Treasury they can lay their hands on. What is the alternative (the Germans and the EU would go ballistic if they started
buying EURO bonds and drove up the EURO), or basketcase Japan and its Yen who would also frown on further appreciation)? But the
American is spent out, her income flat for seven years. Now she is underwater with the asset price declines, she either wants
to just pay off this debt or else default in face of the hopelessness of the situation. Those who aren't, are saving (see the
already current swing from a negative savings rate in 2005 to a 3.5 savings rate in 2008)as the only way to build an emergency
fund for job loss and for retirement.
If China can't find jobs for its people, they, the Chinese people may conclude that the Chinese Communist
Party has lost the "Mandate of Heaven" and it is time for a new Emperor. A Chinese civil war (along with a Pakistan-India
Nuclear war)I guess is one way to get rid of surplus capacity.
As far as "investments" coming back, the descendants of the those who invested in pre-1917 Russia and pre-1949 China are still
waiting to get their money back.
We've got a govt run by millionaire congressmen who engorged themselves on
the status quo. There is no hope for the US worker save getting these villains out of high office.
It will never happen.
Prediction:
Martial law in 2009-2010. The rich have stolen the money and they ain't giving it back.
Internet will be shut down and the constitution suspended.
Why wouldn't the rest of the world erect trade barriers? Isn't this basically what European champions
are all about? Why is it so hard for the US to fathom that the rest of the world doesn't see ZIRP
as the answer? Is it because the rest of the world serves a pagan constituency of savers? The high priests at the
Fed and treasury hve decreed that US is doing the yeoman's work spending other people's money. The Pharisees, or is it pharaohs)
simply can't conceive of the idea that their entire kingdom is a mirage resulting in malinvestment the likes of which the world
has never seen. Overcapacity is rampant everywhere, no more so than in the financial community.
Is it not a little shocking that the same crowd that has been at the globalization fore is screaming loudest for neo Keynesianism?
Diversionary catcalls about free market jihadism only detract from the unholy ideological alliance hatched in the wake of BWII.
It's not regulation rather the foundations of the system itself.
The dirty little secret is that the globalizers cum Keynesians had to embrace the free markets because the ideological achievements
of pushing for max integration trumped the short term Faustian bargain. Seen in this light, the Keynesianism shouting make perfect
sense. On need only read the latest post on Economist's View about the Fed adding a asset inflation target mandate to its charter.
The globalizers appear to have more in common with the Chinese and Sun Tzu than would be given credit – win the battle before
it is fought, right.
The globalizers are just opportunistic, or cunning, socialist. They are about bigger and bigger government and integration begets
that goal. The ICC, UN, Kyoto and the fondness of the Davos crowd to talk about global cosmopolitans all speak to the not so thinly
veiled agenda. Abby Joseph Cohen has been promoted to work on environmental and world issues after being so prescient in her market
analysis. Her ilk will lift the world out of poverty; so long as the multinational meets financial set continue to extract their
rents, at the continuing expense of those they seek to help. No BRICs in the Gulfstream, or is tit G7.
The upper west side ulema sit squarely at the vanguard of this agenda. And the illuminati have been fighting their dirty war for
decades. It shouldn't shock that Hollywood captures the esprit de core perfectly in Col. Jessup's rant in a Few Good Men:
"I have a greater responsibility than you can possibly fathom. You have the luxury of not knowing what I know. And my existence,
while grotesque and incomprehensible to you, saves lives (substitute investment banks)...You don't want the truth. Because deep
down, in places you don't talk about at parties, you want me on that wall. You need me on that wall"
He believed it and they do to. Be worried as they say. Paulson tirade in today's FT is yet more of the oozing puss. The agenda
marches on obama, for now.
"December 29, 2008, El Paso, Texas - A U.S. Army War College report warns an economic crisis in the United States could lead to
massive civil unrest and the need to call on the military to restore order.
Retired Army Lt. Col. Nathan Freir wrote the report "Known Unknowns: Unconventional Strategic Shocks in Defense Strategy Development,"
which the Army think tank in Carlisle, Pa., recently released.
"Widespread civil violence inside the United States would force the defense establishment to reorient priorities ... to defend
basic domestic order and human security," the report said, in case of "unforeseen economic collapse," "pervasive public health
emergencies," and "catastrophic natural and human disasters," among other possible crises.
The report also suggests the new (Barack Obama) administration could face a "strategic shock" within the first eight months in
office.
Fort Bliss spokeswoman Jean Offutt said the Army post is not involved in any recent talks about a potential military response
to civil unrest.
The report become a hot Internet item after Phoenix police told the Phoenix Business Journal they're prepared to deal with such
an event, and the International Monetary Fund's managing director, Dominique Strauss-Khan, said social
unrest could spread to advanced countries if the global economic crisis worsens.
The multi-national corporation has a heavy hand in this situation as their
investment both in China's production model and political/PR/financial power within the U.S. promoting global trade benefits are
hitting a wall.
Clearly years of careful financial and political ploys are rapidily coming undone here and abroad with real massive loss for their
financial investments overseas and poltical and public relations influence within the U.S.
I think you nailed it and good to know I am in good company. Sometimes cutting
interest rates can be the wrong thing to do. I believe this crisis was precipitated by the Fed. cutting rates in response to a
solvency crisis.
In a solvency crisis lenders need a higher not lower interest rate! In doing so they destroyed the entire
financial architecture- the spread relationship between various asset classes.
That break down in turn was viewed by the markets as reflective of even greater problems the death spiral
was on.
Can deflation and inflation coexist somehow "peacefully coexist" in the current economy ?
by cactus
Inflation, Deflation... Where The Heck Are We Going?
Some folks are telling we are going to have deflation, what with the economy contracting and the vast disappearance of tons of cash
through the implosion in value of assets that weren't really worth what Goldman, Welfare, Queen & Sachs and the rest of 'em told
us they were worth. Some folks tell us we're gonna have inflation - after all, the Fed is printing money like mad and the Federal
Government is handing out bail-outs to those who got us into this mess like there is no tomorrow.
I've been too swamped with my day job to have a chance to work through this myself, but it seems to me
that falling prices are coming to some sectors of the economy, and the loot is going to other sectors of the economy.
Perhaps the end result of this is going to be merely one big redistribution, with the change in CPI remaining within a range
(say, -1% to 5%) that is not outlandish by US standards and which certainly doesn't qualify as a problem when viewed from the perspective
of countries that have faced hyperinflation or massive deflation.
In other words, we may not see a monetary phenomenon (at least not until significant parts of the
debt eventually become hard to service, which is not a matter of months) but rather a furthering of our travels down the road as
a kleptocracy.
Like I said, I haven't had the chance to work this out. Where do you think we're going?
____________________________
by cactus
I'm reproducing the bulk of a very good (and possibly final) post by London Banker, a former central banker and securities regulator,
that takes issue with some of the conventional wisdom surrounding the efforts to remedy our economic crisis via liberal applications
of monetary easing and fiscal stimulus.
I happen in general to be sympathetic to minority views (conventional wisdom is generally wrong). And in this case, as I discuss
below, I am worried that conventional wisdom rests on a thin and dubious set of data and assumptions.
London Banker's arguments are two-fold: first, deflation is more likely than inflation because the underlying messes have not been
cleaned up. Therefore investors will be leery of putting funds into risky investments. Note this differs from the commonly-held view
that deflation can be cured without addressing institutional arrangements. Second, he argues that punitively
low yields will lead foreign investors eventually to retreat even from government debt. He argues that they will tire
at throwing good money after bad, and will prefer to seek returns closer to home.
This claim is hard to prove (one can argue that the high risk spreads are due to deleveraging, not distrust) but it is a serious
issue if true. One of the things that worked for years in favor of the US is that it had the most liquid, deepest capital markets,
That was due not just to the size of its economy, but also the fact that it had high standards for financial disclosure and generally
strong investor protection. If investors come to doubt the fairness of the markets, or think that the rot in its economy is not being
cleared out and will undermine growth, that will hold investment back. As Brad Setser has pointed out, foreign capital flows have
consisted almost entirely of central bank purchases of Treasuries and Agencies for quite some time, hardly a vote of confidence.
We also have the question of how long the high dollar/low Treasury interest game can go on.
Bernanke wants rates low to try to stimulate economic activity and has even broached the idea of long bond purchases to keep
yields on the long end of the curve down. But the poster child of deflation and low interest rates is Japan, which due to its high
savings rate, was not dependent on external funding. The US should want the dollar cheaper to boost exports, but that risks the ire
of our creditors, who would take big losses on their FX reserves (many economists argue this idea is specious, but try explaining
the loss in paper wealth to a populace not schooled in such niceties. FX losses, when the dollar was weakening earlier in the year,
produced a lot of ire in China, including among bureaucrats). Similarly, even if you subscribe to the deflation outlook, 3%ish 30
year bonds is a pretty risky bet independent of the currency risk. So it looks like our friendly funding sources are likely to get
burned one way or another, perhaps both. There is a real risk of a disorderly fall of the dollar, and
it is hard to tell what the collateral damage would be.
Now to my doubts about the proposed remedies, namely monster stimulus and monetary easing. First, as mentioned before, the analogy
is to the US in the Depression, which we have said repeatedly before is questionable. The US in the 1920s was the world's biggest
creditor, exporter, and manufacturer. Our position then is analogous to China's now. Indeed, Keynes in
the 1930s urged America to take even more aggressive measures, and argued that it was not reasonable for the US to expect over-consuming,
debt-burdened countries like the UK and France to take up the demand slack. So even though most economists are invoking
Keynes, it isn't clear he's prescribe such aggressive stimulus for the US and UK now.
Second, the argument is that the US in the 1930s and Japan in its post bubble era failed to engage in sufficiently large stimulus.
That is mere conjecture; there is no way to prove that argument (we cannot go back in a time machine and test different remedies
in both economies).
In the US, the claim generally made is that the US did not emerge conclusively from the Depression until it engaged in massive wartime
spending starting in 1939-40, and therefore a stimulus of perhaps that large a magnitude is required. However, quite a lot happened
between 1930 and 1939, including going off the gold standard, the securities law reforms of 1933 and 1934, the creation of the FDIC,
refinancing homeowner debt to longer-term mortgages via the Homeowner's Loan Corporation, and the closure of a lot of business, some
of which were probably victims of circumstance, but others probably deserved to be put out of their misery.
There is another huge extenuating circumstance with the war spending that observers choose to forget. The US's problem in 1929, like
China's appeared to be (at least in part) overproduction, that there might be too much global capacity relative to consumer
demand (that is certainly true for the auto industry now, which had managed to forestall the day of reckoning by converting
consumers to leases that had them trading in cars after 3 years, when buyers generally keep them longer. Decreasing the effective
life of cars was tantamount to increasing demand). In addition, the US suffered a fall in GDP of 11% in 1946 and 1% in 1947 in transitioning
off a wartime economy.
But perhaps more important, at the end of WWII, productive capacity in the next two biggest industrialized nations, Germany and Japan,
had been destroyed. The US had effectively no competition for its bulked up industrial capacity.
Had the US in 1930 tried monster stimulus, without the painful adjustments of the 1930s, would it have worked? Probably narrowly,
in keeping unemployment from rising to horrific levels and containing the fall in GDP. But I question whether it would have been
a panacea. The New Deal, contrary to popular opinion, did produce a lot of good results with its workfare, such as the building of
parks and roads, the electrification of rural America. if the US had attempted something at twice that scale, would it have been
productive? Some argue that it didn't matter, the important thing is to get money into the economy, but I wonder. Japan did engage
in pretty heavy infrastructure spending (a lot of bridges to nowhere) and it does not seem to have done them much good.
Note my sophisticated investor buddies disagree, saying this is backwards looking, confident that a US budget deficit of 10% of GDP
next year will do the trick, and think inflation/hyperinflation is the bigger risk (note some consider hyperinflation to be operative
at 20% per annum; you do not need to get to Weimar scenarios for inflation to start distorting economic decisions in a very serious
way).
For a while now I have been on the fence on the inflation/deflation issue .... I'm now coming down on the side of deflation for
a very simple reason: there is no longer any incentive to save or invest, and so debt and investment cannot increase much beyond
current bloated levels.
In Lombard Street,
Bagehot's seminal tome on fractional reserve central banking, Bagehot advises any central bank facing a simultaneous credit crisis
and currency crisis to raise interest rates. By raising rates they will ensure that foreign creditors remain incentivised to maintain
the general level of credit available while the central bank resolves the local liquidity crisis through liquidation of failed
banks and temporary liquidity support of stressed banks.
Yves here. For the UK, the currency crisis issue is a real concern. Recall that the pound has taken a huge dive in recent months,
and Willem Buiter has taken to comparing Britain to Iceland. Back to the post:
The very opposite policies have been pursued by central banks in the US, Europe and UK ...They have cut policy rates drastically,
and as the crisis escalated and spread, the yield on government debt has dropped to negative territory. Meanwhile they have shielded
those responsible for the creation of record levels of bad debt from any regulatory accountability, relaxed transparency of accounts,
and provided massive taxpayer-funded financial infusions to prevent failure and liquidation.
While in the short term these policies have expediency and the maintenance of market "confidence" on their side, in the longer
term these policies must undermine any confidence a rational and objective saver or investor might have that savings or investment
in the US, EU or UK will be fairly remunerated at an above-inflation rate, or that savings and investments will be protected by
effective oversight and regulation from the sorts of executive debasement and outright misappropriation and fraud that are beginning
to colour our perceptions of the past decade...
If US, EU and UK had substantial domestic savings to fund their banks (as in Japan in 1990), then perhaps the consequences would
not be so imminently disastrous. Lacking sufficient domestic savings, however, their actions will likely make foreign creditors
in Japan, China, the Gulf and elsewhere question whether it is worthwhile to keep pumping scarce savings into such flawed and
reckless economies...
The determination to avoid any accountability for failed banks, failed business models, failed regulatory systems and failed academic
rationales for all the above invites anyone with spare cash – an increasingly select crowd – to withhold it from further depredations.
It is this instinct, more than confidence in the government, which is driving so many to seek the temporary safety of short-dated
government securities.
The result of discouraging domestic and foreign creditors and investors must be inevitable deflation as debt levels become increasingly
hard to finance and ultimately contract. Irresponsible central banks and governments can try to bail out the failed banks, businesses
and municipalities at the centre of every popped bubble, but the bubble economies are ever more certain to deflate with each bailout.
Each bailout further undermines the market discipline which is bedrock to a saver or investor's decision to part with hard-earned
cash by trusting it to the intermediation of the management of a bank or business.
It's this simple: I won't invest in a country that bails out failure and punishes savers. I won't invest in the US or UK until
they change course and protect savers and investors, ensuring a reasonably predictable positive return. In the EU, I will be very
selective, preferring those conservative states like Germany that never embraced the worst excesses, although sadly still have
fall out from individual banks' stupidity in buying into foreign excess. I will know when it is safe to reinvest when policy interest
rates, bank/intermediary oversight and accounting standards give me confidence I am better protected than the corporate or financial
elite.
While it may take the Asian and the Gulf State investors longer to embrace my analysis, I have no doubt that they too will eventually
conclude that parting with their savings under the terms now on offer will only deepen their losses. They would be better off
keeping the money at home, investing locally under local laws and vigilance, and letting the US and UK implode.
The argument against this has always been that with trillions already invested in the US during the deficit years, the Chinese
and Gulf States would suffer even more horrible losses from a collapse of the western economies. This is accurate, but not complete,
as it ignores the relative value of cash investment at the top and bottom of a bursting bubble. Once the collapse has bottomed
out, so long as a globalised economy survives, there will be even better opportunities for those with savings to invest selectively
in businesses with clearer prospects and more certain profitability under regulatory frameworks which have been restored to a
proper balance of investor protection and intermediary oversight.
Right now survival of businesses in the West depends largely on political pull and access to regulatory forbearance and central
bank or treasury finance. The market has failed, and officialdom is collaborating in perpetuating that failure...
I think it took me so long to feel confident about predicting deflation because the floating currency system under dollar hegemony
and Bretton Woods II distorts the workings of both inflation and deflation. Despite the US being the epicentre of all the failed
debts, failed securitisations, failed credit derivatives, failed rating agencies, failed banking businesses, failed corporate
governance, failed accounting standards, failed capital adequacy models, and failed regulatory forbearance, the US dollar has
recently strengthened as deflation globalised. The US exported inflation in the boom years, and now exports deflation in the bust
years.
Since spring 2008, as US investment banks sold off assets, imposed margin calls, and used access to unsegregated wholesale assets
in custody in the rest of the world to upstream liquidity to their US-based parents and affiliates, the dollar has strengthened
relative to other currencies. The media reports this as a "flight to quality", but it is more like a last looting of the surrounding
countryside before dangerous brigands hole up in their hilltop fortress. The brigands appear temporarily wealthy compared to the
peons left stripped and penniless and facing winter. When the brigands have eaten all the stolen grain and livestock, however,
they will have no means to replenish except to use force to raid the countryside again. The peons can always hunt, forage, farm
and carefully husband a surplus to gradually increase their wealth. If the brigands raid too thoroughly or too regularly, the
peons have no incentive to grow crops or keep herds (negative savings returns) and everyone starves (deflation).
In the meanwhile, the peons just might wise up, hide any surplus more securely and organise mutual defense against further attacks
to ensure that their peon children prosper and the brigands die off. That would be the end of Bretton Woods II, and the rise of
China, India, the Gulf and other productive and/or resource rich states which invest surplus in domestic productivity and regional
growth...
Only when that deflation has played out and rational policies that reward market-based management and returns are restored will
it be worthwhile to invest again. In the meanwhile, any wealth saved securely from state seizure will "swell" to buy more assets
in future - a key aspect of deflation and a key means of restoring the control of the economy into the hands of more farsighted
savers and investors.
I have quoted Mr John Mill before, but it bears repeating: ""Panics do not destroy capital; they merely reveal the extent to which
it has been destroyed by its betrayal into hopelessly unproductive works." The extent to which capital has been betrayed in the
past quarter century under Bretton Woods II, bank deregulation and the Basle Capital Adequacy Accords is unrivalled in the history
of fiat banking. The bankers, lawmakers, regulators and academics who collaborated in the betrayal still hold power, like the
well-armed brigands in the fortress, and their continued collaboration to prevent accountability must inevitably discourage honest
savers from risking further loss. Even so, it is the savers/peons who hold the ultimate power as they can starve the brigands.
Some day soon savers will revolt at financing further depredations. They will refuse to buy even government securities, gagging
at the quantities of issue forced upon them under terms of only negative return. When that final massive bubble bursts, deflation
will follow its harsh corrective course and clean out deficit-financed "unproductive works".
When that happens, if reason is restored in markets with effective oversight, I might consider investing again, very selectively,
in whatever productive works might then be on offer and only when secure in realising - and retaining - a positive yield.
There is a moralizing tone to LB's post. Moral judgments in economics are often exercises in wish fulfillment
and are distorting.
"...the rise of China, India, the Gulf and other productive and/or resource rich states which invest surplus in domestic productivity
and regional growth."
By contrast to the UK and USA and their vampiric relation to surplus states?
Or, not so much. As wages have fallen in China relative to GDP, investment in productive capacity has been in a bubble. The crash
will be horrific. That model is at least as unsustainable as the American model.
Yes there will be deflation. It is a consequence of world-wide unwinding of leverage. But that doesn't mean the 'Liquidate labor,
liquidate stocks, liquidate the farmers, liquidate real estate' policy is what we need.
Rescuing productive and financial capacities from the forces of collapse is the only way right now towards any sort of climate
for investment at all.
As a deflationista, I thank you for posting this minority opinion. I know you are not sold on all the
points. Deflation is about destruction of unproductive ventures. There is global overcapacity in every area, and a concentration
of wealth from unproductive industries (yes, Wall street). Keynes and the Monetarists have created a mindset that acts of money
can overcome acts of stupidity.
You can't throw enough money at this to compensate for the rapid extraction of capital from folly. We should be putting all our
energy into getting money into self sustaining productive enterprises. There are plenty. Detroit is not one of them.
Money Supply (deflation and inflation) are always and everywhere a policy decision in a purely fiat regime.
What the Fed and Treasury cannot manipulate as easily is the velocity of money, aka the aggregate demand component.
The mind rebels at the fact, and invents reasons 'why the Fed cannot do this, and why private borrowing must do that.'
If anything the last six month ought to have put some real meat on the bones of Bernanke's assertion about the Fed's printing
press. The only reason we have not yet reaped the benefits of his handiwork in inflation is because they are trying to drain as
they liquify, a noble pursuit.
But wait until the Keynesian and Monetarist cocktail party gets seriously underway next year. And when foreign money starts tiring
of subsidizing the US as LB suggests, the artficial underpinnings of the US dollar will vaporize.
The bogeyman is Japan. But people ignore the several hundred other examples of the inflationary impact of credit and monetary
manipulation. Japan's trouble was a pure policy decision made in combination with their desire to maintain a high export driven
low consumption economy, combined with a stable and aging popupulation because of a bias against immigration.
so, we'll see which way this goes, but there was not a lot of new material in LB's essay.
I have a strong feeling that what does result will be as shocking as the stagflation we had in the 1970's that had every economimist's
jaw dropping and mouth agape.
I greatly admired LB's parting shot, however felt his analysis made sense only in the pure crucible of
economics. In the real world I think political economy will determine our fate...
"In the meanwhile, the peons just might wise up, hide any surplus more securely and organise mutual defense against further attacks
to ensure that their peon children prosper and the brigands die off. That would be the end of Bretton Woods II, and the rise of
China, India, the Gulf and other productive and/or resource rich states which invest surplus in domestic productivity and regional
growth"
LBs analogy is posing a false dichotomy. There are no peons in the current world economy.
A better analogy is that we have competing feudal fiefdoms. At the top of which sit corrupt elites that are complicit in a vast
cross-border covenant designed to perpetuate their own power and wealth.
In the Chinese fiefdom, savings are controlled by a landed technocracy. That clic deploys those savings in such a way that its
peasants invest in production destined for the neighbouring fiefdom. Its does not invest in domestic productivity nor in services
that support its local citizenry. It invests in neighburing demand. This system has created vast over-capacity in the local economy.
The ruling technocrats know that without the demand of the neighbouring fiefdom this over-capacity will collapse and its power
will be threatened by peasant riots. The elite also understand that its immature capital markets, no reserve currency and lack
of legal clarity mean it is unable to finance its own economy. Moreover, its default politics depends largely on political pull
and access to regulatory forbearance and central bank or treasury finance. Just the way they like it.
They will therefore continue to finance the neighbours ad nauseum.
Deflation may have its way but not through a collapse of foreign flows into the US.
"high standards for financial disclosure and generally strong investor protection. If investors come
to doubt the fairness of the markets, or think that the rot in its economy is not being cleared out and will undermine growth,
that will hold investment back."
The one reason why investor put their money in the USA is simply political risk: the USA has been run by rentier/business
elites for its entire history and there is no political risk unlike in China, India, or even the UK.
Only Switzerland comes close in investors' minds, for the same reason, and indeed capital flight money goes either to Geneve/Zurich
(from Europe, Middle East and Africa) or to NYC (from Latin America and Asia).
Since political risk is about the risk of losing part or all of the principal, not the returns, 0% USA or Swiss returns don't
discourage capital-flight investors. Indeed for quite a while Switzerland had negative interest rates (via a tax on foreign capital)
and this did not much to stop the action.
Apart from returns mattering a lot less than political risk protection, everybody knows that the USA capital markets are rigged
and unfair, and the USA was still the target of capital flight when insider trading was legal. That is considered a minor risk
by capital flight investors, and anyhow there are treasuries and minus.
"Money Supply (deflation and inflation) are always and everywhere a policy decision in a purely fiat
regime. What the Fed and Treasury cannot manipulate as easily is the velocity of money, aka the aggregate demand component."
The terminology here is not quite right: "Money Supply" is the combined product of quantity and velocity, and both of these
are ill-defined, never mind the product.
Not only it is difficult to define what the quantity of money is, but whatever it is the authorities can only control part
of it, as a lot of that is just credit, and since the USA government effectively abolished fractional reserves in 1995 and the
Japanese government lending Yen at 0%, the availability of credit (money? quasi-money?) has been in the hands of bank boards.
Deflation until late 2010 followed by the collapse of the Treasury market bubble and the dollar. Too
much debt is the problem and adding more debt will onlly make it worse.
Agree with LB on his analysis of rewards for investing in US markets. This should result in an deflationary
environment for ASSETS. Who would want to invest in US assets / treasuries / dollars with the current state of the economy, massive
money printing, and rigged financial markets.
However, its also clear that the Fed will print money until the press collapses from overuse. After all, the voter will have to
be supported somehow. This will likely play out in inflation in the US but also for those countries that maintain the dollar peg.
In other words, if you want to export to the US at current exchange rates, you will have to sterilise dollars and lots of them.
If the Chinese want to maintain their peg and are willing to accept dollars for their hard work and manufactured goods for the
benefit of the US consumer, well, lets drown them in dollars.
The US dollar is going to drop and drop hard in 2009.
"Money Supply (deflation and inflation) are always and everywhere a policy decision in a purely fiat regime."
That is the most accurate thing that has been said here.
While I am certainly sympathetic to much of what London Banker has to say, I believe his analysis to be more transformative than
descriptive. There is absolutely no logic to his argument that we require the aid of foreign investors in order to massively inflate
the number of dollars in circulation. Some constituencies will benefit from inflation. Others will benefit from deflation. London
Banker is advocating for those constituencies that will benefit from deflation. But politics, and the resultant policy decisions,
will ultimately determine whether it's inflation or deflation.
I'm intrigued by attempts like this to pass policy prescriptions (and again, don't get me wrong, I'm not necessarily adverse to
London Banker's policy prescriptions) off as if they were some sort of inevitable outcome. Robert L. Heilbroner in Behind the
Veil of Economics does a wonderful job of ilucidating how these games are played. As Heilbroner concludes, by "screening out
all aspects of domination and acquiescence, as well as those of affect and trust, it [the discipline of economics] encourages
us to understand capitalism as fundamentally 'economic'--not social or political--in nature."
For me a bigger question is why there is such a drive to create the impression that there is some "invisible hand" that makes
all this happen, when in reality there is a Wizard of Oz that has his hands firmly on the levers. The only thing I can figure
out is that it gives the Wizard plausible deniability. It's like extrordinary rendition: the government can always claim it is
someone else or something else that is causing the pain.
We should be mindful that politicians and their financial cronies have an interest in maintaining a floor,
hence all the bailout action. I accept London Banker's thesis or prediction that the end is nigh. The Wizard of Oz was smoke and
mirrors, unable to work real miracles.
Yves, thank you very sincerely for helping us think this through and unique timely coverage.
The banker finally gets it and Bagehot has always been right. The reason they are not listened to is
because it is too simple. We like our stuff complicated.
Even a casual study of previous bubbles going back several hundred years leaves the reader with only two major observations--there's
absolutely nothing you can do to put Humpty Dumpty back together and/but they will still try. That's where we are today.
Another major mistake that activist market historians make, Bernanke is getting his chance now, is mistaking hindsight for clairvoyance
going forward. It is easy to forget that the mistakes made by the New Dealers were mistakes made by folks who were considered
the best and brightest of their times. Each succeeding generation of the best and brightest always make the mistake of thinking
that they are, today, the best ever. Never does it enter their minds that, whereas every past group of interventionists failed
that maybe post bubble traumas are not open to intervention. This is what the Austrians and Bagehot understand.
Furthermore the lack of this understanding makes the situation worse. The simple fact of intervening postpones the curative powers
of the market itself. Bagehot has always been right, make money available but at rates above the current freight. Then stand aside
and leave the market alone. Only time can remedy the "splat" effects of a bubble. Meanwhile protect your currency and reward prior
savers.
I have said from day one that the "plans" would all fail. Not because I have some great insight or a brilliant economic mind in
sifting through academic data points but a simple market historian's approach---there has never been successful post bubble interventions.
When bubbles burst everything returns to the original point of departure. Interventions only slow or speed up that process. The
other fact, they are all deflationary.
We don't even have to discuss the absolute insanity of the idea that a small group of people anywhere has the knowledge and foresight
to manipulate seven billion peoples economic transactions on a daily basis to effect a certain outcome and resolve problems that
they never saw coming in the first place. Wow, the absurdity of it all.
And finally the constant screaming of fire in the theater is not helpful. They are not messengers they are arsonists. Wagner and
cohorts being the last example.
"The one reason why investor put their money in the USA is simply political risk: the USA has been run by rentier/business elites
for its entire history and there is no political risk unlike in China, India, or even the UK."
Blissex, even though there is much truth to this, it is not the whole truth.
Kevin Phillips in Wealth and Democracy does a stellar job of describing the political ebb and flow in the United States
as it relates to wealth. There were indeed eras--the Gilded Age, the Roaring Twenties and the period from about 1980 to present--when
the rentier/business elites you describe did "run" things. But there were other eras, such as those under the administrations
of Jefferson, the two Roosevelts, Washington, Jackson and Lincoln, where the power and influence of bankers, financiers and corporate
elites was greatly rolled back and kept in check by a more populist--and democratic--polity. It is during these more populist
periods that the "high standards for financial disclosure and generally strong investor protection" came into being.
Your highly bowlderized and revisionist recounting of history, especially when it comes to the past performance of economic elites,
seems to be in keeping with all libertarian ideologues, whether they be of the Aurstrian or Chicago varieties. Since history doesn't
fit well within their doctrines, they find it necessary to distort the historical record so that it does.
Lune
On the UK and BRD. There most likely will be some kind of agreement between the two. But it will be a negotiated one. The final
result most probably will involve some arrangement for Britain to join the Euro which would free Germany to join a Euro-wide stimulus
package. France would approve this. It will include some settlement of the eastern EC members issues. How that result is brought
about, and over what time frame will be interesting. The key issue of course will be the UK's future relationship to the dollar.
There were also currency issues at play in the 20's and 30's. I would imagine, given how serious the whole situation is, that
the UK would be quite capable of doing something generally unexpected and emulating Churchill's decision to go off the gold standard.
I doubt there would be much upside at this point to tighter integration with the US. Mandelson's return and the deal with the
Russians over their oligarchs' foreign investments kind of point to UK participation in the European discussion with the Russians.
Otherwise, time will no doubt tell, but things will not continue on their present path for with the present choice of policies
the continuing mess remains unsustainable.
You are a big hypocrite. It's clear you are a rent seeker, rather than a wealth creator. You whine about the failings of government
yet want the protection of a government. You ARE the problem. With wealth comes responsibility. Somehow you fail to see this.
You expect wealth from wealth without work. Something for nothing always leads to nothing for something.
There are NO guaranteed real returns. That's life. Grow up you spoiled brat. Nobody owes you savings a living let alone a real
return. You want a guaranteed victory in order to "compete." What a seriously warped view of capitalism.
Take your "savings" and hide them in a mattress. I seriously doubt you would ever directly invest in a competitive endeavor.
Again, yours is a highly revisionist view of history, the historical revisions being necessary for hitory to fit neatly within
your economic dognma.
As Phillips sets out in Wealth and Democracy, all "Capitalist Heyday" periods--the Gilded Age, the Roaring Twenties, the
Great Bull Market of the 1980s and 1990s (and the Great Housing Bull Market of 2000 to 2007)--share certain characteristics. These
include conservative politics and ideology; skepticism of government--laissez-faire and deregulation--and emphais on market and
the private sector; the exaltation of business, entrepreneurialism, and the achievements of free enterprise; aspects of survival-of-the-fittest
thinking; reduction and elimination of taxes, especially on corporations, personal incomes or inheritance; and rising levels of
inequality.
But it was Reinhold Neibuhr, in The Irony of American History, who rendered what was probably the most devastating critique
of the entire libertarian enterprise:
"The ironic contrast between Jeffersonian hopes and fears for Americans and the actual realities is increased by the exchange
of ideological weapons between the early and the later Jeffersonians. The early Jeffersonians sought to keep political power weak,
discouraging both the growth of federal power in relation to the States and confining political control over economic life to
the States. They feared that such power would be compounded with the economic power of the privileged and used against the less
favored. Subsequently the wielders of great economic power adopted the Jeffersonian maxim that the best possible government is
the least possible government. The American democracy, as every other healthy democracy, had learned to use the more equal distribution
of political power, inherent in universal suffrage, as leverage against the tendency toward concentration of power in economic
life. Culminating in the "New Deal," national governments, based upon an alliance of farmers, workers and middle classes, have
used the power of the state to establish minimal standards of 'welfare' in housing, social security, health services, etc. Naturally,
the higher income groups benefited less from these minimal standards of justice, and paid a proportionately higher cost for these
than the proponents of the measures of a 'welfare state.' The former, therefore, used the ideology of Jeffersonianism to counter
these tendencies; while the classes in society which had Jefferson's original interest in equality discarded his ideology because
they were less certain than he that complete freedom in economic relations would inevitably make for equlity."
"In this development the less privileged classes developed a realistic appreciation of the factor of power in social life, while
the privileged classes tried to preserve the illusion of classical liberalism that power is not an important element in man's
social life. They recognize the force of interest; but they continue to assume that the competition of interests will make for
justice without political or moral regulation. This would be possible only if the various powers which support interest were fairly
equally divided, which they never are.
"Since America developed as a bourgeois society, with only remnants of the older feudal culture to inform its ethos, it naturally
inclined toward the bourgeois ideology which neglects the factor of power in the human community and equates interest with rationality.
"Such a society regards all social relations as essentially innoncent because it believes self-interest to be inherently harmless.
It is, in common with Marxism, blind to the lust for power in the motives of men; but also to the injustices which flow from the
disbalances of power in the community."
Your talk of the "mistakes made by the New Dealers" also betrays your ideological predelection. As Phillips points out:
"Politics...often lends itself to moneymaking, but its higher levels of popular respect--generally missing in the late twentieth
century--are reserved for those who have fought the forces of avarice."
YS:
I read the LB and Buiter posts; I regularly read both. I think LB is all wet here. So wet, I wonder if he wrote this post "tongue
in cheek". Is LB serious? Jesse's got this right. Our "money supply" is misnamed because supply is a flow number, a schedule of
quantities at prices over time. What we have is a "stock" number, a balance sheet number. Consider, if M2 is say $8 trillion,
it's $8 trillion right now! There is no time dimension, hence it's a balance sheet number. That said, what we call "money" is
the monetary base multiplied by the "money multiplier", which currently is decreasing. When it gets going again, measured "inflation"
will soar. Study the German 1918-1923 experience. With fiat money worldwide, I can't credit the defaltion case.
Asia and the ME won't have any savings when this over with. They'll be too busy propping up their economies.
The weakness in countries with reserves is already apparent in Russia. It's quite likely that China will go from 12 % GDP growth
to 0% in less than a year.
A lot of people are acting like this is the 9th inning, when it's still the 3rd, or even warm ups.
In the same way, I am disgusted by the central banks preserving the privileges of the financial elite
in preference to the jobs, incomes and businesses powering the real economy
Where was the disgust when the term "downsizing" was invented to disguise the appalling (to anyone
not Wall Street brain dead) "firing" thousands to the applause of instantly higher share prices. Greed is too mild a term.
Fascinating arguments, all this, thanks to all for the education.
In trying to sift through contending historical interpretations, it is unclear whether there is substantive disagreement on the
matter of policy prescriptions, say for the USA, nowadays.
For example, does DownSouth disagree with Mr. Neid on the matter of Bagehot's preference for rewarding savers in the aftermath
of a bubble? Does Mr. Neid disagree with DownSouth's apparent preference for imposing stronger and more clear regulatory oversight
in pursuit of widespread confidence in the rules of the game? I feel like the grandpa in Moonstruck, where this is all very confusing,
so a clarification on what this thoughtful panel recommends govt should do now would be much appreciated. Grazie.
Yves "Now to my doubts about the proposed remedies, namely monster stimulus and monetary easing"
and
"In the US, the claim generally made is that the US did not emerge conclusively from the Depression until it engaged in massive
wartime spending starting in 1939-40, and therefore a stimulus of perhaps that large a magnitude is required. However, quite a
lot happened between 1930 and 1939, including going off the gold standard, the securities law reforms of 1933 and 1934, the creation
of the FDIC, refinancing homeowner debt to longer-term mortgages via the Homeowner's Loan Corporation, and the closure of a lot
of business, some of which were probably victims of circumstance, but others probably deserved to be put out of their misery."
Agreed.
Debt held by the government is no worse, AND no better than privately held debt. The
question I always have (and cannot be definitively answered - I've read various suppositions) is how
much debt can the US amass before bondholders come to the conclusion that it is an uneconomic proposition? If it happens, I expect
it will be sudden.
We are beyond the extremes of the 1930s. The frontiers of monetary policy are being pushed to limits that may now test viability
of paper currencies and modern central banking.
You cannot drop below zero. So what next if the credit markets refuse to thaw? Yes, Japan visited and survived this policy Hell
during its lost decade, but that was a local affair in an otherwise booming global economy. It tells us nothing.
This time we are all going down together. There is no deus ex machina to lift us out.
Certainly not China, which is the most vulnerable of all.
As the risk grows, officials at the highest level of the British Government have begun to circulate a six-year-old speech by Ben
Bernanke – at the time of its writing, a garrulous kid governor at the US Federal Reserve. Entitled Deflation: Making Sure It Doesn't
Happen Here, it is the manual of guerrilla tactics for defeating slumps by monetary means.
"The US government has a technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially
no cost," he said.
Critics had great fun with this when Bernanke later became Fed chief. But the speech is best seen
as a thought experiment by a Princeton professor thinking aloud during the deflation mini-scare of 2002.
His point was that central banks never run out of ammunition. They have an inexhaustible arsenal. The world's fate now hangs on
whether he was right (which is probable), or wrong (which is possible).
As a scholar of the Great Depression, Bernanke does not think that sliding prices can safely be allowed to run their course.
"Sustained deflation can be highly destructive to a modern economy," he said.
Once the killer virus becomes lodged in the system, it leads to a self-reinforcing debt trap – the real burden of mortgages rises,
year after year, house prices falling, year after year. The noose tightens until you choke. Subtly, it
shifts wealth from workers to bondholders. It is reactionary poison. Ultimately, it leads to civic revolt. Democracies
do not tolerate such social upheaval for long. They change the rules.
Bernanke's central claim is that the big guns of monetary policy were never properly deployed during the Depression, or during
the early years of Japan's bust, so no wonder the slumps dragged on.
The Fed can create money out of thin air and mop up assets on the open market, like a sovereign sugar
daddy. "Sufficient injections of money will ultimately always reverse a deflation."
Bernanke said the Fed can "expand the menu of assets that it buys". US Treasury bonds top the list, but it can equally purchase
mortgage securities from US agencies such as Fannie, Freddie and Ginnie, or company bonds, or commercial paper. Any asset will do.
The Fed can acquire houses, stocks, or a herd of Texas Longhorn cattle if it wants. It can even scatter $100 bills from helicopters.
(Actually, Japan is about to do this with shopping coupons).
All the Fed needs is emergency powers under Article 13 (3) of its code. This "unusual and exigent
circumstances" clause was indeed invoked – very quietly – in March to save the US investment bank Bear Stearns.
There has been no looking back since. Last week the Fed began printing money to buy mortgage debt directly. The aim is to drive
down the long-term interest rates used for most US home loans. The Bernanke speech is being put into practice, almost to the letter.
No doubt, such reflation a l'outrance can "work", but what is the exit strategy? The policy leaves
behind a liquidity lake. The risk is that this will flood the system once the credit pipes are unblocked. The economy could flip
abruptly from deflation to hyper-inflation.
Nobel Laureate Robert Mundell warned last week that America faces disaster unless the Bernanke policy
is reversed immediately. This is a minority view, but one held by a disturbingly large number of theorists. History
will judge.
Most central bankers suffer from a déformation professionnelle. Those shaped by the 1970s are haunted by ghosts of libertine excess.
Those like Bernanke who were shaped by the 1930s live with their Depression poltergeists.
His original claim to fame was work on the "credit channel" causes of slumps. Bank failures can snowball out of control as the
"financial accelerator" kicks in. The cardinal error of the 1930s was to let lending contract.
This is why he went nuclear in January, ramming through the most dramatic rates cuts in Fed history. Events have borne him out.
A case can be made that Bernanke's pre-emptive blitz has greatly reduced the likelihood of a catastrophe. It was no mean feat
given that he had to face down a simmering revolt earlier this year from the Fed's regional banks.
... ... ...
Monetary stimulus is a better option than fiscal sprees that leave us saddled with public debt – the path that nearly wrecked
Japan.
Yes, I backed the Brown stimulus package – with a clothes-peg over my nose – but only as a one-off emergency. Public spending
should be a last resort, as Keynes always argued.
Of course, Bernanke should not be let off the hook too lightly. Let us not forget that he was deeply complicit in creating the
disaster we now face. He was cheerleader of Alan Greenspan's easy-money stupidities from 2003-2006. He egged on debt debauchery.
It was he who provided the theoretical underpinnings of the Greenspan doctrine that one could safely ignore housing and stock
bubbles because the Fed could simply "clean up afterwards". Not so simply, it turns out.
As Bernanke said in his 2002 speech: "the best way to get out of trouble is not to get into it in
the first place". Too late now.
Comments:
Ever since WW2, governments have got elected by promising an 'easier life' than the other side. This is
the inevitable outcome of democracy without thought of anything but the very shortest of time horizons. Keeping the maximum number
of voters happy has become the main aim of parliament. Hence the 10 years of Brown overspending. Eventually, down goes the value
of the pound, but for the UK this is especially serious, as we have-- to import 40% of our food! [ France is a major food exporter].
Just at a time when rising job losses will increase the percentage of income needed to fund the family food bill.Simply because
the Labour government has been able to forget about UK food production, as we have so few rural voters. With a high pound imported
food was cheap, very dangerous as we have a have a vastly overpopulated island!
David Vinter
on December 07, 2008
at 03:13 PM
Ambrose, there is no retail price deflation, only debt deflation of assets that were bid too high during
the low interest/money printing era that we have lived through during the last ten years. The only people that believe this scare
story are the same ones who believed in the year 2000 bug, the dot com era and man made global warming.
Deflation is a monetary phenomena caused by the reduction in the issuance of money by governments. The money supply has been
increasing at around 13% in the UK for years now and is still increasing at an alarming rate.
The only game in town is inflation, lots of it.
david webb
on December 07, 2008
at 03:13 PM
Chris: We were brought here deliberately. There was nothing incompetent or
reckless about it--except for those of us who let it happen, who voted in our leaders, believed them and their trickle-down economics,
etc.
Manlius
on December 07, 2008
at 03:10 PM
I for one am getting sick to the back teeth of Ambrose Evans Pritchard and others bleating on about deflation.
This is pure propaganda.We are still in inflation even
by the Governments own distorted figures. Deflation propagandists such as Pritchard Evans are doing the work of
the heavily indebted Government and reckless borrowers by preparing us to accept massive inflation or even hyperinflation to help
out the debtors but shaft the savers at the same time.
Why should the savers pay for the economic incompetence of the Government and the greed and recklessness of borrowers. Do we
really want to go down the road of 30s Germany and carry wheelbarrows of notes to buy a loaf of bread? Did that not end with total
collapse?
Rather deflation followed by recovery when everything has bottomed out than hyperinflation I would have thought. But then we
are run by 'experts' who either failed to see where their policies were leading for the last decade or indeed brought us here
deliberately.
chris
on December 07, 2008
at 02:48 PM
Deflation is a symptom not a cause surely. The causes are many of course.
I would say a main cause to be the fractional reserve system with money creation through debt.
Last and not least the people have been blinded and fleeced equity cannot flourish.
Mark 2
on December 07, 2008
at 02:48 PM
A policy of printing money as outlined in this article - 'the helicopter approach'
one might call it - will have the effect of rendering all savings worthless.
If one puts the basic immorality of this to one side, it is worth remembering that the last time this was done in a industrialised
country it played a major part in the rise to power of a party called the National Socialist German Workers Party.
The leader of that party was one Adolf Hitler.
Mark
on December 07, 2008
at 02:47 PM
Citizen X
"If the danger of deflation is that it raises the real value of debt, then the answer must be to reduce debt, not to increase
it as the madman in charge of the Fed is preparing to do."
I'm sure AEP would agree with you that the answer is to reduce debt. But there are only two ways.
1) For the debtor to work to pay it off and
2) for the creditor to take the hit in the form of high inflation. AEP, being the socially and morally responsible person he
is, prefers that savers be robbed of their wherewithal.
Steve
on December 07, 2008
at 02:47 PM
What planet is this Ambrose guy on? I keep having this nightmare that I have been transported to
a parallel universe where everybody in power has gone mad and is trying to destroy the world. I am running around trying to find
someone with any sense who isnt obsessed with lowering interest rates. And then I wake up and - wait a minute - oh my God
it wasn't a nightmare. This is really happening!
Pete
on December 07, 2008
at 02:46 PM
Let us also remember that the Fed along with the Comex are manipulating the price of gold and silver to
make it look like the Fed`s actions are working, its a total disgrace, free markets? what a laugh, these people are totally out
of control.
Mr Barnett
on December 07, 2008
at 02:46 PM
Let us also remember that the Fed along with the Comex are manipulating the price of gold and silver to
make it look like the Fed`s actions are working,its a total disgrace,free markets? what a laugh, these people are totally out
of control.
Mr Barnett
on December 07, 2008
at 02:46 PM
What I still don't get is if there is a "credit crunch", why aren't interest rates rising? Or does supply
& demand just not apply to paper currency?
Manlius
on December 07, 2008
at 02:46 PM
You should all take "The Crash Course" at www.chrismartenson.com Note also that for the first time in
history in December 2008 gold prices went into backwardation. Anyone who has actual gold won't sell at any price denominated in
worthless paper. I don't know what will happen, but the greatest probability is that whatever happens isn't going to be pretty.
Gordon Mugabrown should remember we savers have votes as well.
Gerard
on December 07, 2008
at 02:46 PM
Deflation is only a worry for the economies that matter. This
means China, The Eurozone and unfortunately the USA. We in the UK with a trashed currency will be
marginalized.
The effect of hopelessly expanding the economy with a weakening currency. As overseas investors
withdraw their support, will surely be rapidly rising interest rates in 2010 to combat the threat of hyper inflation. Then we
shall be obliged to take the action we should be taking now. That is paying off debt and reducing public spending.
After many years of pain, a seriously diminished and bowed UK, will be begging to be allowed to join the Euro. Yes, even the
Conservative Party.
Harry H
on December 07, 2008
at 02:46 PM
Douglas Holder: You forgot to add the foreign manufacturers whose goods would be sucked in and who would
in return buy any assets left over in the following fire sale ;)
Reaper
on December 07, 2008
at 02:45 PM
Remember a couple of years ago how we laughed at the 80's: "Greed is Good".
Could I suggest the mantra for the 0's should be: "Someone else's Money"
david roots
on December 07, 2008
at 02:45 PM
These are my questions: Can governments 'print' money or are they also subject to the laws of economics?
Surely they need to borrow the money through the issue of bonds. Will the market then lend to government when the repayments are
devalued by inflation? Will the markets demand higher interest rates that eventually threaten the
solvency of the government? If the stimulous works will it not send economies into yet another greater debt fuelled
spending and crash cycle?
Stephen
on December 07, 2008
at 02:45 PM
So this is what all sensisble people should do: (1) wait for the value of
a �1,000,000 house to fall to,say, 600,000 borrow 600,000 to buy it and then 2) wait for the arrival of hyperinflation to
wipe out the real value of the loan. Brilliant!
John Foley
on December 07, 2008
at 02:39 PM
The question that needs to be asked is "who should be responsible for controlling the money supply and
how should it be done?".
Allowing commercial banks to decide who gets what and how much and at what interest rates doesn't work. It means almost all of
the money supply consists of debt - owed to commercial banks plus interest - and results in booms and busts.
Now the credit bubble has exploded and debts are being written off this is the chance for the government to create a considerable
amount of interest free money that can be pumped into the economy in a variety of ways. It should not be borrowing still more
money at interest that has to be created by banks somewhere in the world.
It is not inflationary to pump interest free money into the system providing that banks and credit card companies etc are required
to tighten up on their equity end lending requirements.
Government debt levels are so high that they can never be paid back under the current absurd system
that one day must collapse completely unless we start thinking outside the box and make radical changes for the benefit of the
people instead of trying to prop up bankrupt banks.
Alan
on December 07, 2008
at 02:39 PM
If we don't print, what else can we do about the debt overhangs? Let all the CDS default?
One needs to answer that question before saying we should not print. What is Mundell's answer to it?
Certainly we cannot expect the population to pay off those debts (not even caused by that population, but by banks that got bailed
out) in uninflated dollars. Democracy will indeed not stand for it, and that's a good thing.
artichoke
on December 07, 2008
at 02:38 PM
There is no sense of what the desired policy outcome is. Economists use apocalyptic language to instill
fear of deflation, and then argue that any other possible outcome is to be desired. So far as the
1930's is concerned hyper-inflation led to Hitler; deflation in the US led to Rooseveldt and the New Deal. Resorting to the printing
presses is not so clear cut a solution as some eminent economists would have us believe.
What did Lenin say about destroying a nation's currency?
Michael Sykes
on December 07, 2008
at 02:38 PM
There is nothing wrong with deflation. Prices fell for the entire victorian era, yet the UK had the fastest
growing and largest economy in the world between 1800 and 1890.
Falling prices are particularly good for the poor, whose incomes are most eroded by rises in the prices of basic foodstuffs.
Stuart
stuart
on December 07, 2008
at 12:08 PM
I am sure that in 1923 someone in the Reichsbank must have argued that creating money "out of thin air"
(to pay the wages of striking German workers) was a terrific idea.
Ambrose, you have clearly caught the madness of the Fed!
If the danger of deflation is that it raises the real value of debt, then the answer must be to reduce
debt, not to increase it as the madman in charge of the Fed is preparing to do.
Undoubtedly, this will be very painful in the short-term, but it is the only foundation upon which a sustainable economic recovery
can be built.
If you fear "civic revolt" as the end-point of deflation, consider the social chaos of hyperinflation.
Citizen X
on December 07, 2008
at 12:08 PM
Intellectual rubbish, what we need is a return of protectionism.
Courage and conviction are what is needed Ambrose, not sniveling compliance to the failed obnoxious
anti British practices of Globalism and high Corporatism.
This is the opportunity to put Britain right, and MORE DEBT is patently not the solution.
You should be ashamed of this defeatist article.
R McAuley
on December 07, 2008
at 12:03 PM
Recession ,depression, britain isnt in one, asked our brainwashing broadcast industry, shops tills are
ringing all our industry mostly foriegn owned is okay, we on a spending spree, the goverments printing press(MOney) is working
overtime, the majority of english, havnt a clue, what the rest of the world is talking about,apart from the ones who will lose
thier jobs in the near future,anyway our philosophy is ,just get more in debt ,and hope your debt which will accumulate ,will
see better days in a few months or years time.not bad ,considering we got no other alternative.but continue, like the ostrige
bury our heads.
joseph walker
on December 07, 2008
at 12:03 PM
Your and Benanke's solution - at best - will return the record back to a few seconds before the track
ends.
We'll be back where we are again within a very short time and it will have cost billions and no lessons will have been learned.
Joe
on December 07, 2008
at 12:03 PM
I fear over the years ahead there are to be many harsh lessons learned. Deflation or hyperinflation?
I fear hyperinflation more, it leads to a path of chaos which will see civil unrest and the rise of extremist political parties.
Unfortunately we have a govt whose economic actions are driven by political and misplaced enviromental concerns.
I wonder how much the marxist greens are laughing at how we have destroyed UK manufacturing and competitive edge in order to
be carbon neutral.
manav
on December 07, 2008
at 12:03 PM
Perhaps one way out of the crisis would be for the Government to place large orders with British manufacturers,
which would keep people in work, and permeate throughout the economy. These companies would then be well placed for the eventual
upturn.
EX-BRAT
on December 07, 2008
at 12:03 PM
Economists are the only 'professionals' who can be wrong 100% of the time and not lose their jobs.
There is no simple solution to the deflation 'problem'. Recessions are the Winter season in the economic cycle. You can't avoid
them. The longer you fight them off with monetary tricks, the deeper the correction.
Recession corrects the inflationary excesses of an expansion of capital.
We need bankruptcy to bring us back to the starting point again.
Michael J. Clark
on December 07, 2008
at 12:03 PM
It is a mistake to make the real economy pay for the market inflation of the
last 10 years - when assets increased in value without 'real' money being injected (except the debt of the poor
saps who really thought their houses had tripled in value). Let the monopoly money disappear from the system - don't turn our
currency into monopoly money!
Tony
on December 07, 2008
at 12:03 PM
The UK and USA have been on a debt based spending binge and are now running
out of money. The solution proposed by Ambrose is to print some more money and lend it to the bingers so that this crazy life
style is protected. Any sane person must realize that this only postpones the day of reckoning.
It would have been better if the UK government had encouraged investment in our productive industries through tax incentives
and had decided to improve the infrastructure of the UK rather than spend future tax payers money on meaningless but costly VAT
give aways.
I have long ago noticed that in his articles Ambrose always avoids the thorny subject of the big
UK and USA trade gaps. These trade gaps are an indirect result of the lack of a savings culture in these countries and the erroneous
belief that the service "industry" can replace the manufacturing industry. We can now see the results of
this folly!
MikeA
on December 07, 2008
at 12:03 PM
Zero rates are not only morally inexcusable they do not work. Banks haven't lent because they need to
repair balance sheets. US moved to near zero nominal and negative real rates 12 months ago so any whining now that "if only we
had reduced to zero a year ago we would be OK" is bilge. What people who advocate this policy really mean is that if only we had
moved to zero 12 months ago we might have fooled everyone for another year or two with this massive con trick.
Printing money in these circumstances is simply criminal. There is no other word to describe it.Savers are being robbed in
order to make life easier for borrowers (and government). If this happens we should get out the iron bars, haul out the government
thieves and their aiders and abettors and find a use for a length of rope and the street furniture.
Government thinks savers are the more socially responsible section of the community and the less likely to riot and rebel.
This is why they think they can get away with gangsterism. I sincerely hope, if they go ahead with this policy, that there will
be blood on the streets.
Steve
on December 07, 2008
at 12:02 PM
I am an ignoramus about economics, but I cannot see how providing more money for uk consumers will help
uk because we do not make anything any more so the only people to profit will be the retailers with their mark-up and the government
with tax
Douglas Holder
on December 07, 2008
at 12:02 PM
AEP gets to sound more like Mugabe with every passing article. 'reactionary
poison; we have a great scholar with the Solution; do what we say or face revolt; we have the democratic power so we can ignore
the rules of economics; let the printing-presses churn out the banknotes; central banks can create wealth out of thin air'.
But wait, is there hope for him - 'the risk is an abrupt flip to hyperinflation'. Perhaps he should listen more to his doubts
than to the siren voices of 'ditch free-market ideas'.
Conrad
on December 07, 2008
at 12:02 PM
Great Job Ambrose...!
This is what others have been telling us for a while.
Protect yourself and your family...
Great Men like >> Jim Willie, Mike Maloney, John Embry, James Sinclair, Richard Daughty, Ron Paul , David Morgan,
They have all been saying, look out , protect yourself,... >> get out of paper assets... paper is just that ...paper..just a debt
note that some-body owes you something...not good enough... The dollar is Dog Food...
Bill L . in North Carolina
on December 07, 2008
at 12:02 PM
Bernanke's speech was just a thought experiment. There is no evidence that it would work, no systematic
scientific scrutiny, nothing. And this is the guy who you (rightly) criticise for his cheerleading stance during the credit boom.
So why give such credence to his thoughts???
However we get out of this mess, the end destination should include:
no private company/ hedge fund/ bank EVER acquiring the status 'too big to fail'
a purge to end the more or less transparent regulatory capture of central banks and regulatory authorities by private bankers
a fundamental review of the role of central banking, debt-based money and fractional reserve lending
a rebalancing of the economy at least partly away from consumption. The willingness to de-industrialize, run big trade
deficits and rely on financial services and consumption for growth has been our losing strategy in the trade war we didn't
even realize we were in with the great Eastern powers
Forget Bernanke's playbook. It doesn't even have an end in mind.
onion
on December 07, 2008
at 12:02 PM
One respondent said "What Bernanke and you are failing to grasp Ambrose is that we have effectively spent 10 years worth of income
over the last 5 years, and the world economy has rebased itself on this overconsumption.
Over the next 10 years, we will spend 5 years worth of income, it is unavoidable, and the only thing we will gain from all the
money printing is Zimbabwesque inflation."
I agree and i have a furhter point. The interest cost of debt to consumers is not the first consideration now that interest rates
are approaching zero. The ability to repay is the main consideration, and as people have massive indebtedness, they will not borrow
more until they have repaid much of it. So what good will making credit available do, if people dare not take it because they
cannot repay the principal sum?
Therefore politicians better start explaining that standards of living will have to reduce as we live within our means and rebuild
a genuinely useful self sustaining economy. It will happen, that's for sure, just a question of whether it is managed or forced
on us through poverty and disorder.
greg
on December 07, 2008
at 12:02 PM
Deflation as Ambrose Evans-Pritchard wrote about it, explaining how it played out during the Great Depression
of the 30s, indicates why deflation is not good in any economy. Many not used to
principles of fundamental economics would see deflation just as falling of prices of goods. Which consumers would prefer. But,
it's more than that. If prices fall like in gasolene, and that's all about deflation, then motorists and other consumers would
be popping champagne. Because, the gas
prices that hammered them and raised the prices of goods have come down.
But, if gas prices keep falling down below a certain margin, oil companies won't make enough money or profits to start oil exploration
to discover new oil reserves or have the incentives to drill more oil well. That was happned for most of the 80s and 90s, when
oil prices were cheap--so cheap that some companies had to abandon some oil wells. Because, the cost of drilling was higher than
price of crude oil in many cases. The average price for drilling a barrel of crude oil--at the lowest is about $15.00. When you
add the cost of shipping and transportation costs, this could push it up to $30 to $40. So, the lower oil prices go, the more
regressive consequences of deflation kicks in.
Oil price is getting down to around $50 a barrell. Perhaps, if I say that's a enough, some crude, consumerist economists might
think I'm insane to say that. But, that's the harsh reality of microeconomics-- pocket-book, family-expenditure economics and
macroeconomics
at industrial, corporate, government and multinational levels. In all these situations, prices of goods and services have to be
at an optimum level, where buyers and sellers will feel comfortable. Sellers make profits. Buyers don't feel they are paying too
much. This was the case in good, economic times when prices were a little high-- mild inflation--and affordable: Jobs were available,
wages
weren't depressed, demand was high and companies made profits.
But, the problem is, right now, prices are falling, but there is no sufficient liquidity--cash availability, monetary supply--to
move the goods. US economy alone shed 533,000
jobs during this Christmas season. That's aweful. Which means for these folks, there
will be no Chistmas. But, the worst part of it is that those who still have jobs, now think
more about saving than buying. So, when Evans-Pritchard brings Great Depression-era scenarios
and recollections, that's exactly what's it: Regressive and unprofitable deflation, injurious to the economy, and even to consumers,
happen during hyper-recession mild to serious
depression.
This is why General Motors and US auto manufacturers went to Washington, D.C,, asking for
help. Because, average car sales have declined by about 40 percent. Prices are down. But, people aren't buying, because of concerns
about the economic future, unusual degree of thriftness, high unemployment, illiguidity and prioritization of necessities.
I outlined some of these deflationary trends in my Dec. 5 commentary under Philip Booth's article: "Interest rate cut. Deflation
hurts everyone,"
(7:47 AM).
What it shows is that neither interest-rate cuts or fallen prices have moved the economy, or boosted sales and demands yet.
Igonikon Jack, USA
Igonikon Jack
on December 07, 2008
at 09:59 AM
Ambrose. I feel obliged to disagree with you. Even though you have made some interesting digressions.
Your point concerning prevention rather than cure, is the main argument. Perhaps the only way through this mess, is through this
mess. That means accepting deflation. There was a lot of deflation in Germany after reunification, as a result of 16 million East
Germans placed on the labour market. Plus Czechs with visas etc.. It held wages down, despite union demands.
Firstly, inflation above 2% has distortional effects on medium term economic development. Savings are divested from business ventures
into all sorts of assets classes in an effort by individual to preserve their store of value. There is nothing wrong with this,
as every individual must allocate their time between working/saving and resting/investing. However this only creates more speculation.
Second the rich hold assets, whereas the poor hold cash. This means that the rich get richer, and the poor get poorer as a
result of inflation. Inflation prevents social mobility. To address this, governments institute government 'programs' to answer
growing disquiet amongst the working population.
Third, inflation undermines market efficiency, as increasingly distortions exist in the pricing mechanism. And this is without
mentioning inflation causes an increase in bureacracy.
There will be debt deflation. This will occur in all Western societies. Basically the Western economic
model since the 1960s is bankrupt. We have a muddle through system that combines the politically acceptable elements
of Keynes, Friedman and Marx. It is not a proper framework for economic policy, but a fudge. It is best exemplified by the bailout
of the large banks in the UK, and the ECB underwriting of Spanish banks. The concept of 'something for nothing' is still essential
to the political system. The hard choices are pushed out.
There is a war currently between deflation (caused by the fact that the Western economic model is loaded with bottlenecks,
debtedness, inefficiencies, imbalances, bursting asset bubbles, and overconsumption). And we have inflation caused by media advertising
needs, political promises, financial requirements from the bankrupt banks. The only limiting factor on inflation is the number
of trees in the world. (on an interesting note of hypocrisy-tree huggers love inflation)
Japan, was a case of stagnation, as unfixed problems acted as a constraint on progress. And the unfixed problems existed because
Japan was in a state of denial. But Japan needed deflation, to continue to protect it's economic model. And Japan has subsidized
the US while at the same time limping along. This is a considerable "achievement" in policy terms.
The UK cannot meet it's own bills, and the pound sterling will fall. This is due mainly to NewLabour. Not that the Tories or
the Lib Dems would have been any better. Basically, the UK economy is a combination of structural imbalances, in both the private
sector and the public sector. The UK economy evaluates performance in a different manner to Japan. Success based on the metrics
used in the UK, has been a complete red herring. GDP growth was based heavily on increasing debt levels, and public sector expansion.
These were unsustainable. This is more in line with Argentina, than Japan.
And that is where the West is headed - ARGENTINA. Argentina treated every economic imbalance with more paper money, and a complete
failure to make the economy function efficiently. The Western countries are all doing the same.
Healthy sceptic
on December 07, 2008
at 09:58 AM
Ambrose. I feel obliged to disagree with you. Even though you have made some interesting digressions.
Your point concerning prevention rather than cure, is the main argument. Perhaps the only way through this mess, is through this
mess. That means accepting deflation. There was a lot of deflation in Germany after reunification, as a result of 16 million East
Germans placed on the labour market. Plus Czechs with visas etc.. It held wages down, despite union demands.
Firstly, inflation above 2% has distortional effects on medium term economic development. Savings are divested from business ventures
into all sorts of assets classes in an effort by individual to preserve their store of value. There is nothing wrong with this,
as every individual must allocate their time between working/saving and resting/investing. However this only creates more speculation.
Second the rich hold assets, whereas the poor hold cash. This means that the rich get richer, and the poor get poorer as a result
of inflation. Inflation prevents social mobility. To address this, governments institute government 'programs' to answer growing
disquiet amongst the working population.
Third, inflation undermines market efficiency, as increasingly distortions exist in the pricing mechanism. And this is without
mentioning inflation causes an increase in bureacracy.
There will be debt deflation. This will occur in all Western societies. Basically the Western economic model since the 1960s is
bankrupt. We have a muddle through system that combines the politically acceptable elements of Keynes, Friedman and Marx. It is
not a proper framework for economic policy, but a fudge. It is best exemplified by the bailout of the large banks in the UK, and
the ECB underwriting of Spanish banks. The concept of 'something for nothing' is still essential to the political system. The
hard choices are pushed out.
There is a war currently between deflation (caused by the fact that the Western economic model is loaded with bottlenecks, debtedness,
inefficiencies, imbalances, bursting asset bubbles, and overconsumption). And we have inflation caused by media advertising needs,
political promises, financial requirements from the bankrupt banks. The only limiting factor on inflation is the number of trees
in the world. (on an interesting note of hypocrisy-tree huggers love inflation).
Japan, was a case of stagnation, as unfixed problems acted as a constraint on progress. And the unfixed problems existed because
Japan was in a state of denial. But Japan needed deflation, to continue to protect it's economic model. And Japan has subsidized
the US while at the same time limping along. This is a considerable "achievement" in policy terms.
The UK cannot meet it's own bills, and the pound sterling will fall. This is due mainly to NewLabour. Not that the Tories or the
Lib Dems would have been any better. Basically, the UK economy is a combination of structural imbalances, in both the private
sector and the public sector. The UK economy evaluates performance in a different manner to Japan. Success based on the metrics
used in the UK, has been a complete red herring. GDP growth was based heavily on increasing debt levels, and public sector expansion.
These were unsustainable. This is more in line with Argentina, than Japan.
And that is where the West is headed - ARGENTINA. Argentina treated every economic imbalance with more paper money, and a complete
failure to make the economy function efficiently. The Western countries are all doing the same.
Healthy sceptic
on December 07, 2008
at 09:58 AM
In yesterday's Telegraph there was an excellent cartoon by Adams. It showed Mervyn King as a skydiver
in four frames from left to right. On the first two he is falling serenely towards the ground arms folded with his parachute safely
on his back. On the third he has smashed into the ground, and looks non-plus. On the fourth frame he reaches for his rip cord
and pulls it, and the parachute limply opens, and collapses back over him.
That cartoon represents the end game of a cartoon from nineties recession, in which John Major is depicted standing on a town
hall balcony, shops boarded up all around him, row after row of houses for sale, megaphone to his mouth, saying, 'Good news everybody,
inflation is down again'.
This deflation started with the anti-inflationary excess embodied in the Maastricht convergence criteria in 1992, promoted
by the IMF, and adopted unofficially throughout the West since the same date.
It was, above all, based on the belief that it was post WW2 German anti-inflationary rigour which had led to the German post
war economic growth miracle, whereas in fact that growth was merely an unavoidable consequence of the devaluation of the Mark
by losing the war, as it was with Japan.
But it became ingrained in the minds of politicians who were often at best no more than economic historians rather than applied
economists, and so the chant started, 'Keep inflation low and all will be well'. Soon the chant grew so loud and was shouted by
so many that any contrary thinking was ridiculed. Complacent the chanting mob marched on, reinforcing each other in their simplistic
belief - the madness of crowds - and even as the deflationary dragon's head was breathing fire above their heads, they remained
complacent, sure that their anti-inflationary rigour was all the armour they needed.
And now they scatter as the dragon tramples and eats them one by one - Iceland was nice - and reach for the sword of the printing
press, the Germans still shouting, 'No, no, our armour will save us if we do not panic'.
As you say, Ambrose, what applied to Japan this last decade or so cannot apply to the whole world, and the German anti-inflationary
excess was only ever possible because it was accommodated by Western credit expansion. We cannot all be Germans.
Just to be clear, none of this is anti-German. After the Weimar hyperinflation their overzealousness is understandable. That the
Anglosphere thought that they could adopt the same policies is now one of the greatest ever world tragedies.
They will print money endlessly, but they cannot get it to people through the banks because of the bad debt risk the banks now
face, so they will have to post it to consumers without fear nor favour until they start spending again. If it takes $2 trillion,
�300 billion, and 1.5 trillion Euros, then let it, if it takes more, then it must. Even then such carnage will have been wreaked
on the structure of supply and demand that a very severe economic dislocation is now unavoidable.
All this hell could have been avoided if they had reduced interest rates to 0% throughout the West this time last year, along
with tighter reserve controls. But, for the chanting, but for the madness of crowds.
David Goldsby
on December 07, 2008
at 09:57 AM
An open mind is always a good start to finding the solution to a problem. If the exit to freedom from
the present mess is marked 'Hyperinflation' then we should take it. The real value of physical assets won't change, be they houses,
gold et al. Paper assets and liabilities, unless indexed to inflation, will become worthless.
Which is worse - Hyperinflation, as experienced in Weimar Germany, or the deflation of the hungry 'thirties? I have a flat to
sell, but have recently decided I am already too long of paper currencies. I am praying I'm wrong; if not, there may soon be blood
in the streets.
protogodzilla
on December 07, 2008
at 09:57 AM
Angry -
The US/UK/Aus and Euro Club Med are all borrowers. Therefore they will all choose Inflation as a policy tool. In the US and the
UK you will hear a muted discussion, and government programs to help those a the bottom rung of the ladder. But the results will
be economic mayhem, and increased movement of jobs and productive investment outside of the region. In the Euro you will have
a massive argument between the Benelux/Germany and the PIGIS. France will be in the middle unsure which side to pick !! The tendency
towards centralised unaccounable decision making in EU institutions means that you will have loads of distortions in the economic
area, and a complete mess.
Inflation will only drive a tsunami of money into oil again, and the "winners" will be OPEC.
healthy sceptic
on December 07, 2008
at 09:57 AM
The core problem is that economic resources were allocated to those who over the medium and longer term
do generate any new wealth.
For example, a council tenant exercised their right to but their socially owned home at a significant discount to the market value.
As property prices started to increase the former tenant benefited from an increase in equity on their purchase. The former council
tenant decided to take a step up the property ladder and buy a much nicer house, taking on a larger mortgage.
The house proud former council tenant could easily afford to make the payments on his mortgage as he earned a good income as painter
and decorator. The former council tenant then decided to get on the buy-to-let bandwagon and purchased a 1 bedroom city flat.
Then the problems begin. During a credit crunch the former council tenant can no longer find work in the construction industry
and he cannot find a tenant for his city centre buy-to-let flat.
At no point during the entire cycle has any new wealth been generated. Everything was done with credit. The thing that makes it
even worse is that during the credit boom the former council tenant didn�t pay much tax as much of his work was cash-in-hand.
In contrast, the young highly skilled graduate with a bright future in research and development is blighted with student loan
debt, choking levels of rent and high taxation.
The governments� response to the current financial crisis is to further ruin the wealth generating parts of the economy by bailing-out
the reckless. The present governments� policies to overcome the financial crisis can be described as being a busted flush. Once
the government has mired future generations with massive national debt the former council tenant is going to be saved from their
own recklessness. The former council tenant will have been saved but the highly skilled graduate will have taken a job overseas
as he cannot achieve a decent standard of living due to crashing levels of taxation. The nation will have increased its liabilities
and decreased its ability to pay for further recklessness.
The most important thing that needs to been done is to rid ourselves of this reckless government.
CM
on December 07, 2008
at 09:50 AM
Very interesting article, Ambrose. If I've picked you up right, you're saying that the only cure for the
credit boom we've just been through is to have another credit boom.
I think I prefer the analysis of your colleague, Liam Halligan. I sense that even you are having trouble actually believing what
you write.
Rob
on December 07, 2008
at 09:33 AM
"So it is one thing for people to hang onto their savings, refusing to spend and causing a downward asset
spiral, but how can that happen in economies with no savings?"
They do the equivalent: pay down debt, rather than go shopping.
Robinson
on December 07, 2008
at 09:33 AM
Scott 11.01pm
Scott, you must remember Ambrose hates savers. That's why he calls them "rentiers" and promotes and encourages their destruction
by the inflation-spraying helicopter gunships. Remember; savings are not the translation of a person's work and effort into money
but the property of the state to be taken away or devalued as it sees fit.
Steve
on December 07, 2008
at 09:33 AM
glaring inconsistency here, Ambrose faits Bernankes actions but also worrying highlights the economists
who call his policies completely destructive? So which is it? Time will tell is no answer! how about this, cut spending and focus
on the trade deficit... might as well be a joke in a christmas cracker
Martin C
on December 07, 2008
at 09:33 AM
An often overlooked point about Japan is demographics. The population is rapidly aging, the number of
young people is small. Therefore there is nobody to bid up prices, the Japanese economy will continue deflating for the next 100
years.
As regards the UK, the government is transferring wealth from savers to bankrupt bankers. Obviously politicians wish to maintain
the pre-eminence of British banks, because of the tax revenues they bring in, and for positions on the boards after they quit
politics. However, wealth and power are clearly shifting to Asia, it is very doubtful Asians will continue to lend money to our
banks. Why should they? This is an opportunity to build up their own banking business.
So our current business model is broken, hyper-inflation may hide that fact for a short while, but not for long.
jim
on December 07, 2008
at 09:32 AM
I was wondering why the government really need to get involved. Prices go up. prices go down. So what?
Trying to keep things artificially high will not work.
Steven Jones
on December 07, 2008
at 09:32 AM
If history has taught me anything in life, its that theres usually no quick fix when it comes to debt.
Andy
on December 07, 2008
at 09:01 AM
What Bernanke and you are failing to grasp Ambrose is that we have effectively spent 10 years worth of
income over the last 5 years, and the world economy has rebased itself on this overconsumption.
Over the next 10 years, we will spend 5 years worth of income, it is unavoidable, and the only thing we will gain from all the
money printing is Zimbabwesque inflation.
rick
on December 07, 2008
at 09:01 AM
You say in the article that we should do the same here.
Well a 25% devaluation against the dollar is a pretty huge stimulus, much better than monetary printing. Maybe there will be a
need to do what the US is doing, but I say not. Let them print and let us keep our interest rates low for a while, things should
work out.
Possibly.
Dave
on December 07, 2008
at 09:01 AM
Who do we listen to, who do we take notice of! Why is it that economists are the only exponents of hindsight
and get away with it, that any one takes notice of. Can some one please point to a piece of forecasting that any economist has
actually got right. I am sure there must be one somewhere out there. It is no good saying that in general people dont understand.If
you take in all the views, and thats all they seem to be, of economists in general it is no wonder people dont understand. It
is clear that neither do the economists!! If they did the problem would not occur in the first place.
pedro
on December 07, 2008
at 09:01 AM
We need to return the US and UK economies to a state of balance. Both economies have been running on debt
for more than 10 years and economists seem to measure "growth" by the value of the amount of foreign made goods that we purchase
with our borrowed money.
These crazy policies need to be reigned in immediately. What we need are large government budget cuts, lower taxes on small businesses
and tariffs on countries who are not trading freely (or have fixed their currencies).
Andre
on December 07, 2008
at 09:01 AM
The helicopters are already in the air. The problem is that air traffic control isn't sure where to send
them and the Treasury doesn't know how many it needs to send.
Brown of course wants to send them only to his client state but they will only be successful is if they cover the land.
If they drop a large enough load on everyone deflation ceases immediately. The trick will be to mop it all back up again with
tax rises before hyper inflation sets in.
The window will be very small. Timing as always is of the essence. Don't bet on Brown being able to get to the pitch and despatchung
the hypergoogly to the fence.
Even then it will require all world treasuries to act in synch or the first one to tighten will drown.
Interesting times.
Richard Vine
on December 07, 2008
at 09:01 AM
The most effective method to increase aggregate demand is for the FED to purchase all revolving credit
assets held by the top 5 US Banks using quantitative easing. In return, this liability is removed from the consumers balance sheet
thus enabling re-leverage and consumption.
The banks then take these funds and purchase from the FED 100-year "credit card asset" bonds and receive tax free 1% a year.
Al
on December 07, 2008
at 09:00 AM
I cannot understand to save my life how common hardworking people are smart enough to creat wealth but
need dum-ass mba's and economists and bankers and lawyers to handle their affiars in the name of government for a 'FEE"....
billy b.
on December 07, 2008
at 09:00 AM
Hey I've got an idea...
Lets inflate away the value of money, so we can inflate away our debts... and keep house prices massively out of reach of our
children's children.
Ambrose - you need to learn that the costs of high/hyper inflation are more than deflation.
The market may soon be willing to educate you about that.
You've had a wonderful 11 year boom. Now it is time to give some back boomer-boy.
Quote: "Ultimately, it leads to civic revolt. Democracies do not tolerate such social upheaval for long."
You think they react any better under hyperinflation fool?
Inflating away bad debts also inflates away the value of good credits.
You boomers. You want all the wealth and for us to slave away to keep you cushty.
David S
on December 07, 2008
at 09:00 AM
Its all about real and ficticious money,really! Real money comes from producing real goods and ficticious
money comes from gambling on money itself. Its simple, really! You can read all about it in any good Introduction to Marxism.
Once you understand the scientific solution to capitalism then you can stop reading about and listening to so much drivel like
for example, the US car bosses blaming everyone but themselves for the capitalist crises.
Giles Wynne
on December 07, 2008
at 08:59 AM
Well said Scott at 11:01 PM!
Why on earth do commentators, economists and politicians, who should know better, seem to believe that there is a painless way
out of this mess? It seems to me that a period of deflation is simply the price that must be paid to unwind the major imbalances
in the economy that the bankers and politicians foolishly allowed to build up over the last decade.
Take a simple analogy. If you spend 10 hours one night drinking as much free whiskey as you can, then the next morning you will
have a bad hangover. Accept it, take the cold turkey, and by the evening you'll be feeling fine again.
Unfortunately, after 10 years of gorging on excess debt, our politicians and bankers seem intent on curing the collective economic
hangover with the "hair of the dog" method. Pump more of the stuff that caused the problem in the first place into the system,
it's a temporary fix that seems to work, but it leads to much greater problems in the long run, as any drug addict or alcoholic
will tell you. It's time for our "leaders" to put aside the "easy money" bottle and take the deflationary pain. If they don't,
then just like an alcoholic who continues binge drinking, ultimately the system will collapse.
Steve Cox
on December 07, 2008
at 08:59 AM
How are you going to fund your loans and deficits when buyers think they will be spending real money now
and be paid back in worthless monopoly money later. All you are doing is buying a currency crisis later. These are Argentinian
policies, they will ruin the country.
Christopher H
on December 07, 2008
at 08:59 AM
Quantitative easing will make debt deflation a certainty. The moment you offer unlimited quantities of
credit in the state money at zero rates to a select few (the banks), you will ensure that they lend nothing. All they will do
is borrow from one arm of governent at zero and lend to another arm of government at a positive spread by buying sovereign bonds.
It is true that this will recapitalise banks, but it will destroy any sembalance of profit incentive from taking credit risk.
Ben Bernanke will shortly go down as the architect of the single most rapid and vicious example of debt deflation in modern economic
history as every spare dollar competes to get into government bonds and other assets are liquidated to raise the cash to do so.
To- Adrain Munsey- on December 06, 2008 at 11:53 PM
Spot on... I've been trying to understand what the US Federal Reserve is trying to accomplish and I think you've figured it out.
To paraphrase your quote including the USA's portion of this crisis;
The Federal Reserve�s printing of money, if done "carefully", in theory could replace money destroyed by the stock market decline,
credit crunch and/or deflation without upsetting the status quo. A significant percentage of the total money in the World has
disappeared and now can be replaced without substantially inflating and/or deflating the US or World economies. The Federal Reserve
(and World Banks) could manage this crisis and should be able to print and inject new money into the system while maintaining
the status quo without causing major deflation or hyperinflation.
I would think the amount would have to be reasonably calculated and injected with some sort of timing... it's would be a balancing
act of sorts.
This explains why the M-3 has shot up like a rocket yet true US inflation has been in low double/single digit for quite some time.
We had a manageable situation for several years� up to the present crisis's.
There is hope... a "slim" chance the Fed may get it right.
G.
______________________________________________
G.
on December 07, 2008
at 08:59 AM
Quote 'now test viability of paper currencies and modern central banking.' Correct.
In a conversation with someone from the Bank of International Settlements they said that no one from any Central Bank knew what
to do. They were simply trying anything. Makes you feel good does it not?
You correctly say that the Japanese example is no good. You are correct in this as Japan has huge savings and a trade surplus.
USA and UK do not have this.
I actually think that we are heading for hyperinflation. If we are lucky we will avoid the deflationary period first. We talk
about FDR and the New Deal and how it saved the USA and the world. It did not, it was WW2 which solved the last crises.
I am pleased that you criticise Benanke. He is a big culprit in all of this. I do not express your faith in him. With a mix of
BO, Benanke and a Democrat Government, you can bet that the US will simply print, print, print. They have to as BO has promised
'change'. If he does not give 'change' he will get massive unrest.
The US is restless and in a state of flux. This is where your rational partially fails. You have underestimated the fear, loathing
and shere anger around. The Russian, Indian and Chinese populace have been shown the huge opportunities offered by capitalism
and bet massively on it. This is now crashing down as they treated money markets as a casino. They embraced capitalism with irrational
exuberance and lost. Will their Governments be willing to face the peoples anger or deflect it elsewhere in a huge wave of anti
capitalism hysteria focused on the USA and Europe? I know what I think.
I actually would not be surprised if we head for WW3 in the next 5 to 10 years. At the very least we will have massive social
unrest in China, USA, India, Russia, UK and some parts of Europe. Germany and Switzerland are probably the two safest countries.
Prepare for the worst as I really do think that hell is coming. I really hope that I am wrong. I am sure that some people will
read this and think 'what a nutter'. A year ago I was positive, not any more.
D Rumsfeld
on December 07, 2008
at 08:59 AM
Actually, the thinking of Greenspan and Bernanke were not connected directly. Both men studied and worshiped
the sage of our era, Milton Friedman
RB
on December 07, 2008
at 08:58 AM
I understand that China, having built up a huge trade surplus from trade with the West, is now unwilling
to invest that value in the West because it is concerned about the stability of Western economies. The productive industries of
the West were gradually run down over a 25 years period while the elaborate packaging of debt referred to as "the financial services
industry" grew. China is behaving rationaly but unhelpfully. We must raise ourselves by our own bootstraps. Unless we start again
to make something useful we will not climb out of this pit. A few modest proposals therefore: (1) take no more students on any
courses involving media studies, television, film or photography but increase dramatically funding for science, engineering and
manufacturing courses and pay employers 50% of the wages of all science, engineering and manufacturing graduates for two years,
25% in the third year but with a claback for any who are not kept on for the next three years; (2) cut all welfare payments after
6 months unless the recipients daily attend training courses and learn a new practical skill or work clearing up the streets,
parks and public places; (3) take the public funding away from the banks unless it is directed immediately into funding industries
that make useful things; (4) tax any spending on foreign holidays or travel at 400% and apply all monies raised to funding UK
leisure facilities; (5) raise taxes on alcohol and limit pub opening hours to 12 noon till 3pm and 6pm to 10.30pm and punish public
drunkeness; (6) eliminate capital gains taxation on investment in UK science, engineering and maunufacturing businesses for investments
held for at least 5 years. We cannot live by indulging our appetites for cheap foreign goods.
John Stobart
on December 07, 2008
at 08:58 AM
There needs to be a rebalancing of east/west trade, particularly with China. Their strategy of keeping
their currency low and designing every other policy to get an advantage for their exporters while holding cash in western currencies
is destroying our industry and providing cheap money that creates consumer debt and housing asset bubbles.
The most effective way to rebalance things would be the US and EU threatening a tariff on Chinese imports.
Mathematically negative interest rates are not impossible - they send a message that deposits are not wanted and should be spent.
Putting a -2% interest rate on bank accounts sends a 'spend it or lose it' message. Hording cash is the other side of excessive
debt: the cash needs to be spent if people are to be able to pay off the debt.
Tom
on December 07, 2008
at 08:58 AM
"Monetary stimulus is a better option than fiscal sprees"
At this juncture, there are more than a few who might disagree with you.
Stevie b.
on December 07, 2008
at 08:58 AM
Trouble is, the media have urged the 'sheeple' over decades to believe it is their right to live out the
materialism indoctrinated by Edward Bernays, the nephew of Freud. Now, with solid ground giving way to shifting sand, the prospect
of civil unrest is a real threat.
Uscus Lamb
on December 07, 2008
at 08:57 AM
It's over. Man the lifeboats - but fight off the panic-stricken profligate and chav queue-jumpers with
any weapon you can bring to hand.
What a world, and what a dump of a country we have.
Ted Knight
on December 07, 2008
at 08:57 AM
A German in Spain
on December 06, 2008
at 11:53 PM
Dear Sir
It would be very interesting to have your view as to what is happening economically to Spain at this time. Is the government handling
the crisis properly?
A friend of mine says that fools and their money are easily parted. Would you agree?
Antonio P�rez (Madrid)
on December 07, 2008
at 08:56 AM
Alchemy is no substitute for a sound economy.
The people have been blinded and fleeced. There is not much more business to be done, it is over.
Money creation and usury has had its day. It seemed such a good idea at the time.
The goose that laid the golden egg is dead.
It is not widely believed but the prophets foretold these things. Fallen fallen is Babylon the great!
Saka
on December 07, 2008
at 08:56 AM
Great piece, Ambrose.
Now, how did the Bank of France shoot down the US helicopters in October 1931?
In short, what CAN go wrong? Are the Red Chinese planning to shoot down the US helicopters?
A Liquidity Lake is a fine concept, but unless one can reasonably expect to be able to pay a loan back one has no business in
borrowing. Same with lending. Japanese individuals I understand have long tended to save/hoard, so have the Germans. Food for
Thought (for Ambrose) is what happens with idle capital; I have a hunch a lot of the American bailout money is sitting in balances
as reserves and is not out doing anything except stopping bank runs (this includes non-banks) and at the end of this crisis will
be given back unused. In the meantime the Paulson Plan bails out those with "good credit" and creates a sub-tier of debt of those
less fortunate; since my dirty little secret is to be lving in part on junk bonds (the real thing: not junk bond funds!) the Paulson
Plan is a real threat. It looks to recreate FDR's New Deal with a handful of large companies allowed to limp along while their
unions bled them dry: East Germany with "democracy".
Hyper inflation. Ambrose, I don't want to have to go out rounding up the horses again so try not to frighten them again.
I have to go back to work. Much more important things; I will leave things in good hands with Ambrose; American affairs look worse
and worse with the US auto industry poised to go the British Leyland route. Meantime the Chinese are looking more ominous and
I found a picture of Der Fuehrer who actually from that angle actually looks a bit like BO. Rumours abound that BO is going to
go the Argentine route about retirement plans and confiscate them; the Democrats tried to do that in 1993 (serious proposal for
a 15% "excise" tax on ALL non-Social Security retirement plans).
I haven't mentioned CDO's for months, but I see NO attempts to outlaw them so the iffy/waffly/mushy/spongy debt securities are
still going to be around breeding like rats; these were the original source of this contagion.
To understand the effect: imagine if every cash figure magically had the Harry Potterish power to vary so that the ten pounds
in your wallet could magically turn into L9.75 tmmw and then be L10.15 the day after that, or that check you wrote said $10 (OK
I'll use $$) when you mailed it had $9.80 written on it when it's received. That is the CDO Effect; when I pay my mortgage off
early some CDO holder is going to come up short.
I think the US is going to be turned into East Germany as I saw it at the "Turning" (Die Wende auf Deutsch); OK I saw it in June
1991 9 months after but I could extrapolate what a country run by its Labour Movement had been like
Nathan Redshield
on December 07, 2008
at 12:21 AM
Deflation is bad for borrowers; inflation is bad for lenders. Ultimately, we need to get back to boring
trend growth that is based on productivity gains and not "Money for Nothing". The US and the UK have been growing for the last
10 years on the back of borrowed money. Ultimately, the bill has to be settled: today by the idiots who overleveraged themselves
or tomorrow by our children who have nothing to do with today's idiots save they might be their parents.
Angry
on December 07, 2008
at 12:20 AM
Why do people not understand we have had deflation for the last 11 years, it was on the imported goods
from China. This is what caused us to get into a mess as we decided for an arbitrary reason that inflation had to be 2% and so
we kept rates low and had an inflation boom in services and assets.
Now it is reversing as the deflation from China has run its course and becomes inflation, hence the assets and services must deflate.
Letting rip with money supply and govt spending will end with significant inflation and not the "old equilibrium" that they seem
to be looking for. it will erase the debt but will not give people jobs.....
Ian Jones
on December 07, 2008
at 12:20 AM
It is difficult to know whether or not to sell everything for gold bullion or mortgage up to the hilt
and max out the credit cards. You'll need to have better timing than a swiss clock.
Personally I plan on following thhe advice of buying a castle in Scotland, a couple of shot guns and a couiple of years supply
of tinned food.
Kevin Smith
www.deadcert.com
Kevin Smith
on December 06, 2008
at 11:54 PM
So, economists, commentators and policymakers continue to veer wildley here and there. Fiscal stimulus,
interest rates near zero, nationalised banks and now letting rip with the printing press.
In the mean time no one addresses the problem as to why we're here in the first place. They concentrate on trying to fix the first
dominoes to fall without thought to why the real wreckage is happening.
A constant and systematic huge balance of payment deficit for 20 years set to deteriorate further as invisibles collapse,the decline
of real wealth producing industry to be replaced by a collapsing financial and service sector, a decade of GDP growth pumped by
1.5 trillion pounds of private debt and hundreds of billions of public borrowing that has replaced real growth in the productive
economy and a savings rate that has gone from approx 10% in 1997 to -0.4% in Q1 2008.
We now have an economic policy where the govt is borrowing on behalf of a maxed out consumer in order that people can continue
consumption on imported products.
Do you really think that getting the banks into a position to lend for more consumption is the answer to our prayers. Do you really
think that we can replace the wealth flowing out of the country with debt indefinitely ?
Our economy is now pureley based on consumption, but the UK consumer, with 1.5 trillion of debt are the most indebted people on
the planet, by a mile, and the solution is to lend more!
When will economists stand back from their charts of minutae and open their eyes and minds to the blindingly obvious problems
in front of them.
Cranking up the printing presses and throwing it around like monopoly money will result in it becoming exactly that MONOPOLY MONEY.
For gods sake, recognise the problem, then at least we can begin the long process of climbing out of the chasm we're in.
japstick
on December 06, 2008
at 11:53 PM
It is obvious that we are somehow stepping into new terrain and in theory nobody really knows if we are
going to do the right thing. It seems to me nevertheless that Bernake's position might not be the right one . Just consider that
especially high (debt based) spending has driven the train into deep mud . So is it the right solution to carry on the same way
, which got us into this mess , to get out of it again ? I doubt it . I think the problem lies within the current system of the
poor getting poorer and the rich getting richer . It is the heavy burden of too high existing debt that paralyses the economy
.
Money thrown from a helicopter would rather end up tilting monthly payments . The masses have been stripped of spending power
while on the other side huge assets have been build up and are hungry for any kind of speculative profits . In addition I would
favour some kind of currency reform as a solution where huge amount of debt is being forgiven to the masses by taking away the
last one or two digits of debt and savings . Okay , this will provide us with huge moral problems but it might strip the wagon
of the overweight to get out of the mud more easily . Besides I think that we should quickly get rid of the economy conductors
who got us into these problems ..I have no faith that they can solve the problems with their way of thinking . Welcome Obama ,
welcome Cameron etc. .
A German in Spain
on December 06, 2008
at 11:53 PM
This analysis is very sound. In the UK we are very late. The printing of money if done carefully may now
be the only way to replace the money destroyed by the credit crunch and deflation. A significant percentage of the cash/money
in the world has gone forever. It needs to replaced. Would that our interest rates had been reduced in September 2007. This delay
is why we will have to inject new money into our system. Otherwise we will have a slump. But the amount has to be calculated (it
can be!) and done with skill.
Adrian Munsey
on December 06, 2008
at 11:53 PM
When Hyperinflation hits the G7 countries the UK will be in better shape than most. That is because they
have a large gold reserve right under their feet, in the form of the gold ETF whose symbol is GLD. When conditions reach their
worst and GLD approaches Berkshire Hathaway price levels the UK will simply move in and confiscate all the gold. After all, the
gold doesn't belong to any government, it belongs to individuals, most of whom live outside the UK, so theres no danger of provoking
a war.
I'll go from feeling like Warren Buffet to being the next guy on the soup line.
hanky panky
on December 06, 2008
at 11:52 PM
Boom and Bust live on!
OK, we've had our spree. Now, we pay. It will take 5 years to get over this mess. We just have to sit it out.
A monk of great
renown
on December 06, 2008
at 11:01 PM
So deflation transfers wealth from 'workers' to 'bondholders'?
How about from debtors to savers!
I fear hyperinflation far more than I do a modest bout of deflation. Falling prices, to an extent, are stimulative as those with
incomes benefit.
The debtors and the deadbeats have caused enough damage. Let's
not save them at the expense of pensioners, the thrifty and the prudent.
Scott
on December 06, 2008
at 11:01 PM
The major difference between Japan 1990s and UK / USA today is personal savings. Japan had plenty, the
West has none (agrregated / generalisation).
So it is one thing for people to hang onto their savings, refusing to spend and causing a downward asset spiral, but how can that
happen in economies with no savings?
Moreover, the number of people on the public sector payroll (including those on benefits) and a large number of innumerate people
who are addicted to shopping and spending, suggests that the out-turn in the UK could be significantly different from Japan.
The more commentary that appears in the mainstream financial media on the subject of "deflation", the more the relationship between
our bubble-economy and this powerful word is starting to sound like the debate over whether alcoholism is an addiction or a disease.
As
noted previously, when they set out to write about "deflation" today, far too many writers confuse our world of pure fiat money
and government-sanctioned, serial asset bubbles with an earlier era of sound money. That is, when falling consumer prices were commonplace,
presenting great difficulty for both the economy and the banking system when people began hoarding money in anticipation of lower
prices.
This behavior made sense in the 1800s.
For example, if you lived during the late 19th century, you could look back a hundred years and see basically zero inflation. Given
this view of the world, you could be pretty sure that this trend would continue far into the future.
Why not wait for prices of goods and services to bottom out before buying?
Fast forward more than a hundred years and you have meteoric advances and declines in stocks and housing compounded by wild swings
in commodity prices - crude oil at $85 a barrel in January, then $147 in July, and then $46 in December - all of this presenting
a dizzying price picture to consumers, but a picture that should not be confused with a world of zero inflation and sound money.
Increasingly, it seems as though writers with too short a view of history are trying to legitimize the world's bubble-economies (likely
setting the stage for the next bubble's inflation in the process) by creating a new bogeyman in "deflation", akin to viewing alcohol
abuse as a disease rather than an addiction that too few have the will to break.
Typical of this characterization of today's economic ills is this
story in USA Today:
Deflation: Bargains abound, this could be a problem
Everything is on sale. And that's not a good thing.
Consumer prices in October fell at the fastest pace in more than 60 years, sucked down by the rapidly deteriorating economy. The
prices of oil, food, cars, clothing and electronics have all plunged. Home prices continue to swoon and so do stock prices.
As the early reports from the holiday shopping season suggest, the nationwide fire sale might seem like a boon for consumers.
But it's increasing the risk that the economy could become mired in a dangerous deflationary spiral - a widespread, sustained
reduction in prices. That's something that hasn't happened here since the Great Depression.
Economists say it's too early to tell whether deflation has set in - and many say the government's aggressive responses to the
credit crunch likely will prevent sustained deflation.
...
A deflationary spiral can have several causes, such as a widespread glut of goods that forces manufacturers to slash prices. In
the current crisis, the bursting of the housing bubble has forced home prices down, pulling down the prices of raw materials,
cars and even stocks.
As prices fall, consumers eventually stop spending, either because they are worried about their jobs, or because they figure they
can get lower prices later. Companies start laying off workers because lower prices have pushed down - or eliminated - their profits.
That, in turn, means even less demand.
A slowdown in consumer spending because workers are fearful of losing their jobs, perhaps realizing for the first time ever that
they can't continue to borrow and spend like drunken sailors, is a completely understandable reaction to the current economic condition.
But, aside from the very short-term, to think that consumers will not spend because they see lower prices for consumer goods in the
future is ridiculous. We've had almost a hundred years of non-stop inflation and, despite the confusion created by the bursting of
asset bubbles all around them, consumers understand quite well that, over the long-term, prices for domestic goods and services go
up, not down.
Even in the case where prices for imported goods have been falling for years - electronics and clothing, to name just two - falling
prices have had not resulted in lower spending.
Yet, for some reason, writers continue to think that it might.
There aren't too many who understand this issue as it should be understood, but one of them is Robert Higgs who
writes at the
Mises Institute and offers the same critique of reporting on "deflation" today.
Nonsense about Deflation
We are now hearing ominous warnings about imminent deflation. Checking the welcome page at AOL this morning, I see that the lead
item in the financial news section heralds "The Looming Threat of Deflation." This headline encapsulates two highly problematic
ideas. The first is that deflation would necessarily be a bad thing. The second is that deflation is likely to occur in the near
term.
...
You can see clearly that the rate of economic growth and the rate of price-level change have been independent, at least within
the ranges of these variables in US economic history. (Hyperinflation or hyperdeflation would be another matter: either would
be devastating by making economic calculation and long-term contracting virtually impossible.)
Any decent economics teacher makes sure that before the students have gone more than a week or two, they have mastered the difference
between absolute (nominal) and relative (real) prices. All of economic analysis hinges on this understanding. Yet practicing politicians,
investment gurus, news media hyperventilators, and others who play important roles in influencing public opinion are completely
lacking in this basic understanding. The upshot is a destructive bias in favor of secular inflation, with the risk of periodic
bouts of rapid inflation.
Which brings us to the second question: for better or worse, does deflation actually loom at present? If it does, its occurrence
will surprise me greatly, because the Fed has been creating base money as if there were no tomorrow, and if the bailouts continue,
as seems likely, more of the same is virtually certain. So far, the huge spurt in base money has simply been absorbed and held
by the banks in the form of (legally) excess reserves, but the likelihood that the banks will sit on $268 billion of excess reserves
forever is nil. Once they feel more secure, their loans and investments will go forth in search of a higher yield than the Fed
pays them (since a recent change in policy) on their reserves, and at that point the banking system's money multiplier will kick
in with terrific force.
In short, given the monetary conditions now prevailing, the greater threat by far is inflation, not deflation. And contrary to
what the investment "experts," the politicians, and the mainstream economists believe, inflation is not a benign element in the
economy's operation. It is, as it has always been, the most dangerous and destructive form of taxation.
At times like this it is much more convenient to have an easily identifiable bogeyman at the ready - the word "deflation" fits this
role quite well - rather than dealing with the much more significant underlying problems of a fundamentally flawed monetary system
and misguided economic policies that have been all too dependent upon debasing the currency and fostering asset bubbles over the
last hundred years, a process that has accelerated sharply over the last twenty and may now be coming to a painful conclusion.
I reiterate my previous point, which can be found
here, and say that they are both kinda right. We are experiencing investment asset value deflation, which will likely continue
for a while, until the economic environment for private investment is perceived as more healthy again (unlikely under a Democrat
administration, so at least 4 years). On the other hand, as the government back-fills the shrinking private-debt hole with newly
created real money in a misguided, moronic, and ultimately disastrous attempt to prevent a healthy market price correction, real
inflation will likely also dramatically increase, causing a stagflation scenario. All of this is easily predictable, yet also
unavoidable with the idiots in charge.
Myself,
I would rather have a bottle in front of me than a frontal labotomy! During this economic downturn I do not drink anymore; of
course I do not drink any less either.
When I was about to graduate from the University of Illinois at Urbana back in 1958 I took an econ course
from a visiting professor from Harvard. He was great!
When he was a grad student at Harvard back about 1913 he accompanied his econ professor to the secret meeting at Jeckel Island,
Georgia where the Federal Reserve Act was crafted by the bankers for the bankers. He was all sold on it then but now (1958 and
some years before then) he decried it as the creation "...of an engine of inflation."
"We are experiencing investment asset value deflation, which will likely continue for a while, until
the economic environment for private investment is perceived as more healthy again (unlikely under a Democrat administration,
so at least 4 years)"
Well, no. The evidence is that the economy always does better under a Democratic administration than Republic.
James Grant, editor of Grant's Interest Rate Observer, talks with Bloomberg's Tom Keene about his
new book, ``Mr. Market Miscalculates: The Bubble Years and Beyond,'' inflation risk in the U.S., business failures
and financial history, and Federal Reserve monetary policy.
Looks like Krugman is out of touch with reality... Not the first time, not the last... Are 401K investors ready for a dislocation
in the treasury market? Boomers can became busters...
One thing I have found troubling is the near-unanimity in the US that we must Do Something about the burgeoning economic crisis,
and that Something is big time monetary and fiscal stimulus.
Near unanimity is almost never a good thing in the political and policy realm, since conditions and options are sufficiently complicated
so as to make it unlikely that there is a magic bullet.
Not to beat a dead horse, but we have been struck by the number of analogies made to the Great Depression that strike us as wrongheaded.
The first is the idea that throwing money at "stimulus" will actually do the job, I see a lot of back of the envelope calculations
of what % of GDP it will take to do the job.
But as the misguided tax rebates showed, it is quite possible to devise programs that are largely ineffective
(roughly 80% of the rebates went to savings or debt reduction, which is a form of savings).
A lot of money has similarly been thrown at the "get credit markets working again" program. And what are the results? Consumer and
small business credit slashed, private securitizations a thing of the past, almost no debtor in possession financing (crucial for
Chapter 11 bankruptcies), letters of credit scarce and costly,
A2/P2 commercial
paper at record spreads, and the Fed and Treasury still seeming to create, increase, or extend programs on virtually a weekly
basis.
So what economist Tom Ferguson calls the "hydraulic Keynesian" approach might not be as successful as its advocates suggest. And
that assumes it is the right remedy. We have argued that
Keynes himself would not be on board with the
idea of the US leading the stimulus charge:
The operating assumption behind US policy now is seeing the US situation as parallel to that of the US in the Depression, and
taking the view, based on the fact that the US seemed to finally shake off the slump with the demands
of wartime production and the unprecedented budget deficits that accompanied them. But there were considerable
worries in 1946 that the US would fall back into Depression. The conventional view is that pent-up demand carried the US through,
after a sharp but very short downturn in 1946.
However, would this strategy have worked in a peacetime setting? The US also emerged from its slump
to a world with a tremendous amount of industrial production destroyed by the war. Thus, the US, whose problem
in the late 1920s (which didn't look like a problem at the time) was that it was a huge exporter, to the point where it sucked
up so much gold as to be destabilizing to the financial system, could with 50% of world GDP, revert
to its preferred old role with less damaging side effects. Had the rest of the world gone into wartime levels of
stimulus along with the US, without the loss of productive capacity, would there ever have been an end of the beggar-thy-neighbor
trade policies of the 1930s? International trade didn't just fall, "collapsed" is not an uncommon characterization of the degree
of contraction....
Similarly, as we have said before, the US was a world-dominating exporter, as China is now, and had the biggest gold reserves,
as China now had the largest FX reserves. Thus it is China that needs to undergo a huge-scale stimulus program to make up for
the loss of demand from the US. Keynes, in the 1930s, advocated that the US make up for the demand
loss rather than expecting the US's overindebted European trade partners to continue overconsuming....
Yet what is being advocated as a Keynesian remedy is in fact the opposite of what Keynes called for in his day. Keynes' prescription
then would lead to a global rebalancing, with the US depending more on internally generated demand and less on its foreign partners
(who were defaulting on their government debt). But if it were successfully deployed in the US now, it would lead to a continuation,
of our excessive consumption and China's underdevelopment of its internal demand.
With businesses uninterested in spending more on investment than their retained earnings, and households
cutting back, despite easy monetary policy, fiscal deficits are exploding. Even so, deficits have not been large
enough to sustain growth in line with potential. So deliberate fiscal boosts are also being undertaken...
This then is the endgame for the global imbalances. On the one hand are the surplus
countries. On the other are these huge fiscal deficits. So deficits aimed at sustaining demand will be piled on top of
the fiscal costs of rescuing banking systems bankrupted in the rush to finance excess spending by
uncreditworthy households via securitised lending against overpriced houses.
This is not a durable solution to the challenge of sustaining global demand. Sooner or later....willingness
to absorb government paper and the liabilities of central banks will reach a limit. At that point crisis will come.
To avoid that dire outcome the private sector of these economies must be able and willing to borrow; or the economy must be rebalanced,
with stronger external balances as the counterpart of smaller domestic deficits. Given the overhang of private debt, the first
outcome looks not so much unlikely as lethal. So it must be the latter.
In normal times, current account surpluses of countries that are either structurally mercantilist
– that is, have a chronic excess of output over spending, like Germany and Japan – or follow mercantilist policies – that is,
keep exchange rates down through huge foreign currency intervention, like China – are even useful. In a crisis of deficient demand,
however, they are dangerously contractionary.
Countries with large external surpluses import demand from the rest of the world. In a deep recession, this is a "beggar-my-neighbour"
policy. It makes impossible the necessary combination of global rebalancing with sustained aggregate demand. John Maynard Keynes
argued just this when negotiating the post-second world war order.
In short, if the world economy is to get through this crisis in reasonable shape, creditworthy
surplus countries must expand domestic demand relative to potential output. How they achieve this outcome is up
to them. But only in this way can the deficit countries realistically hope to avoid spending themselves into bankruptcy.
The UK is closer to the endgame than the US, so it is easier for them to perceive the risks (Willem Buiter has detailed the parallels
between the UK and Iceland). The US, with the advantage of its deep Treasury markets and the reserve
currency, has more rope with which to hang itself and its hapless creditors.
Anonymous said...
What's left out of this picture is a section in Wolf's article you didn't quote:
"Some argue that an
attempt by countries with external deficits to promote export-led growth, via exchange-rate depreciation, is a beggar-my-neighbour
policy. This is the reverse of the truth. It is a policy aimed at returning to balance. The beggar-my-neighbour policy is for
countries with huge external surpluses to allow a collapse in domestic demand. They are then exporting unemployment. If the countries
with massive surpluses allow this to occur they cannot be surprised if deficit countries even resort to protectionist measures."
The policy choices should not viewed as huge American stimulus OR rebalancing by Americans saving more and consuming less.
The policy choice is huge American stimulus PLUS large dollar depreciation, to restore
American manufacturing.
With all due respect, how do we "restore manufacturing" in this country? Blue collar
work is demonized; look at the outrage against the UAW versus white collar workers in investment banks that have created products
that have on balance proved detrimental, drove their companies into the ground, and took out vastly greater comp? Objectively,
they did far greater damage and earned far greater rewards.
We no longer have factories, related infrastructure, or managerial expertise in many industries
where we were once meaningful players. The shoe business is my favorite example. There is no reason we should have ceded it entirely,
but we did.
And you don't just need workers, you need managers. How many capable people want to run a factory, or have the skills? My father
ran paper mill startups in the coated paper business (very fussy manufacturing, unlike newsprint, and with a startup, you go from
zero to 500 to 1000 people in 2 years, people who for the most part never operated this massive equipment. And getting all the
custom machinery to work is no piece of cake either. Something is always botched. A two year startup, where the startup costs
are 20% of the capital costs, which today would be $1 billion plus, is a good outcome. A bad start up is an ongoing hemorrhage).
Despite being a difficult character and not a good marketer, he had a very robust consulting business in his later years because
pretty much no one in the industry could shake down operations like he could. And how many people want to live in the boonies,
which is where manufacturing plants are located (you don't put them on expensive land).
Investors would have to believe a cheap dollar was more or less a permanent condition to bet on manufacturing on a sufficient
scale to get our trade balance back in order. And even then, we have major rebuilding before us.
Note that the recent improvement in our trade balance was largely commodities.
Martin thinks; others blindly apply principles without looking at conditions. I've been screaming about
what a huge mistake further intervention and stimulus here would be at the top of my lungs for the last month, and I'm sorry to
everyone who had to suffer through the repetition. Stimulus focused on increasing US demand can only
make the situation worse, and we're ignoring our vulgarly obvious national insolvency.
The beggar-my-neighbour
policy is for countries with huge external surpluses to allow a collapse in domestic demand.
Bingo. There can be no solution until this fundamental misalignment is fixed, and because that fix would induce tremendous
pain for an already bleeding China, I don't think it's going to happen unless there's a true miracle of diplomacy.
Given how trusted Hank was by China, and his strong attempts in better times to make them revalue,
I don't believe in this miracle.
Yet what is being advocated as a Keynesian remedy is in fact the opposite of what Keynes called for in his day.
Krugman better read this. Nobody has disappointed me more than he, because while many bad economists
don't, he does know better. I've come to believe he's just seizing an opportunity to get admittedly needed domestic priority adjustment
done under a false flag. He's better than that, and it makes me sad.
I dont see any reason why exchange rate realignment + concerted international financial regulation cannot
solve this problem.
Global banking regulation needs reform and Shiller has also highlighted this his new book (I just saw the
interview - waiting for the book). There is something fundamentally wrong with accounting policies that let banks lower capital
requirements based on "perceived" asset price increases. The same regulation also creates holes in balance sheets as asset prices
falls. This regulation needs to be suspended for sometime - (upside suspension), banks be forced to take all the write-downs marking
the assets to agreed upon prices (lets call them steady state prices) - and then made to raise capital enough to sustain them.
Secondly exchange rate realignment is absolutely must. I have been harping about this on this blog comments for long now.
US must become producer and China and surplus countries must become consumers. Without this there
is no resolution of this crisis.
Finally, there is likely to be a diplomatic war to protect and isolate the consumers an keep the consumer to itself. Such a
trading barrier game will be detrimental to global prospects and will decrease the total pie.
If a big ship(US and EU) is sinking - one way is to protect your resuce boat - or save the ship. Former saves you comfortably
but leaves the world with just a boat! and latter is difficult but the Ship stays so we are better off.
Investors would have to believe a cheap dollar was more or less a permanent condition to bet on manufacturing
on a sufficient scale to get our trade balance back in order. And even then, we have major rebuilding before us.
We need
to rediscover our competitive advantages beyond excellent farmland in Iowa and a greater propensity to lie. Turning on the spending
booster jets before pointing ourselves in the right direction isn't a great idea.
The Internet has fundamentally busted a ton of business models. Margins have been permanently slashed,
knowledge is now incredibly slippery and difficult to sell or leverage, and everyone around the world is now equally well positioned
to do many jobs.
It's going to take a lot of industries and individuals a long time to adjust, and the citizens
of the richer countries are generally the losers. Let's see policies put into place that will protect and help
them, rather than just hitch them more tightly to the debt yoke in hopes that even more leverage can pull us through to another
few years of prosperity.
Another data point, Until the second half of this year, we have seen
a protracted decline in the value of the dollar. Yet our savings rate continued to fall and the current account deficit rose to
new highs. Now you can argue this is due to China's peg, but the point is that in a floating rate
regime, we cannot simply revalue our currency (and too precipitous a fall, which we may unwittingly engineer thanks to all our
debt creation, would create a destabilizing currency crisis).
And Cerberus, which bought the Mead-WestVaco paper mills (now called NewPage) in 2005 has been closing mills and cutting costs
aggressively in those mills, to the point of cutting maintenance, which is an unsafe practice. That
in a weakening dollar environment in a capital intensive, high skill manufacturing business.
Secondly exchange rate realignment is absolutely must. I have been harping about this on this blog
comments for long now. US must become producer and China and surplus countries must become consumers.
Without this there is no resolution of this crisis.
I agree, but I don't think China's going to do this. They're suffering
plenty of internal problems and a revaluation will instantly bankrupt the PBoC, leading to a need to recapitalize it through
taxing angry Chinese citizens. Not only that, but there's a lot of other peggers out there, and if only a few of them revalue,
they lose out to the ones who preserve their peg. It's the OPEC problem in drag.
This is likely to lead to the real deal Smoot-Hawley, as indebted uncompetitive nations feel they
have no choice but to stop the mercantilism through trade restrictions.
The current strength of the dollar is temporary and the US currency risks a hard landing in 2009, according to a team of United Nations
economists who foresaw a year ago that a US downturn would bring the global economy to a near standstill.
In their annual report
on the world economy published on Monday, the economists said the dollar's sharp rebound this autumn
had been driven mainly by a flight to the safety of the international reserve currency as the financial crisis spread beyond the
US.
The overall trend remained a downward one, however, reflecting perceptions that the
US debt position was approaching unsustainable levels. An accelerated fall of the dollar could bring
new turmoil to financial markets.
"Investors might renew their flight to safety, though this time away from dollar-denominated assets,
thereby forcing the US economy into a hard landing and pulling the global economy into a deeper recession," the report said.
Publication of the annual survey by the UN's Department of Economic and Social Affairs, its trade organisation Unctad and UN regional
bodies, was brought forward by a month in the light of the financial crisis. It was launched in Doha to coincide with the UN-sponsored
development financing conference in the Qatari capital.
The UN team said that, as the financial crisis spread beyond the US, there had been a massive shift
of global financial assets into US Treasury bills, driving their yields almost to zero and pushing the dollar sharply higher. At
the same time, however, the US's external debt had risen to new heights that could provoke a dollar collapse.
The report recommends reform of the international reserve system away from almost exclusive reliance on the dollar and towards
a globally backed multi-currency system.
Rob Vos, a Dutch economist who heads the UN's policy and analysis division and who is responsible for the annual economic review,
said the global economic pain could be eased if governments co-ordinated a spate of stimulus packages
that were already under way.
"There has been a sea change in attitudes in favour of intervention and concerted action," he told the Financial Times. He welcomed
statements from US president-elect Barack Obama's transition team in support of spending on infrastructure.
Another batch of worse than awful news greeted today Americans getting ready for the Thanksgiving holiday: free falling consumption
spending, collapsing new homes sales, falling consumer confidence, very high initial claims for unemployment benefits, collapsing
orders for durable goods. It is hard to get any worse than this but the next few months will serve even worse macro news. At this
rate of contraction as revealed by the latest data it would not be surprising if fourth quarter GDP were to fall at an annualized
rate of 5-6%.
And Roubini concludes:
[T]he Fed, together with the Treasury, started to implement some of the "crazier" policy actions that we discussed last week:
a) outright purchases of agency debt and MBS to the tune of a whopping $600 billion; b) another $200 billion of loans to backstop
the consumer and small business credit markets (credit cards, auto loans, student loans, small business loans); c) an effective
policy of aggressive quantitative easing as the balance sheet of the Fed – already grown from $800 billion to over $2 trillion
– will be expanded further as most of the new bailout actions and new programs will be financed via injections of liquidity rather
than issuance of public debt.
Effectively the Fed Funds rate has been abandoned as a tool of monetary policy ... the Fed is now relying on massive quantitative
easing and direct purchases of private sector short term and long term debts to try to aggressively push down short term and long
term market rates.
...
Desperate times and desperate economic news require desperate policy actions ... The Treasury will be issuing in the next two
years about $2 trillion of additional debt ... These policies – however partially necessary – will eventually leads to much higher
real interest rates on the public debt and weaken the US dollar once this tsunami of implicit and explicit public liabilities
and monetary debt driven by rising twin fiscal and current account deficits will hit a world where the global supply of savings
is shrinking – as most countries moves to fiscal deficits thus reducing global savings – and foreign investors start to ponder
the long term sustainability of the US domestic and external liabilities.
To continue to attract massive inflows of capital, the U.S. might have to start paying higher interest rates on the public debt.
This is one of the concerns that Volcker (previous post) expressed in early 2005.
Another effect of falling prices is to increase the burden of any given amount of debt, even as banks and households are sharply
paring debt, or deleveraging, in reaction to financial turmoil and a wave of bad economic news.
"The problem with negative inflation is that the real value of your debts is increasing," Societe Generale economist James Nixon
said.
"In a deleveraging cycle you need negative inflation like you need a hole in the head."
With recession now a reality in major economies from Japan to Germany, policymakers are starting to fret about the chance of
a phenomenon many see as even more deadly: deflation. ***
"Deflation is probably the worst case for the financial sector because it is very difficult to overcome. Therefore all central
banks are going to do everything to avoid it," European Central Bank policymaker Ewald Nowotny said on Nov. 10.***
UK prime minister Brown expressed
a similar sentiment:
Prime minister Gordon Brown told the House of Commons yesterday: "Next year, the problem is deflation and the problem of inflation
close to zero."
Forget about inflation. The opposite threat - deflation - is what has policymakers sweating now.***
Bankers are worried that the destruction of trillions of dollars of wealth in the collapse of the housing and stock markets will
stem demand for goods of all sorts, creating the kind of falling price environment not seen here since the 1930s. Among central
bankers, there is "a real sense of concern about falling inflation," says Lena Komileva, an economist at interdealer broker Tullett
Prebon in London. ***
"The Federal Reserve put deflation back on the table as a significant policy concern,'' said Vincent Reinhart, former director
of the Fed's Division of Monetary Affairs, who is now a visiting scholar at the American Enterprise Institute in Washington.
Nov. 19 (Bloomberg) -- The cost of living in the U.S. fell by the most on record as fuel costs plummeted and retailers used discounts
for cars and clothing to entice consumers hobbled by job losses and sinking home values.
Consumer prices plunged 1 percent last month, more than forecast and the most since records began
in 1947, after being unchanged the prior month, the Labor Department said in Washington. Excluding food and energy,
so-called core prices unexpectedly fell for the first time since 1982.
Today's report signals deflation, or a prolonged slide in prices, may become another hazard facing Federal Reserve Chairman
Ben S. Bernanke and President-elect
Barack Obama. Deflation could worsen what some economists already call the deepest recession in decades, by making debts harder
to pay off and countering the impact of Fed interest-rate cuts.
``We are moving into an environment where prices are falling across the board,''
David Resler, chief economist at Nomura Securities International Inc. in New York, said in an interview with Bloomberg Television.
``That is going to continue. Deflation is spreading across the economy.''
Target
Corp. is among retailers cutting prices in an effort to lure away cash-strapped holiday shoppers from
Wal-Mart
Stores Inc., the discount retailer that last week reported a gain in third-quarter profit.
A separate government report today showed housing starts fell 4.5 percent in October to an annual rate of 791,000, the lowest
level since the Commerce Department began keeping the data in 1959.
Treasuries Gain
Treasuries, which rallied earlier in the day, remained higher after the reports. Yields on benchmark 10-year notes fell to 3.45
percent at 8:37 a.m. in New York, from 3.52 percent late yesterday.
Consumer prices were forecast to fall 0.8 percent, according to the median forecast of 77 economists in a Bloomberg News survey.
Estimates ranged from a decline of 1.2 percent to a gain of 0.4 percent. Costs excluding food and energy were forecast to rise 0.1
percent, the survey showed.
Prices increased 3.7 percent in the 12 months to October, the smallest year-over-year gain since October 2007. They were forecast
to climb 4 percent from a year earlier, according to the survey median.
The core rate increased 2.2 percent from October 2007, after a 2.5 percent year-over-year increase the prior month.
Energy expenses dropped 8.6 percent, the most since 1957. Gasoline
prices fell 14 percent, the biggest decline in four decades.
Gas Prices
Gasoline has kept falling this month. A gallon of regular gasoline at the pump averaged $2.07 on Nov. 17, down from an October
average of $3.08, according to AAA.
``We are seeing the fallout of global recession on inflation,'' said
Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts. ``In commodity prices, it's leading to deflation.''
The consumer-price index is the last of three monthly price gauges from the Labor Department. The CPI is the broadest gauge because
it includes goods and services.
A Labor report yesterday showed wholesale prices fell 2.8 percent last month, the most on record. Last week, the government also
said the cost of imported goods declined by the most ever.
Food prices, which account for about a fifth of the CPI, increased 0.3 percent after a 0.6 percent increase in September.
The drop in core prices reflected declines in the cost of clothing, automobiles, air fares and hotel rates. New-vehicle prices
fell 0.5 percent and clothing costs dropped 1 percent. The price of airfares plunged 4.8 percent, the most since June 1999.
First Since '82
The cost of all services, excluding fuel, was unchanged, the first time it hadn't increased since 1982.
The benefit of the drop in prices can be seen in its effect on incomes. Today's figures also showed wages increased 1.4 percent
after adjusting for inflation, following no change in September. They were still down 0.9 percent over the last 12 months. The decline
in purchasing power is contributing to the slowdown in consumer spending.
Retail sales fell 2.8 percent last month, the most on record, Commerce Department figures showed last week. Mounting job losses
and record foreclosures are causing American consumers, who account for more than two-thirds of the economy, to retrench.
Wal-Mart, the world's largest retailer, said yesterday it planned to reduce U.S. prices on Thanksgiving food and Christmas merchandise
to lure customers during the holidays.
Price `Rollbacks'
``You'll see a lot of rollbacks,''
Eduardo Castro-Wright, Wal-Mart's U.S. stores chief, told analysts at a Morgan Stanley conference in New York. Rollbacks refer
to price reductions the retailer scatters throughout grocery, pharmacy and other departments to spur sales.
Target, the second-largest U.S. discounter, said this week it plans to add grocery items and offer ``sharper'' discounts to draw
shoppers who are shunning jewelry, clothing and home goods, which account for more than 40 percent of its revenue.
``Right now, the consumer is very hesitant,'' Chief Executive Officer
Gregg Steinhafel said during the company's Nov. 17 earnings call. ``They're very stressed.''
Sales of clothing and home goods have been ``sharply lower,'' partly because of banks decreasing consumer
credit limits, Chief Financial Officer
Douglas Scovanner said during the call.
Leaders in the U.S., Europe and Asia are calling for increased government spending to make up for the loss of consumer purchasing
power and lessen the global recession.
Obama and House Democrats are planning to spend as much as half a trillion dollars to stimulate the world's biggest economy and
U.K. Prime Minister
Gordon Brown pressed other leaders of the Group of 20 nations to follow that effort last weekend.
To contact the report responsible for this story: Bob Willis in Washington at
[email protected]
How long it will exceed is the question: dividends are to be cut...
Nevertheless, the 4 per cent dividend return on the S&P 500 exceeds the yield on the ten and thirty year Treasury bonds for the
first time in fifty years.
In the short term an expected equity market rally, quite plausibly the beginning of a cyclical, although not secular, bull market
should bring an end to the dollar's recent "repatriation rally". The inverse correlation of the dollar and the S&P 500 is well established
and not expected to break any time soon, given the global macroeconomic backdrop. The short term trend
should be further reinforced by the broken financial system which impairs the US economy's ability to releverage and mutes the strength
of its cyclical recovery. The inability to releverage precludes the US from leading the global economy out of this
recession. That also reinforces the dollar's short term unattractiveness.
In the medium term, the US economy faces significant, albeit not insurmountable, structural problems. In particular
the interaction of a heavily indebted economy with a broken financial system suggests a decade of poor
domestic economic growth as savings are rebuilt and trust in the system restored. The US is a debtor nation and owes
the rest of the world more than $2,000bn (up from $750bn as recently as 2000). Indeed both the household and the government sectors
have been dis-saving in recent years – a trend that now needs to reverse. All of which suggests an extended
period of sub-par domestic economic growth.
There are two distinctive policy choices for an overly indebted economy when confronted by a breakdown in the financial system.
Which is chosen can have a significant impact on the long term outlook for the currency.
Policy choice 1 – do nothing and allow the economy to work itself out with a severe recession or even depression, with
a cleaning out of the system as weak companies fall into bankruptcy, leaving strong companies and a base from which to build recovery.
Policy choice 2 – use all policy tools available to attempt to stem the downturn.
Choice 1, not surprisingly, is considered politically unpalatable as millions of people lose their jobs and many companies go
bust. Choice 2, while seemingly more palatable, carries far greater risk. If it doesn't work it sows the seeds for a decade or more
of disappointing growth as savings are rebuilt slowly and the pain of the adjustment prolonged. If it does work it sows the seeds
for significant inflation.
Ineffective policy results in a Japanese style "lost decade" accompanied by a weak currency. Effective policy combats
debt deflation and offsets the worst of the immediate recession but creates a real risk of eventual significant inflation. For a
debtor nation such as the US that creates a real risk of a major currency crisis as investors shun dollar-based assets (because their
real value is undermined by inflation and a falling currency). Either way, the dollar goes down.
Currently, US policymakers are halfway through policy choice 2. Interest rates have been cut aggressively and are now almost zero.
Politicians are about to embark on their second fiscal stimulus. The banks have been recapitalised. The government has started buying
and guaranteeing distressed debt. Finally, the Federal Reserve has begun in earnest to use its balance sheet (in a sterilised manner)
to step into the absent shoes of the private sector in the financial system. The Fed's balance sheet
has expanded from $900bn just three months ago to $2,200bn today.
A failure of the initial set of policies to reflate the economy is likely to lead to the next, more
risky, set of policy choices – those involving unsterilised intervention. Given the breakdown of trust in the financial
system, the lack of savings by the US and the continued deleveraging of balance sheets, however, those initial policies, aimed mostly
at supporting the economy through creating credit (rather than increasing savings) seem destined to fail.
As the US embarks on the next set of policy choices for curing deflation, as outlined by Ben Bernanke, Fed chairman, in his 2002
speech "Deflation – Making Sure it Doesn't Happen here" – inflationary risks will begin to rise. With
that comes the risk of sustained medium term dollar weakness and the risk ultimately of the demise of the dollar as the world's sole
reserve currency.
The writer is chief executive of Longview Economics
Now, as we approach the end of the noughties, we have to hope that assumption is wrong. Because if the bond market does have the
better predictive powers, the global economy is in for an extremely miserable time.
Yields on US government bonds are at historic lows. Last Thursday saw panic buying as investors deserted stocks, and, wary of
alternative assets such as commodities and corporate debt, piled into the safe haven of Treasury paper.
Market participants described the activity in the Chicago bond futures pits and in electronic trading later that day as unprecedented.
Yields on the 30-year bond plunged below 3.5 per cent, their lowest ever level. The return for owning a two-year note dipped below
1 per cent.
The immediate cause of this frenzy was US data that showed the rate of inflation slowing sharply and high levels of unemployment.
Yields dropped so far that they appeared to be pricing in an economic downturn akin to the 1930s depression, say some analysts.
So what should investors do next?
The obvious temptation is to think that with such a dire scenario already baked into government bonds and equities the darkest
hour is upon us. Now might be the time to favour stocks over bonds.
Unfortunately, the experience of Japan suggests this is not necessarily a good idea.
The hangover from that nation's asset bubble that popped in the early 1990s is still being felt, with the Nikkei 225 Average remaining
79 per cent below its peak.
But arguably the more remarkable trend was witnessed in the Japanese government bond market. As deflation took a grip and the
Bank of Japan held interest rates at zero for much of this decade, the yield on the Japanese 10-year government bond dipped at one
stage in 2003 to almost 0.4 per cent. The yield has averaged about 1.49 per cent over the past 10 years.
What can stop such a trend developing in the US bond market, where the 10-year bond is currently yielding 3.2 per cent?
Well, first, we must hope America does not experience anything similar to Japan's "Lost Decade" of economic torpor. US consumers'
greater propensity to spend than their Japanese counterparts may help in that regard.
Second, bond bears will point to the imminent tsunami of supply.
Governments in many western states need to fund their myriad bailouts and fiscal stimulus packages. More debt appears to be the
short term answer. And why not? Today the US Treasury can borrow for 30 years at 3.6 per cent.
However, as my colleagues in Lex have pointed out, concerns about increased supply can be subsumed by the recognition that governments
often only need to sell more bonds to plug their finances when times are tough.
And there is another factor that may continue to provide a bid for bonds. The latest US Tics data shows that net purchases of
long-term US securities climbed to $66.2bn in September compared to $21bn and $18.4bn in August and July respectively. So foreign
demand remains strong.
But surely after such a sharp decline, US Treasury yields will at least pause for breath? As Barton Biggs noted in this column
on Monday, the yield on the S&P 500 has raised above the 10-year bond, an oft-quoted sign that equities are undervalued relative
to bonds.
But it is noticeable that as stocks have rallied sharply over the past few days, bond yields have
remained close to their lows – aided by news of support for the US mortgage-backed securities market.
Deflation is sometimes likened to Dante's Inferno. "Abandon all hope" once you step into that Hellfire.
We are not there yet but Mervyn King, the Governor of the Bank of England, says it is now "very likely" that the UK retail price
index will turn negative next year. This is a drastic reversal of the oil and food spike that played such havoc with monetary policy
over the summer. "The world changed in September," said the Governor.
The Bank's fan charts point to zero inflation at current interest rates of 3pc, but the startling new feature is that price falls
could gather pace. This is a clear signal that the Monetary Policy Committee will cut rates again in December – perhaps by a full
point to the historic low of 2pc, last seen in the Great Depression.
Mr King let slip yesterday that there is "obviously" a risk of deflation, although he remains sure it can be averted by a pre-emptive
monetary blitz. Let us hope he is right.
The curse of deflation is that it increases the burden of debts. Incomes fall: debts stay the same.
This way lies suffocation. It was bad enough in the early 1930s when US farmers faced a Sisyphean Task trying to meet
mortgage payments on their land as crop prices kept sliding. They suffered mass foreclosure and fled West, as recounted in
John Steinbeck's Grapes of Wrath.
We forget, however, that overall borrowing was modest in the 1930s. The great credit bubble of the last 20 years has pushed debt
levels in Britain, the US and other Western societies to unprecedented highs. UK household debt reached a record 165pc of personal
income last year. This is almost 50pc higher than the burden at the onset of the recession in the early 1990s.
Our sensitivity to debt deflation is therefore greater.
"It is going to be absolute murder in Britain if inflation turns negative," said Professor Peter Spencer from York University.
"The big difference with past episodes is that we are now much more heavily indebted. Few people owned their own houses in 1930s.
Debts were miniscule."
Deflation has other insidious traits. It causes shoppers to hold back. They wait for lower prices. Once this psychology gains
a grip, it can gradually set off a self-feeding spiral that is hard to stop.
It also redistributes wealth – the wrong way. Savings appreciate, which is nice for the "rentiers" with capital. The effect is
a large transfer of income from working people with mortgages to bondholders. (These may be pension funds, of course).
The modern warning to us all is the "Lost Decade" in Japan, a loose term for the on-again, off-again slump that ultimately led
to zero interest rates and – when that failed – to the printing of money. After 18 years, the Nikkei stock index is now trading at
8,700 – down from a peak of nearly 40,000. House prices have fallen by half. Yet after all the stimulus, the country is once again
tipping back into deflation.
Governor King said Britain was likely to avoid this fate. "We've taken action much earlier than was the case in Japan," he said.
Not everybody agrees, even after the shock and awe cut of 1.5 percentage points by the MPC. Albert Edwards, global strategist
at Société Générale, has long warned that central banks in the Anglo-Saxon countries have stored up trouble by stoking credit booms,
and may find it harder than they think to engineer a soft-landing.
"This could easily go the way of Japan. It is true that Bank of England has moved faster, but Japan was a local bubble. This time
it is the 'great unwind' on a global scale with leverage spaghetti everywhere," he said.
"The monetary authorities don't have foggiest idea themselves whether this is going to work. They're crossing their fingers and
hoping," he said.
Nor is it clear whether rate cuts are gaining much traction. The average rate of tracker mortgages has risen 72 basis points since
last month, and credit card rates have been rocketing. The Bank's transmission mechanism is not working properly. This a variant
of the 1930s struggle when the central banks found themselves "pushing on a string", in the words of John Maynard Keynes. He called
for public works to lift the economy out of its liquidity trap. This is more or less what the US, Japan, China, and parts of Europe
are now doing – with more in store after the G20 this weekend. Britain has pitifully limited scope on this front. We had a budget
deficit of 3pc of GDP at the top of the cycle – when we should have been in surplus – and we are heading for over 8pc. This is already
nearing the danger level. If the Government now lets rip on fiscal policy, we could face a 'gilts strike' as foreign investors retreat
from UK debt.
The Bank of England has not run out of ammo yet. It can cut rates to zero if necessary and then escalate to direct infusions of
money by purchasing bonds – or indeed by buying a vast range of securities, assets and even houses if necessary. Ultimately it can
print money to cover the budget deficit.
As the late Milton Friedman put it, governments can drop bundles of banknotes from helicopters. If they really want to defeat
to deflation, they can. Mr Friedman may have overlooked the fact that gunmen can shoot down the helicopter – the Bank of France in
October 1931, when it ditched the dollar; perhaps Asian bond investors today? – but that is to quibble.
Professor Spencer says the Bank of England has learned the hard lessons. Without the constraints of the ERM, Gold Standard, or
any other fixed exchange system, it retains great freedom of action.
"They are very aware of the deflation risk. They are cutting rates very fast, and if necessary they too will turn to helicopters.
But in the end they will keep the wolf from the door," he said.
===
Jose Luis
on November 15, 2008
at 03:02 PM
And Haydn
on November 15, 2008
at 02:06 PM
You are both so right. A current example of deflation is the price of computers, something which obviously has a high weighting
factor in Gordon Brown's inflation measure. You can't wait for ever for prices to go down nor for the "latest model" or you would
never buy anything. Even if prices are reducing, if you want something, you buy it, even if you are conscious that it will be
cheaper next year or that there will be a new model. The same applies to cars. There is always a new model coming out but if we
all waited for it, nobody would ever buy a car. It is a totally false argument against allowing deflation which is feared by governments
and banks for the reasons explained clearly in Haydn's comment.
Like many others in recent months, another anonymous economist at The Economist makes the same mistake of confusing 1990s Japan-style
deflation with 1930s U.S.-style deflation and, in the process, adds to the growing fear that, somehow, a negative CPI implies that
the value of paper money is increasing, causing debtors to hasten repayment of their loans resulting in a dreaded "debt deflation".
Really?
In a world full of pure fiat money, that central banks and governments can borrow and print into existence at will and with virtually
no limit, people are really going to think that their money is gaining in purchasing power and change their behavior?
A commodity-led fall in inflation ought to be good news for rich economies. It boosts consumers' real incomes and fattens firms'
profit margins. Yet there is something pernicious about inflation falling too far, too fast. Because falling prices make debt
more expensive, indebted households would be more anxious to pay off loans, even as other consumers were benefiting from a boost
to their purchasing power. If deflation took hold, the gap in demand left by those fleeing debt would not be filled by cash-rich
consumers, who tend to be less free-spending.
A deadly mix of falling prices and high leverage could foment a "debt-deflation" of the type first described by Irving Fisher,
an American economist, in 1933. In this schema, debt-laden firms and consumers rush to repay loans as credit dries up. That hurts
demand and leads to price cuts. The deflation in turn increases the real cost of debt. It also means that real interest rates
can't be negative, and so are undesirably high. That spurs yet more repayment so that, in Fisher's words, the "liquidation defeats
itself."
Perhaps a reference more recent than 1933 would have bolstered their case.
I understand your argument that more money will come into existance. I have been following both the inflation
and deflation argument closely.
The only part I haven't seen you clarify (or itulip, or Schiff etc) is how does this money get into the hands of the common folk?
I, as an individual, don't value a $20 bill based on how many there are in the world, but only based upon how easy it is to get
my hands on one..., or how many are in the hands of the common person.
If one guy has 20 trillion dollars sitting in a garage somewhere, I don't see how this affects value I place on money.
Without huge gains in income, how does the average joe feel that his 20 bucks is worth less (i.e.
easier to come by).
Just like home prices drop to what the median income is....regardless of how rich the richest of us are.....prices for products
like cars, food, gas, etc don't rise when a few people have lots of cash, but when lots of cash are in lots of hands.
I just don't see the "helcopter" that will drop all this cash in the hands of many, truly sparking inflation.
You can't get a deflationary spiral without wage deflation as well. If wages
stay the same or grow, consumption will quickly pick up. That is what happened during the brief post WW2 deflations
such as in 1954. Those deflations also never went beyond (-1.5%) on a YoY or less basis.
In the Great Depression, wages also were cut -- dramatically in many instances. With reduced wages, the
ability to pay off debts imploded.
Now, a possibility that might happen now (and might have been happening for the past decade or more!),
is that layoffs increase dramatically, and the new jobs pay less than the old ones. Then you could get a deflationary spiral of
sorts, it seems to me.
To defeat that spiral, you would need to get cash to the consumer/debtors -- not to the bank/lenders.
"I just don't see the "helcopter" that will drop all this cash in the hands
of many, truly sparking inflation."
Even though only about 15-20 percent of the last $150B(?) stimulus was spent, that was still a big chunk of money and shows up
clearly in the Q2 GDP data.
But, that was just the warm-up - soon there will be more rebate money to spend and lots of "make-work" jobs that will produce
real income for many people.
Personally, I think the Treasury Department should just issue a debit card to each and every U.S. citizen and then add money to
each account as they see fit to stimulate the economy (no cash withdrawals allowed).
I fail to see how all this money couldn't get into the hands of common folk. I mean, if the money
keeps increasing in value and asset prices keep declining, wouldn't the hoarders eventually start
buying real estate, businesses, toys and gadgets, etc at fire sale prices? It's not like the money will be stuck
in somebody's account in perpetuity.
Personally I think the whole deflation argument represents certain elements of the media grasping
at straws to justify creating unprecedented amounts of money out of thin air.
It's like Tim said -- it makes no sense for us to print seemingly limitless amounts of currency at will, only to have it increase
in value. If that is the case, we'll all soon be rich without having to do anything! Let the REAL fairy tale economy begin!
Will China use its dollar reserves to buy US/NAFTA imports, instead of US treasury debt instruments?
Where else are they going to spend US currency?
The dollar can decline on an international exchange basis, yet increase in value domestically.
Manufactures have excess/idle productive capacity.
Increased exports may not necessarily mean fewer goods available domestically.
Also, stagnating and negative income growth combined with less credit available individually
will ration the consumption of goods and services..
Deflation (as seen in Japan) resulted in the manufacturer's inability to increase prices.
But NOT necessarily, a decline in product prices. How is that possible??
Mass consumption and mass marketing changed the game.
The competition moved from price competition to innovation. This means improving reliability and increasing the number features
a product offers. (I.E. A Camera built into your cell phone.)
I predict - in the (near) future critics of government use of Hedonic pricing will have many opportunities to be disappointed.
One of the underlying assumptions of the Fed's and many other central banks' response to the credit crisis is that it can be halted,
and hopefully remedied, by having the government backstop the troubled financial sector. One template is not to repeat the supposed
mistakes of the Great Depression and Japan's post bubble era, where conventional wisdom has it downturn morphed into disasters as
a result of the failure of central banks to break glass and supply liquidity aggressively enough. A second model is Sweden. There,
the government intervened aggressively to combat a large scale banking crisis by nationalizing failing banks (they had a methodology
for doing triage, to determine who could be saved and who needed to be liquidated or merged), spun the bad assets off into a liquidation
vehicle, recapitalized what remained, and sold them off when the economy recovered.
However, these paradigms are being applied selectively, with the politically convenient bits being implemented and the harder remedies
ignored. The Fed moved quickly to cut rates and then create special vehicles to help provide liquidity to markets that appeared stuck.
But this response came out of both Bernanke's study of (one might say fixation with) the Depression. plus the "if the only tool you
have is a hammer, every problem looks like a nail" syndrome. Central banks are in the liquidity business, so they tend to fall back
on the tools they have at hand, rather than going to the more difficult process of building political support for other types of
solutions.
For instance, a number of observers, ranging from Depression expert Anna Schwarts and the Japanese have taken issue with the heavy
reliance on liquidity injections. Schwartz has pointed out, as many others have, that the current financial meltdown is not a liquidity
crisis but a solvency crisis. Both Schwartz and the Japanese recommended approaches that put much greater priority on purging bad
assets (Schwartz recommended letting insolvent firms fail, while the Japanese urged speedy recapitalizations).
And even the Swedish approach, which is now being given lip service, is largely ignored. One of its key elements was that the banking
system had grown disproportionately, unsustainably large, and needed to be shrunk. The US, by contrast, is not only trying to prop
up the financial system in place, but also wants it to make more loans to keep the economy going. In other words, they want to make
the underlying problem of overleverage worse.
Since the US looks borrowings relative to GDP are higher than Sweden's were at the time of its crisis, the need to figure out how
to reduce indebtedness is crucial. Some analysts have pegged US debt to GDP at 350%; reader Bjornar kindly did some digging, and
based on
this and this source concluded Swedish
debt to GDP in 1990 was roughly 170%. While both estimates are admittedly quick and dirty, the obvious shortcomings in the US estimate
suggest it is, if anything, understated.
However, reducing indebtedness means a lower GDP, when the idea of letting growth suffer is anathema. Yet Sweden, which is widely
held as a model, did in fact have a very nasty two year recession, but had a strong rebound afterwards. Most analysts believe this
was the least costly approach, in terms of long-term consequences. Yet the US seems determined to minimize immediate pain, not matter
how great damage to long-term economic health.
Moreover, the US is starting to get warning signs that it may encounter resistance from our friendly foreign funding soruces when
we ask them to pick up the tab for our debt party. Willem Buiter, who was a front-row spectator in the Iceland meltdown (he and Anne
Siebert were bought in to advise the authorities late in the game, and they evidently didn't heed Buiter's and Sieber's advice) warns
that having the government rescue the banking sector does not reduce risk but merely transfers it, and
investors are wising up:
Under current circumstances, if the government injects capital into a bank to compensate for past and anticipated future losses,
it may not achieve a risk-adjusted expected rate of return on this investment equal to its borrowing cost. The difference will
have to be recouped through higher future primary surpluses, that is, higher future government budget surpluses excluding interest
payments. If there is doubt in the markets about the ability or willingness of current and/or future governments to raise future
taxes or cut future spending to generate the required increase in future primary surpluses, the default risk premium on the public
debt will rise. We are seeing such increased default risk premia even for the most credit-worthy sovereigns, including the German
government, the US government and the UK government. On Friday October 10, 2008, the spreads on 5 year sovereign CDS were 0.456%
for the UK, 0.33% for the USA ad 0.265% for Germany, well above their post-war historical averages. On October 28, 2008, Bloomberg
wrote:
Credit-default swaps on [U.S.] Treasuries have risen nearly 40 percent since TARP was signed into law Oct. 3, and are now about
the same as Mexican and Thai government debt before the credit markets began to seize up in June 2007.
By bailing out the banks, and other bits of the financial system, the authorities reduce bank default risk but by increasing sovereign
default risk. As long as there is sufficient fiscal spare capacity (the technical, economic and political prerequisites are met
for raising future taxes and/or cutting future public spending by a sufficient amount to service the additional public debt and
maintain long-run government solvency).
One worry about government solvency being compromised by the need to rescue an overly large banking sector.Buiter, unlike Paul Krugman
and other prominent US economists, warns that there are indeed limits to how many commitments a a government can take on. Markets
can and will exercise discipline (Buiter argues mainly from the UK perspective, but his logic applies to any government):
The key question is, can the government meet all these fiscal commitments, whether firm or flaccid, unconditional or contingent
and explicit or implicit ? Does it have the resources, now and in the future, to issue the additional debt required to meet the
growing volume of up-front obligations it has taken on?
To be solvent, the face value of the government's net financial obligations has to be no larger than the present discounted value
of current and future primary government surpluses (government surpluses excluding net interest and other investment income)....
In addition to the debt that has been and will be issued to finance asset purchases by the government, there are the future debt
issuance associated with the large cyclical and structural government deficits that will be a feature of the coming recession.
If GDP falls peak-to-trough by, say 3.5 percent and recovers only slowly, we could have a seven percent of GDP or higher government
deficit for 2009 and 2010. Together with the explicit or implicit fiscal commitments made to safeguard the British banking system,
the numbers are likely to spook the markets.
With the true net public debt to GDP ratio probably already well above 100 percent of GDP and rising, and with massive public
sector deficits, partly cyclical and partly structural, about to materialise, the markets will question the fiscal-financial sustainability
of the government's programme with increasing vehemence. The CDS spreads on UK public debt will start rising. The notion that,
except for currency, there may not be a safe sterling-denominated asset may come as a shock. But the same is true in the US. In
2009, the US government will have to sell (gross) at least $ 2 trillion worth of government debt (the sum of the Federal deficit
plus asset purchases plus refinancing of maturing debt). The largest such figure ever in the past was $550 billion. In the US
too, the markets will have to learn to do without a US dollar financial instrument that is free of default risk.
Buiter's comments on the US raise a second issue: even if investors are not worried about the risk of a sovereign default, there
is going to be so much government debt for sale that yields will rise, merely based on supply and demand. We are seeing signs
of that now. Consider this warning sign from Germany, the unheard of specter of the failure of a government bond auction of a highly
credit-worthy state, via the Financial
Times (hat tip readers Chris and Don):
For any government looking to raise money in the capital markets in the next few months, there was an ominous development in Germany
this week.
A German 10-year bond auction failed – something more or less unheard of until this year – as cash-strapped banks and investors
snubbed the government offering.
It is a clear sign of straitened times when a benchmark bond in one of the most liquid markets in the world cannot attract enough
bids to reach its target amount.
Crucially, it raises serious doubts about whether governments can raise the vast amounts of debt needed to fund fiscal stimulus
packages and bank recapitalisations in the current tough market conditions.
Any sign of waning demand may force up bond yields – putting further pressure on public finances when they are already under strain.
Nowhere is the issue more pressing than in the US.
Tony Crescenzi, strategist at Miller Tabak, says: "In a world with finite capital and where sovereign nations everywhere are in
need of capital to finance their financial and economic stabilisation efforts, the substantial increase in Treasury supply could
become manifested in higher long-term interest rates."
Rick Klingman, managing director at BNP Paribas, adds: "There is no doubt that supply will matter at some point as the financing
needs are staggering [in the US]. At the moment, supply is not a large factor with stocks in freefall"....
US Treasury bond supply is expected to hit record levels, in a range from $1,400bn to $1,750bn in the 2009 financial year, starting
in October. In Europe, bond supply is forecast to rise to more €1,000bn ($1,247bn) next year – also a record high, according to
Barclays Capital.
The extraordinary thing is that, in spite of this huge supply, most analysts expect bond yields will fall. This is because many
analysts are now anticipating a deep and protracted global recession, and talk of deflation is even stalking bond markets.
Yields have fallen particularly sharply at the shorter-end of the bond curve, which is most sensitive to interest rate movements,
because of the accelerating slowdown in the world's economies.
Analysts say the economic backdrop is the key determinant of where yields will trade. At the moment equities are so unappealing
to investors that bond markets appear more attractive, offsetting supply concerns.
Some government bond yields are also historically low, around levels last seen in 2005, and much lower than in June when inflation
concerns dominated trade. For example, German 10-year Bund yields are trading at 3.63 per cent, compared with 4.68 per cent in
June.
Riccardo Barbieri, a strategist at Bank of America, says: "In the unlikely event that yields should rise, which I would not expect,
they are coming from a fairly low level."
Germany – in spite of its fourth 10-year Bund failure this year – and the US are likely to be more successful in attracting investors
and depressing yields, should the difficult conditions persist, than other countries as they have the most liquid markets and
are seen as safe havens...
Another problem for the governments is the competition from banks and financial institutions, which have sovereign guarantees
yet offer much higher yields.
For example, this week the UK's Nationwide priced a three-year deal at close to 100 basis points over gilts.
"The simplistic question is, why buy government paper when you can buy government-backed paper such as this for a much greater
return?," says Sean Shepley, fixed income strategist at Credit Suisse.
With an expected €1,600bn of bank guaranteed issuance in Europe alone next year, this could have a significant impact on investor
appetite for government bonds.
Mr Chapman says: "In spite of the prospect of this huge issuance, yields are not being forced higher. This shows just how gloomy
people are about the economic outlook."
Personally, I think investors are so shell-shocked by the crisis that they are only thinking about what to do this quarter, and not
about the longer term. Just as during the waning days of the bubble, Citi's Chuck Prince talked of dancing as long as the music was
playing, and assuming he and Citi could exit risky positions when the time came, so to many investors may recognize the risk of a
rise in government bond yields, but similarly assume they can sell if that comes to pass without taking too much of a loss.
In another, more widely reported sign of stress, the US 30 bond auction this week saw a big drop in demand from central banks, a
crucial group of buyers. From Bloomberg:
Treasuries fell, led by 30-year bonds, after investors shunned the government's $10 billion sale of the securities amid concern
that U.S. debt sales will grow....
The bond auction followed yesterday's sale of $20 billion in 10-year notes. The $30 billion total of the two auctions is the biggest
amount of the securities sold in a week since at least 1990...
``In the current market environment there are still too many unknowns,'' said William Larkin, a portfolio manager at Cabot Money
Management in Salem, Massachusetts, which manages about $500 million in assets. ``People are looking for the safety of the shorter-term
securities.''
Today's bond auction forecast to draw a yield of 4.224 percent, according to the average estimate of seven bond-trading firms
surveyed by Bloomberg News. The bid-to-cover ratio, which gauges demand by comparing the number of bids to the amount of securities
sold, was 2.07, below the average of 2.19 times in the nine auctions since the bond was revived in 2006.
Indirect bidders, a class of investors that includes foreign central banks, bought 18 percent of the securities offered, down
from 43 percent at the last sale.
The skittish may due in part to the G20 meeting this weekend, which could be a negative for the dollar if China's pet theme, the
need to move away from the dollar as reserve currency, gets a hearing. The dollar and Treasuries tend to move together. But this
is not the first weak Treasury auction we've seen, and if they become more than isolated events, it bodes ill for the strategy many
central banks are taking.
22 Comments
cent21 said...
Sort of like trying to stop a bullet speeding towards you by rapidly inflating a balloon?
Let's suppose, first, that we would suffer a deflation and many bond defaults if we don't do anything at all. It would be led
by a deflation of bubble assets (has already been?) but would come to include, well, what?
So govt would like to prevent that, and might as well inflate at least to the extent that defaults would impact govt's balance
sheet. But I tend to agree - it's likely simply to drive up interest rates - and hence induce more solvency defaults when combined
with mega excess capacity.
We do have a demand issue, certainly, much more stuff could be produced and consumed this year and probably next - who knows,
things are changing so fast. But perhaps classic govt stimulus would do at least as well as buying up troubled assets.
They went for bank capitaization seeking to use leverage and avoid the mess of figuring out how to
buy garbage, but with how many god-trillions of derrivatives at even higher leverage all over the world, do govts
even have the capability of having the biggest sticks?
Still, I think, at worst, if the finance sector is going to use even 1% of the bailout funds to pay for bonuses this Christmas,
that program ought to be short circuited. They say bonus funds are necessary to keep top people, but that's zero sum for the industry
as a whole, except to the extent that there are too many top people in finance, and
not enough in the rest of the economy. So if the sector can't pay its bonuses out of profits, lets at least do a democratic stimulus
plan that has a broader aim. A bit for the middle class. A bit of bridge building. A bit of block grants to the states.
Even at 10% of the amount they've borrowed this year that would be a pretty big stimulus, I think. And probably with no more risk.
Gnite.
November 15, 2008 1:05 AM
hbl said...
Excellent and important post...
I have not seen an analysis of Japan's experience with respect to fears of sovereign default. If memory serves, their government
debt has tripled from 60% of GDP to 180% of GDP in the almost two decades since the start of their crisis. Yet it would appear
that cost to insure Japanese government debt is
only around 36bp.
Does this offer hope, or are there crucial differences for the US/etc? (I know there are future US government obligations already,
for example, but don't know their magnitude).
The lack of a cogent and "bite the bullet" response from our political authorities could be our
undoing from a nasty recession to a severe deflationary depression. Truth be told, it couldn't have happened at
a worst moment, ie. presidential election and transition to a new administration.
Furthermore, just listening to the Congressional testimonies thus far is enough to make one consider suicide or seek asylum elsewhere.
Politicians just can't help themselves in failing to educate themselves properly on economic matters, and avoiding the tough measures
needed. The Swedish model appears to be unthinkable here,. It is as if they were trying
to save the banks, instead of the banking system.
I'm at the point that I harbor no hope of a quick and DECISIVE solution a la Swede. It'll be uglier before it gets better...assuming
it does get better someday.
November 15, 2008 1:32 AM
hbl said...
Also, with respect to the sustainability of low treasury yields, I agree that the risks of such
a large increase in supply could be serious, however I wonder if some partially mitigating factors are often overlooked
by some commentators (not suggesting Yves is one of them):
1. Most of the new supply of treasuries resulting from the Fed's actions (via Treasury Supplemental Financing Program) are simply
replacing other toxic assets that are being absorbed by the Fed. So the composition of assets in the system is being changed but
not the total quantity, so in this respect specifically, asset supply on aggregate should not be impacted.
2. On the other hand, two big factors WILL add to treasury supply (and hence aggregate assets in the system looking for funding):
(a) new funding needed to cover losses on toxic assets acquired by the fed as they deteriorate, (b) fiscal stimulus spending by
Congress. However, let's say the Fed's losses are $2 trillion and fiscal stimulus is $2 trillion. Then in an ongoing flight to
safety and non-negative returns, $4 trillion in new bonds and bills/notes looking for funding is not too huge relative to other
asset markets. (Pre-crisis $20 trillion US stock market, $20 trillion US bond market, $6 trillion existing treasury float, other
asset markets.)
3. The fed is widely expected to begin monetizing assets at the longer end of the yield curve -- in effect both increasing demand
and reducing supply for treasuries relative to no monetization. This does not have to be inflationary if broad money supply still
contracts faster than "printing".
4. CPI inflation has been high, but this measure is backward looking, is falling, and according to
Mish, is
currently overstated
November 15, 2008 1:33 AM
Tom Bombadil said...
Why does FT say that short bonds are most sensitive to interest rate moves? I always thought the sensitivity was proportional
to the bond duration. Can somebody straighten me out?
November 15, 2008 1:37 AM
Anonymous said...
This is what happens when you apply a gaming math model to the stock/security's market for a profit.
Any one for a Quantum model?
Skippy
November 15, 2008 2:01 AM
doc holiday said...
Gads, that post is like a chapter of War & Peace!
Re: "In other words, they want to make the underlying problem of overleverage worse.
"
Yah, My take on this, is that there is simply too much excess, i.e, too many homes, too many derivatives
connected to bad collateral, too much fraud, just too much excess crap. Every county, city and nation supported
the notion and fraudulent nature of explosive growth, which was related to a pyramid scheme that had zero relationship to realistic
supply and demand. Then, banks and lenders packaged financial instruments that were literally based on thin air to support fraud
-- so what is the current solution being offered -- -- MORE THIN AIR, More shit loans, more credit for more homes, more funding
for more shit derivatives, more of the same fuel that started the fire. How about some easy credit for people that screw up, maybe
a tsunami of credit for corporations that can't keep their noses out of the cocaine machine of synthetic addiction, blah, blah,
blah.... (hair pulling and screaming).
These TARP engineers are retarded dumbasses, and if I need to, I can come back and friggn pound that out in CAPS -- but who cares???
"Sweden spent 4 percent of its gross domestic product, or 65 billion kronor, the equivalent of $11.7 billion at the time, or $18.3
billion in today's dollars, to rescue ailing banks. That is slightly less, proportionate to the national economy, than the $700
billion, or roughly 5 percent of gross domestic product, that the Bush administration estimates its own move will cost in the
United States.
But the final cost to Sweden ended up being less than 2 percent of its G.D.P. Some officials say they believe it was closer to
zero, depending on how certain rates of return are calculated"
I don't know if this helps. This post depresses me. I fear Buiter is right, but, as I've argued on
his blog, we're in a political bind now which might not let us pull back. I don't think it will, so it's just a
matter of triage. Anyway, here's what I believed as of early last month. I feel that the predictions have gone pretty well. If
this continues, I feel that we will have a huge stimulus plan and more bailouts, so, practically, all we can do is try and help
people choose the least awful plan. Too bad.
Thursday, October 2, 2008
How I've Approached The Plans Being Put Forward
I am a libertarian Democrat. As such, I'm interested in working within a party which can actually change our government over time.
Perhaps I am also simply more comfortable culturally in the Democratic Party Coalition.
In any case, I accept that there is a difference between politics and political theory. Politics is the art of the possible.
Political Theory is the view of the government that you would ideally like to see.
In the current crisis, I acknowledged two plans as having some merit, and fulfilling my requirement that any plan be clear and
understandable:
1) A totally free market plan.
2) A version of the Swedish Plan.
In my mind, there are three points that are informing my views on which plan to favor:
A) There will be a government intervention of some sort, undoubtedly large.
B) Because crises such as these bring about government intervention.
C) If there is government intervention, it should be for as broad a purpose as possible and be as thrifty with the taxpayers money
as possible.
Based on these assumptions, I favor a version of the Swedish Plan.
It's not that I don't see other plans as possibly working, but hybrid/compromise plans are generally:
1) Easier to manipulate by special interests.
2) Harder to determine what worked and what didn't.
3) Riskier financially.
That's how I've approached this crisis.
Don the libertarian Democrat
November 15, 2008 2:08 AM
Anonymous said...
so, can I conclude this is what will happen?
1. Real economy will continue to slide at least another 3-6 months. Therefore nobody is making money, let
alone has money to spare.
2. US has mismanaged the bail out money. And in the near future will need to issue MASSIVE amount of (government) bond.
(Who will buy them? PBOC? Saudi?) The US public certainly doesn't have the money.
3. So it comes down to some sort of currency debasing.
4. The world suddenly notice and start dumping dollar.
a piece, that was written by a jewish german philosopher, walter benjamin (+1940)seems to me fitting in this picture. I tried
my best in translating it:
In capitalism one has to realize a religion, e.g. capitalism serves essentially to satisfy the same
kind of sorrows, misery, unrest, which formerly the so called religions provided with an answer … […]
We cannot pull the net, we are standing in, but later on there will be a view of it.
But there are three features, that are even now about to be realized concerning this religious structure of capitalism.
For the first capitalism is a plain cult religion, maybe the most radical which has ever been.
Everything in it has meaning only immediately referring to cult; it knows no special dogmatics, no theology. The utilitarianism
("everything for the happiness of the most") gains its religious color under this point of view.
With this gaining of concreteness there is connection to a second feature of capitalism: the permanent
duration of the cult […] there is no weekday, no day, that wouldn't be a holiday in the dreadful meaning of unfolding
of all sacred pomp, the utterly strain of the worshipper.
This cult is, for the third, running into debt. Capitalism is probably the first
case of a non-expiative but indebtive cult. In here this religious system is standing in the collapse of an immense movement.
An immense sense of guilt, which has no notion how to deexpiate, grasps for cult, not to expiate in it, but to let it become
universal, to hammer it into consciousness and finally and above all to include God himself into this debt to at last have him
being interested in the expiation of the debt.
[…]
It is in the essence of this religious movement, which is capitalism, to endure until the end, until the finally entire indebtedness
of God, the reached world condition of desperation, which is just still hoped for.
The historical outrageous of capitalism is lying in this, that religion is no longer the reformation of being but its smashing.
The extension of desperation into a religious world condition out of which the salvation is to expect. Gods transcendence has
fallen. But he is not dead; he is embedded in human fate.
This passage of the human planet through the house of desperation in the perfect isolation of its orbit is the ethos that is
determining Nietzsche. This human being is the "Übermensch" (Superman), the very first beginning to meet capitalistic religion
by realization.
The fourth feature is, that its God has to be concealed, may not be articulated until reaching the zenith of his indebtedness.
The cult is celebrated in front of an unmatured deity. Every imagination, every concept on her hurts the secret of her maturity
[ …]
The concept of the "Übermensch" transfers the apocalyptic "jump" not into turning back, expiation, purification, penance, but
into the apparent constantly, but in the last space of time bursting intermittent increase. […] The Übermensch is that historical
human that has without turning back arrived by growing through heaven.
This blasting of heaven by increased humanity, which is and remains religious […] indebtedness …
Capitalism is a religion of naked cult, without dogma. Capitalism has parasitically emerged […] on Christianity in the occident
in such a way, that finally its history in essence is the history of its parasite, the capitalism.
(Walter Benjamin, Ges. Schriften, VI, S. 100, Frankfurt/M., 1991)
more for those of you who read german
http://mundanestagebuch.blogspot.com/2008/10/knigspunkt-und-menschenkreis.html
November 15, 2008 6:36 AM
Richard Kline said...
One of your best posts, Yves, as the entire issue of sovereign systemic risk is put in current context, with some historical
comparables.
"Some analysts have pegged US debt to GDP at 350% . . . ." This is the Nidhogg gnawing at the root. Debt never sleeps, it compounds
in the dark. We already have a bunch of debt of all types out there relative to our ability as a country to _keep current on it_
to say nothing of paying it down into tolerable levels. Our ability to pay is going to be impaired for years. The solution? Double
our outstanding debt. At least. Buiter does a fine summary, and having watched a country go down he is far more current on this
than Ben and Hank.
It is anything but certain that the US Guvmint will even be able to _sell_ its impending $2T. Failure to sell will force risk
reappraisals which will have the direst of consequences given the volume of our outstanding debt. Not that I necessarily agree
with hbl at 1:33 above, but he/she does at least propose a credible scenario that the debt could get sold. ---But what of it?
It is very hard to conceive of a scenario where yields DO NOT RISE in floating that kind of debt over the next two years. Which
will have an extremely negative effect on outstanding, lower yielding government and corporate debt.
We are boxing ourselves into a sovereign bond bubble; there is no other way to read this scenario. Perhaps we raise taxes massively,
boom exports with a devaluation of the dollar, and cut zombie financials off at the window in the interests of the parts of the
banking system we can salvage. It is conceivable that by such means we might, with the cooperation not to say connivance, of other
sovereign financial actors, keep out of default. If we do not get exports and taxes well up, and quit wasting the money _in advance_
pushing money into insolvent apex financials, we are croaked, because we are going to issue that debt.
. . . And despite this, the important decision makers in DC just do not act as if we are in a crisis of magnitude, let alone THIS
crisis of THIS magnitude. The Beltway suits act as our crisis involves banks of their friends going bust and homes of a certain
percentage of their local electorates going into foreclosure. And those are crises of their kinds, but not THIS crisis. But in
trying to fix those crises, they will back into THIS crisis without ever believing that they are so at risk. Crisis typically
go from problems to explosions because folks capable of influencing the situation focus on small familiar things at their feet
rather than large unfamiliar things coming at their heads. Thus it is that the beltway suits seem so far behind the curve on this
problem set that they really could slam their own redshifting asses propping up assests into their own blueshifting faces pushing
out debt. With the citizenry briefly wedged between the impact surfaces. This is what worries me.
In 1780 France was a rich and powerful nation with an unstable fiscal and financial system, busily issuing ever more debt. In
1800, France was a rich and powerful nation with a stable fiscal and financial system---and at war with the rest of the world.
In 1790, France was _not_ rich, _not_ powerful, and _very much not_ stable. This is a situation which I doubt that Ben Bernanke
has fully analyzed, in no small part because it would appear that he limits his analysis to examining money rather than examining
contexts. This is what worries me.
November 15, 2008 6:47 AM
River said...
Yves...great post.
Perhaps another aspect of treasury debt issuance is the perceived use of the capital gained. If foreign purchasers suspect that
the US Gov is channeling capital received from treasury sales into unproductive uses which will impede recovery of the economy
then treasury yields will indeed increase. More risk is perceived.
Paulson has placed the AAA credit rating of the US at risk for the benefit of investment banking...A type of banking that is largely
no longer needed with the rapid decline of the securitization model. Golden parachutes continue to be provided for those that
least deserve them. Banks that should have been left to fail have been rescued (for now).
Once again we see that the psychology of the treasury buyers will enter into the success of the sales. In another psychological
environment, one more positive, the treasury sales might be accomplished with ease. In the current environment and the next couple
of years, I doubt it. It is always easier to borrow money when one doesn't need it.
November 15, 2008
7:49 AM
Anonymous said...
Sovereign debt is not such a bad thing when other countries are not in recession. When you have a global recession investors
get to pick a choose the sovereign debt they like as all countries try to issue debt.
There is of course an alternative and that is to print the money, which the US has sort of started down the road with as quantative
easing takes place.
Greece's, Austria's, and Ireland's devts are ones to watch because they may cause mayhem in the euro zone.
As for US debt then there would appear to be a bubble, but it could just deflate gently.
Triggers for a rush away from US debt could be sovereign debt default by generally reliable countrues in Europe, but equally
very bad economic news could.
Watch GM closely this week as insurers have withdrawn insurance for suppliers of goods to them. All ready there are rumours
of some larger gloabal suppliers refusing to supply GM.
November 15, 2008 8:51 AM
Matt Dubuque said...
Yves, this was a worth reading.
I remain disappointed however that in your repeated discussions of the Swedish model I have never seen you mention what the Executive
Director of that program has stated was the KEY element. You are not alone in this omission.
He stated that once the Swedish government acquired the assets it ACTIVELY managed and improved them before selling them.
Value-added.
He says this is THE most important point of the program.
I'm perplexed why Americans steadfastly omit mention of this critical element in their discussions of it.
It shortchanges the discussion of it.
Matt Dubuque
November 15, 2008 9:34 AM
Anonymous said...
sounds to me its more a crisis of our political system than economic system. Politicians don't dare to tell people the truth
anymore, instead they hope central bankers can turn the tide with some tricks.
November 15, 2008 10:07
AM
john bougearel said...
Yves,
First let me say thank you.
This post and the link to FT on the 4 Bund failures this year are very important developments.
The fact that Bund Yields continue to go lower in spite of failed auctions in the Bund signals capital preservation trumps demand
for higher returns in a deflation spiral.
How long this deflation spiral lasts is a doozy. My own models suggest anywhere between 2009 to 2011, which leaves plenty of room
for the ugly economic collapse to get a whole lot uglier. It is possible that we just ain't seen ugly yet. That is the downside
risk we face.
Yves, you do a masterful job at capturing the many different faces of the economic collapse we face.
It is almost xmas time girlfriend, so bring out the figgy-pudding, I mean tip jar, and have a happy new year!
November 15, 2008 10:53 AM
john bougearel said...
As a footnote, Chris Whalen is one of the many along with Anna Schwartz who have pointed out that the liquidity crisis of
August 2007 has morphed into a solvency crisis.
You are right to point out that the US has too much of a vested interest in saving the flawed financial system, and this should
scare the bejeezus out of the public. I know it scares me. As you have pointed out before, "broke is broke." And Paulson's latest
redirect or reform of the TARP plan to "rescue consumer lending" will only put the consumer even further under-water than he already
is.
Paulson simply does not get the fact that the consumer is broke, so his insistence that they go and
borrow more signals he does not get the fact that crisis for the consumer has moved beyond liquidity to that of solvency.
I quote Paulson on Nov 12: "Illiquidity in this sector [consumer credit]is raising the cost and reducing the availability of
car loans, student loans, and credit cards." Paulson mistakenly sees the distressed debt-burdened consumer as starving for even
more credit "This is creating a heavy burden on the American People," he added.
The model is broken, you
November 15, 2008 11:21 AM
john bougearel said...
Yves, you also point out the US is "determined to minimize immediate pain, no matter how great the damage to long term health."
I think about this determination often, and in my reflections I have to believe this is rooted in our deep-seated fears stemming
from the Great Depression.
Never wanting to fall into another one, our policymakers have determined to "never let it happen again."
Their policies of accommodation at any cost whatsoever, indicates just how fearful they are of the business cycle when it begins
to contract.
November 15, 2008 11:27 AM
john bougearel said...
Re: the 30- year auction: the 2.07 bid to cover was not that horrible. The 18% participation from indirect bidders is more
alarming given that their participation was 43% in the last 30 year auction. The three and ten year auctions went far better than
the 30 yr auction this week.
Cabot money manager William Larkin is right, "people are looking for the safety of shorter term securities."
And that includes foreign central banks.
November 15, 2008 11:44 AM
Anonymous said...
So how do you solve a solvency crises? I am talking one of global proportions with a massive and unsustainable debt.
November 15, 2008 11:55 AM
john bougearel said...
@Francois,
Thank you, the refusal of our political authorities to "bite the bullet" as you say, "could be our undoing" And unfortunately,
our lawmakers collective refusal to "educate themselves properly on economic matters" is a very sore point with me. When I read
statements from Frank et. al. about this economic collapse, I find them by and large so offensive that sometimes I wish we could
take Frank out behind the barn and put him out of "our" misery.
Frank's comments in recent weeks/months are of the worst sort precisely because he chairs the Senate Finance Committee. If anyone
should be up to snuff as a representative/watchdog for the american public, it should be him, but he fails us miserably. Frank
is not an overrated asset to the American people, he is to be blunt, a liability.
November 15, 2008
12:06 PM
luther said...
danke schoen for the benjamin mundanomaniac. unfortunately my deutch ist nicht so gut.
browardhome over @ CR shared another gem yesterday by Ravi Batra along the same lines.
"Human beings all seek unlimited joy, but material objects, being limited, can never offer that. The limited cannot yield the
unlimited."
with all the doomgloomers abound now, why this man is not more widely quoted in the blogosphere is curious to me.
perhaps because he offers a way out thru the gloomdoom and most gloomdoomers can only reinforce darkness so they can continue
profiting from the gloomdoom (even if the profit is only their self-identity).
much like capitalists actually...
November 15, 2008 12:18 PM
One of the underlying assumptions of the Fed's and many other central banks' response to the credit crisis is that it can be halted,
and hopefully remedied, by having the government backstop the troubled financial sector. One template is not to repeat the supposed
mistakes of the Great Depression and Japan's post bubble era, where conventional wisdom has it downturn morphed into disasters as
a result of the failure of central banks to break glass and supply liquidity aggressively enough. A second model is Sweden. There,
the government intervened aggressively to combat a large scale banking crisis by nationalizing failing banks (they had a methodology
for doing triage, to determine who could be saved and who needed to be liquidated or merged), spun the bad assets off into a liquidation
vehicle, recapitalized what remained, and sold them off when the economy recovered.
However, these paradigms are being applied selectively, with the politically convenient bits being implemented and the harder remedies
ignored. The Fed moved quickly to cut rates and then create special vehicles to help provide liquidity to markets that appeared stuck.
But this response came out of both Bernanke's study of (one might say fixation with) the Depression. plus the "if the only tool you
have is a hammer, every problem looks like a nail" syndrome. Central banks are in the liquidity business, so they tend to fall back
on the tools they have at hand, rather than going to the more difficult process of building political support for other types of
solutions.
For instance, a number of observers, ranging from Depression expert Anna Schwarts and the Japanese have taken issue with the heavy
reliance on liquidity injections. Schwartz has pointed out, as many others have, that the current financial meltdown is not a liquidity
crisis but a solvency crisis. Both Schwartz and the Japanese recommended approaches that put much greater priority on purging bad
assets (Schwartz recommended letting insolvent firms fail, while the Japanese urged speedy recapitalizations).
And even the Swedish approach, which is now being given lip service, is largely ignored. One of its key elements was that the banking
system had grown disproportionately, unsustainably large, and needed to be shrunk. The US, by contrast, is not only trying to prop
up the financial system in place, but also wants it to make more loans to keep the economy going. In other words, they want to make
the underlying problem of overleverage worse.
Since the US looks borrowings relative to GDP are higher than Sweden's were at the time of its crisis, the need to figure out how
to reduce indebtedness is crucial. Some analysts have pegged US debt to GDP at 350%; reader Bjornar kindly did some digging, and
based on
this and this source concluded Swedish
debt to GDP in 1990 was roughly 170%. While both estimates are admittedly quick and dirty, the obvious shortcomings in the US estimate
suggest it is, if anything, understated.
However, reducing indebtedness means a lower GDP, when the idea of letting growth suffer is anathema. Yet Sweden, which is widely
held as a model, did in fact have a very nasty two year recession, but had a strong rebound afterwards. Most analysts believe this
was the least costly approach, in terms of long-term consequences. Yet the US seems determined to minimize immediate pain, not matter
how great damage to long-term economic health.
Moreover, the US is starting to get warning signs that it may encounter resistance from our friendly foreign funding soruces when
we ask them to pick up the tab for our debt party. Willem Buiter, who was a front-row spectator in the Iceland meltdown (he and Anne
Siebert were bought in to advise the authorities late in the game, and they evidently didn't heed Buiter's and Sieber's advice) warns
that having the government rescue the banking sector does not reduce risk but merely transfers it, and
investors are wising up:
Under current circumstances, if the government injects capital into a bank to compensate for past and anticipated future losses,
it may not achieve a risk-adjusted expected rate of return on this investment equal to its borrowing cost. The difference will have
to be recouped through higher future primary surpluses, that is, higher future government budget surpluses excluding interest payments.
If there is doubt in the markets about the ability or willingness of current and/or future governments to raise future taxes or cut
future spending to generate the required increase in future primary surpluses, the default risk premium on the public debt will rise.
We are seeing such increased default risk premia even for the most credit-worthy sovereigns, including the German government, the
US government and the UK government. On Friday October 10, 2008, the spreads on 5 year sovereign CDS were 0.456% for the UK, 0.33%
for the USA ad 0.265% for Germany, well above their post-war historical averages. On October 28, 2008, Bloomberg wrote:
Credit-default swaps on [U.S.] Treasuries have risen nearly 40 percent since TARP was signed into law Oct. 3, and are now about the
same as Mexican and Thai government debt before the credit markets began to seize up in June 2007.
By bailing out the banks, and other bits of the financial system, the authorities reduce bank default risk but by increasing sovereign
default risk. As long as there is sufficient fiscal spare capacity (the technical, economic and political prerequisites are met for
raising future taxes and/or cutting future public spending by a sufficient amount to service the additional public debt and maintain
long-run government solvency).
One worry about government solvency being compromised by the need to rescue an overly large banking sector.Buiter, unlike Paul Krugman
and other prominent US economists, warns that there are indeed limits to how many commitments a a government can take on. Markets
can and will exercise discipline (Buiter argues mainly from the UK perspective, but his logic applies to any government):
The key question is, can the government meet all these fiscal commitments, whether firm or flaccid, unconditional or contingent and
explicit or implicit ? Does it have the resources, now and in the future, to issue the additional debt required to meet the growing
volume of up-front obligations it has taken on?
To be solvent, the face value of the government's net financial obligations has to be no larger than the present discounted value
of current and future primary government surpluses (government surpluses excluding net interest and other investment income)....
In addition to the debt that has been and will be issued to finance asset purchases by the government, there are the future debt
issuance associated with the large cyclical and structural government deficits that will be a feature of the coming recession. If
GDP falls peak-to-trough by, say 3.5 percent and recovers only slowly, we could have a seven percent of GDP or higher government
deficit for 2009 and 2010. Together with the explicit or implicit fiscal commitments made to safeguard the British banking system,
the numbers are likely to spook the markets.
With the true net public debt to GDP ratio probably already well above 100 percent of GDP and rising, and with massive public sector
deficits, partly cyclical and partly structural, about to materialise, the markets will question the fiscal-financial sustainability
of the government's programme with increasing vehemence. The CDS spreads on UK public debt will start rising. The notion that, except
for currency, there may not be a safe sterling-denominated asset may come as a shock. But the same is true in the US. In 2009, the
US government will have to sell (gross) at least $ 2 trillion worth of government debt (the sum of the Federal deficit plus asset
purchases plus refinancing of maturing debt). The largest such figure ever in the past was $550 billion. In the US too, the markets
will have to learn to do without a US dollar financial instrument that is free of default risk.
Buiter's comments on the US raise a second issue: even if investors are not worried about the risk of a sovereign default, there
is going to be so much government debt for sale that yields will rise, merely based on supply and demand. We are seeing signs of
that now. Consider this warning sign from Germany, the unheard of specter of the failure of a government bond auction of a highly
credit-worthy state, via the Financial
Times (hat tip readers Chris and Don):
For any government looking to raise money in the capital markets in the next few months, there was an ominous development in Germany
this week.
A German 10-year bond auction failed – something more or less unheard of until this year – as cash-strapped banks and investors snubbed
the government offering.
It is a clear sign of straitened times when a benchmark bond in one of the most liquid markets in the world cannot attract enough
bids to reach its target amount.
Crucially, it raises serious doubts about whether governments can raise the vast amounts of debt needed to fund fiscal stimulus packages
and bank recapitalisations in the current tough market conditions.
Any sign of waning demand may force up bond yields – putting further pressure on public finances when they are already under strain.
Nowhere is the issue more pressing than in the US.
Tony Crescenzi, strategist at Miller Tabak, says: "In a world with finite capital and where sovereign nations everywhere are in need
of capital to finance their financial and economic stabilisation efforts, the substantial increase in Treasury supply could become
manifested in higher long-term interest rates."
Rick Klingman, managing director at BNP Paribas, adds: "There is no doubt that supply will matter at some point as the financing
needs are staggering [in the US]. At the moment, supply is not a large factor with stocks in freefall"....
US Treasury bond supply is expected to hit record levels, in a range from $1,400bn to $1,750bn in the 2009 financial year, starting
in October. In Europe, bond supply is forecast to rise to more €1,000bn ($1,247bn) next year – also a record high, according to Barclays
Capital.
The extraordinary thing is that, in spite of this huge supply, most analysts expect bond yields will fall. This is because many analysts
are now anticipating a deep and protracted global recession, and talk of deflation is even stalking bond markets.
Yields have fallen particularly sharply at the shorter-end of the bond curve, which is most sensitive to interest rate movements,
because of the accelerating slowdown in the world's economies.
Analysts say the economic backdrop is the key determinant of where yields will trade. At the moment equities are so unappealing to
investors that bond markets appear more attractive, offsetting supply concerns.
Some government bond yields are also historically low, around levels last seen in 2005, and much lower than in June when inflation
concerns dominated trade. For example, German 10-year Bund yields are trading at 3.63 per cent, compared with 4.68 per cent in June.
Riccardo Barbieri, a strategist at Bank of America, says: "In the unlikely event that yields should rise, which I would not expect,
they are coming from a fairly low level."
Germany – in spite of its fourth 10-year Bund failure this year – and the US are likely to be more successful in attracting investors
and depressing yields, should the difficult conditions persist, than other countries as they have the most liquid markets and are
seen as safe havens...
Another problem for the governments is the competition from banks and financial institutions, which have sovereign guarantees yet
offer much higher yields.
For example, this week the UK's Nationwide priced a three-year deal at close to 100 basis points over gilts.
"The simplistic question is, why buy government paper when you can buy government-backed paper such as this for a much greater return?,"
says Sean Shepley, fixed income strategist at Credit Suisse.
With an expected €1,600bn of bank guaranteed issuance in Europe alone next year, this could have a significant impact on investor
appetite for government bonds.
Mr Chapman says: "In spite of the prospect of this huge issuance, yields are not being forced higher. This shows just how gloomy
people are about the economic outlook."
Personally, I think investors are so shell-shocked by the crisis that they are only thinking about what to do this quarter, and not
about the longer term. Just as during the waning days of the bubble, Citi's Chuck Prince talked of dancing as long as the music was
playing, and assuming he and Citi could exit risky positions when the time came, so to many investors may recognize the risk of a
rise in government bond yields, but similarly assume they can sell if that comes to pass without taking too much of a loss.
In another, more widely reported sign of stress, the US 30 bond auction this week saw a big drop in demand from central banks, a
crucial group of buyers. From Bloomberg:
Treasuries fell, led by 30-year bonds, after investors shunned the government's $10 billion sale of the securities amid concern that
U.S. debt sales will grow....
The bond auction followed yesterday's sale of $20 billion in 10-year notes. The $30 billion total of the two auctions is the biggest
amount of the securities sold in a week since at least 1990...
``In the current market environment there are still too many unknowns,'' said William Larkin, a portfolio manager at Cabot Money
Management in Salem, Massachusetts, which manages about $500 million in assets. ``People are looking for the safety of the shorter-term
securities.''
Today's bond auction forecast to draw a yield of 4.224 percent, according to the average estimate of seven bond-trading firms surveyed
by Bloomberg News. The bid-to-cover ratio, which gauges demand by comparing the number of bids to the amount of securities sold,
was 2.07, below the average of 2.19 times in the nine auctions since the bond was revived in 2006.
Indirect bidders, a class of investors that includes foreign central banks, bought 18 percent of the securities offered, down from
43 percent at the last sale.
The skittish may due in part to the G20 meeting this weekend, which could be a negative for the dollar if China's pet theme, the
need to move away from the dollar as reserve currency, gets a hearing. The dollar and Treasuries tend to move together. But this
is not the first weak Treasury auction we've seen, and if they become more than isolated events, it bodes ill for the strategy many
central banks are taking.
U.S. retail sales took a record dive in October as consumers afraid for their jobs continued a retreat heading into the holiday
shopping season and cut back spending on a wide variety of goods ranging from cars to furniture to electronics.
Separately, U.S. import prices fell at a record pace last month, further evidence that falling oil
prices and the slowing global economy are having a rapid damping effect on inflation. Assuming that trend is confirmed
by upcoming producer and consumer price reports, Federal Reserve policymakers should have added flexibility to address the credit
crisis through liquidity programs and even more rate cuts without worrying about an inflationary outbreak.
The United States government needs to borrow US$1 trillion a year, before a new stimulus package, or handouts for the auto industry,
or healthcare reform, or a dozen other spending programs promised by the incoming administration of president-elect Barack Obama.
Where will the Treasury find the money?
A bizarre jump in the US Treasury's real cost of borrowing points to severe market disruption if the Treasury deficit continues to
rise. It appears that the Treasury market is also a victim of global de-leveraging. The new administration
has far less budgetary flexibility that it seems to think. In 1981, under comparable circumstances, Ronald Reagan had far greater
room to maneuver. I conclude that the new administration is virtually powerless to prevent marked deterioration of
the US economy.
A comparison of Obamanonomics and Reaganomics is instructive. Even in the unlikely event that the Obama administration were to adopt
Reagan-style incentives to risk-taking and investment, the effect of such incentives would be weaker and slower to take effect than
in 1981-1984.
As shown in Exhibit 1, the yield of the 10-year inflation-indexed Treasury (TIPS) tripled from 1% to 3% between June and October
2008. Nominal Treasury yields fell slightly, because the inflation-expectations component of Treasury yields (the difference between
ordinary 10-year Treasury notes and inflation-indexed TIPS) collapsed, from 250 basis points to less than 100 basis points.
The jump in TIPS yields should ring alarm bells. It is not only that inflation-indexed Treasury yields
never have risen so fast and so far since their introduction in 1997. What is most bizarre is that the movement in
"real" Treasury yields is not only massive, but in the wrong direction. Both economic theory and all past experience tell us that
when economic activity falls, "real" yields also should fall.
Exhibit 2 below shows that 10-year TIPS, or "real" Treasury yields have moved in the same direction as equity market returns.
The inflation-adjusted Treasury bond yield is a rough proxy for real long-term interest rates (it is
only a proxy because the consumer price index - or CPI - is not necessarily a good measure of inflation). Real rates
are supposed to reflect growth expectations; higher growth means higher returns to financial assets, including bonds. TIPS yields
are plotted against 12-month returns to the S&P 500. The two lines move together except during the past few weeks, when they take
sharply opposed directions.
Exhibit 2: TIPS yields triple while S&P 500 crashes.
How weird the behavior of TIPS yields has been during the past few months is made even clearer by Exhibit 3, below. We observe that
TIPS yields and S&P 500 returns lined up neatly between 2004 and 2008, and suddenly moved in the opposite direction.
Exhibit 3: Scatter plot of TIPS Yields vs 12-month S&P 500 returns, January 2004 through October 2008.
Just when we should have expected "real" Treasury yields to collapse along with equity market returns,
they spiked upwards, and by the largest margin on record. Evidently something has changed, and changed drastically. One component
of Treasury yields, expected inflation, has collapsed, and the "real" component has jumped.
There is no question as to why the expected-inflation component has fallen, for it has done so along with the S&P 500 and the main
commodity price index (the Constant Maturity Commodities Index published by UBS and Bloomberg). This relationship is shown in Exhibit
4 below.
Exhibit 4: 10-year breakeven inflation, Constant Maturity Commodity Price Index and S&P 500, February 1, 2008 to November
6, 2008 (normalized).
Equity, commodity and Treasury bond markets all are registering a deflationary crash in precisely the same way. That seems clear
enough. The dog that barked, but shouldn't have, is the "real" component of Treasury yields.
The answer to the mystery of tripled real Treasury yields is to be found in the collapse of leverage in the global
financial system. Indirectly, the rapid expansion of leverage in the global banking system contributed to demand for Treasuries.
When de-leveraging commenced in August, an important component of demand for Treasuries declined sharply. That is bad news for Washington,
but even worse news is that it will continue to decline sharply, just when Washington most requires global support for the US government
debt market.
Global leverage indirectly increased demand for Treasuries in three principal ways:
1. It fed the boom in raw materials prices, increasing demand for Treasuries on the part of central banks as well as financial institutions
in commodity-producing countries.
2. It pushed up the value of emerging market
currencies, prompting emerging market central banks to intervene in foreign exchange markets by purchasing dollars which
then were invested in Treasuries.
3. It contributed to the rise in global equity prices, which prompted investors to diversify their portfolios and purchase safer
assets including Treasuries.
The carry trade, in which investors borrow low-interest currencies (dollars or yen) and buy high-interest emerging market currencies,
created demand for Treasuries by funneling money into emerging markets that ended up as dollar reserves in their central banks.
Exhibit 5: Net foreign purchases of US Treasury securities,
12-month rolling total.
At the peak of demand for US government
securities, net foreign purchases of Treasuries came to $400 billion per year, according to the Treasury's TIC data base
(Exhibit 5). Who were the buyers? The Treasury data offers some answers.
Exhibit 6: Foreign holdings of US Treasury securities as of August 2008 (US$ billions): total holdings,
year-on-year
%change, and year-on-year absolute change.
We observe that the biggest increase came from offshore
banking centers (the UK, Switzerland, Luxembourg, and Caribbean banking centers). This tells us little because anyone
may transact through such centers. "Other emerging markets", notably Brazil and other commodity producers, were the second-largest
contributor, followed by Japan and the oil exporters.
Private purchases of Treasuries are larger than official flows in recent years, as shown in Exhibit 7:
Exhibit 7: Private vs official net purchases of US Treasury securities.
As noted, private purchases of US Treasuries seem to scale to global wealth. We observe a fairly close relationship between global
equity
market capitalization (as measured by the MSCI World Index) and private purchases of US Treasuries, as in Exhibit 8.
Exhibit 8: Private net purchases of US Treasuries scale to MSCI World Index, 1988-2008.
An exception occurred during the peak of the US equity boom of the late 1990s, when Treasury purchases fell off at the peak of the
boom. Evidently this exception reflected the general euphoria of the time and investor preference for riskier assets. We do not have
Treasury data past August, and it well may be the case that a similar exception will emerge during the second half of 2008, as foreign
investors increase their net purchases of Treasuries while stock markets crash, and for a symmetrically opposite reason. Investors
may prefer safer assets.
We cannot directly estimate the impact of de-leveraging on the Treasury market, but it seems clear that the explosion of leverage
during the past five years had a profound, if temporary, impact on the world market's demand for US government securities. As a rough
gauge of the growth of global leverage, we observe that between 2003 and 2008, US banks' claims on foreigners nearly tripled from
$1.2 trillion to $3 trillion.
Exhibit 9: American banks' claims on foreigners.
We can observe in the movement of market prices, though, a close relationship between the breakdown of the carry trade and the rise
in real Treasury yields. Withdrawal of leverage from the system forced market participants to liquidate carry trade positions, that
is, to unwind short positions in Japanese yen, and to liquidate long positions in carry trade currencies such as the Brazilian real,
Turkish lira, South African rand, Australian dollar and so forth. I use the parity of the Brazilian real to Japanese yen as a rough
proxy of demand for carry trade. As Exhibit 10 below makes clear, the collapse of the carry trade (the fall of the Brazilian real
against the yen) closely tracks the rise in 10-year TIPS yields. The visual relationship is confirmed by econometric analysis.
Exhibit 10: Inflation-indexed (TIPS) Treasury yield vs Brazilian real/yen parity.
The Treasury market benefited from the explosion of bank leverage during the past 10 years, as emerging market central banks became
the most important new buyers of US government securities. De-leveraging and the collapse of commodity markets combine to destroy
global demand for Treasuries, limiting the US government's capacity to borrow from overseas sources.
Other major holders of US Treasury securities are likely to wish to reduce their holdings rather than to increase them. China's accumulation
of foreign reserves represented "rainy day" savings for the nation, and the severity of the present crisis shows how well-advised
China was to accumulate a large volume of reserves. China has announced plans to spend the equivalent of 20% of gross domestic product
in a stimulus program which is likely to increase the country's demand for foreign capital goods.
China's trade surplus is likely to diminish sharply, both due to falling export demand and import growth arising from the stimulus
package. Chinese reserves are likely to cease growing and may even decline as a result. Oil-producing countries, moreover, may have
to spend reserves in order to maintain import levels as a result of the collapse of oil prices.
Foreign net purchases of US Treasury securities peaked at a $400 billion annual rate, and will fall sharply from this level. Domestic
resources to purchase Treasury securities, moreover, are thin. When Ronald Reagan took office, America's personal savings rate was
10%; today it is around 0%, although it has spiked up in recent months. Disposable income in the US now stands at slightly under
$11 trillion. If the US returned to the personal saving rate of 1981, individuals would save $1 trillion a year, enough to fund the
Treasury deficit, assuming that all net new portfolio investment flowed into Treasury securities. Nothing, though, would be left
over for investment in anything else.
One way to gauge how onerous the Treasury's borrowing requirements appear compared with available savings is to take the ratio of
government borrowing to gross private savings, as in Exhibit 11 below.
Exhibit 11: Federal budget deficit as a % of gross private savings.
We observe that in 1981, the deficit stood at around 15% of gross private savings, and reached 30% at the worst. The deficit already
has reached 50% of gross private savings, before the new administration has had the opportunity to increase spending.
In 1981, moreover, the United States was in current account surplus, and foreign purchases of Treasury securities were a very small
factor in the financing of the government deficit. Today, the current account deficit (and the corresponding capital account surplus)
is almost 6% of GDP.
It is far from clear from whom, and on what terms, the US Treasury will obtain $1 trillion a year, or even more, to finance its deficit.
The overseas well has run dry, and domestic financing of the deficit would require a drastic increase in the savings rate at the
expense of spending, or outright monetization of the
debt by the Federal Reserve.
One way to increase the government savings rate, of course, is to increase taxes, but that is an unlikely course of action during
a severe recession.
Monetization of debt remains a possibility, and to some extent would only continue the current trend. Total Federal Reserve Bank
credit outstanding has more than doubled in the year to November 6, 2008, rising by $1.2 trillion to $2.06 trillion. This reflects
loans, securities purchases, and related actions by the Fed to bail out the financial system. If the deflation persists,
the Federal Reserve may be compelled to purchase US government debt.
Another possibility is that risk appetite among investors at home and abroad will continue to fall, inducing a portfolio shift towards
Treasury securities. In this case "crowding out" will occur through risk-preference. It will not be so much that competing borrowers
are crowded out of the lending market, but that investors will stampede away from risk. In this scenario, even a very low federal
funds rate will not help to restore economic activity.
The point of lowering the risk-free rate is to push investors towards riskier assets. In a normal business cycle, falling output
leads to lower yields on low-risk bonds, which in turn encourages investors to add risk to their portfolios by investing in businesses.
If the safest of all investments, namely US Treasuries, suddenly offer much higher real yields, comparable to the boom years of the
late 1990s, why should investors take risk?
In any of these scenarios, the result of global de-leveraging is dire: the more the US government tries to bail out businesses and
households, the more bailing out the economy will need. The Bush administration's response to the financial crisis, and the likely
content of the Obama administration's economic program, will deepen and prolong the economic downturn.
It is not generally remembered that the premise of the Reagan administration's tax cuts was Robert Mundell's work on the optimal
level of government debt. Mundell, who won the Nobel Prize in 1991 for his work on international economics, observed that an increase
in government debt might represent an improvement in market efficiency, if it corresponded to an increase in incomes. That might
occur if a reduction in taxes caused an increase in the deficit, while stimulating economic growth. In that case, Mundell argued,
a tax cut would increase efficiency if the additional revenues arising from the growth effect were larger than the interest on the
bonds issued to cover the ensuing deficit.
In 1981, Ronald Reagan had a very different starting point:
1. The personal savings rate stood at 10%.
2. The current account was in surplus.
3. The top marginal tax rate was 70%.
The capacity of the US and the world to finance an increase in the federal deficit was much greater, and the incentives arising from
reducing the top marginal tax rate from 70% to 40% were much greater than any incentives that might be envisioned from tax cuts from
the present level.
Even the best-designed economic policy would be hard-put to provide growth incentives without a substantial increase in the savings
rate and a corresponding reduction of consumption, implying a very sharp economic contraction. If the Treasury tries to spend its
way out of recession, the results are likely to be very disappointing.
David P Goldman was global head of fixed-income research for Banc of America Securities and global head of credit strategy
at Credit Suisse.
The deflation-inflation two-step: Too complex for deflationsts to grasp?
By mistaking the short term for the long term, they are missing the trade of the century
by Eric Janszen
Over 100 books, papers, and original analysis went into developing and refining Ka-Poom Theory over the years, and model that explains
how, following the collapse of the credit bubble, the US economy will experience a short (six month to one year) period of deflation
that we call disinflation, such as we are experiencing today, followed by a major inflation induced by monetary and fiscal policy
and the actions of US trade partners in response to that inflation.
It appears that the deflationista camp is incapable of comprehending a model, and the events that it forecasts, that lays out a
two step process. For some reason they cannot grasp the fact governments will respond to disinflation with inflation, that
the impact of those interventions is not instantaneous, and that markets historically are not very good at foreseeing the change
in inflationary conditions in either direction.
Ka-Poom Theory in 1999, the original disinflation/reflation theory developed nearly ten years ago, does not merely forecast a period
of deflation or disinflation that is inevitable after the massive credit bubble popped. A child could do that. We call it
"Ka" as the first step in the two step process outlined by Ka-Poom Theory. The difficult part is forecasting what comes
after the disinflation phase. Does the Fed sit back and do nothing while the debt deflation runs out of cotnrol? Does the Fed
have a choice, or does it become impotent, overwhelmed by the rate of debt defaults and money destruction?
The deflationistas apparently think what comes after post-bubble deflation is more deflation, as occurred in the early 1930s in the
US but nowhere else ever since. It has not occurred to the deflationists why no similar period of deflation has ever
occurred since the 1930s, or when they do confront the question they explain that the debt is really, really, really big debt this
time, bigger than the Fed. Or that differences between the kind of money that the Fed prints versus the kind of money that the endogenous
credit markets create when money is loaned into being by businesses and consumers means the Fed cannot impact the latter.
As we explain that in
The truth about deflation,
the reason no deflation spiral has occurred in any nation since the one instance in the US in the 1930s is because since then no
nation has chosen to remain on the gold standard through a debt deflation. Needless to say, the US is not on a gold standard today.
What governments do when confronted with a deflation spiral is take measures to increase the money supply to induce inflation. If
they succeed and money aggregates are increased, over time inflation will follow.
Money first, inflation second
One of the better papers on this topic is
No money, no inflation-the role
of money in the economy by Mervyn King, Deputy Governor, Bank of England. It was presented to the Festschrift in honour of Professor
Charles Goodhart held at the Bank of England on 15 November 2001.
Most people think economics is the study of money. But there is a paradox in the role of money in
economic policy. It is this: that as price stability has become recognised as the central objective of central banks, the attention
actually paid by central banks to money has declined.
It is no accident that during the 'Great Inflation' of the post-war period money, as a causal factor for inflation, was ignored
by much of the economic establishment. In the late 1970s, the counter-revolution in economics-the idea that in the long run money
affected the price level and not the level of output-returned money to centre stage in economic policy. As Milton Friedman put
it, 'inflation is always and everywhere a monetary phenomenon'. If inflation was a monetary phenomenon, then controlling the supply
of money was the route to low inflation. Monetary aggregates became central to the conduct of monetary policy. But the passage
to low inflation proved painful. Nor did the monetary aggregates respond kindly to the attempts by central banks to control them.
As the governor of the Bank of Canada at the time, Gerald Bouey, remarked, 'we didn't abandon the monetary aggregates, they abandoned
us'.
So, as central banks became more and more focused on achieving price stability, less and less attention was paid to movements
in money. Indeed, the decline of interest in money appeared to go hand in hand with success in maintaining low and stable inflation.
How do we explain the apparent contradiction that the acceptance of the idea that inflation is a monetary phenomenon has been
accompanied by the lack of any reference to money in the conduct of monetary policy during its most successful period? That paradox
is the subject of my talk.
This paper contributed three concepts to Ka-Poom Theory that deflationistas should think very carefully about. Read the paper and
its conclusions are inescapable.
One, if "No money, no inflation" then if "Money, inflation." Two, money first, inflation second with long and unpredictable time
lags. Three, the money markets always get it wrong; inflation expectations are sticky following periods of deflation and sticky following
periods of inflation. The big money to be made in our fiat money era is in betting that the bond market is getting it wrong rather
than assuming that a market that is forecasting future inflation or deflation is getting it right. When governments are inflating,
the bond markets tend to be right short term, wrong long term.
That being the case, this may be the trade of the century because the bond markets are pricing corporates, treasury bonds, and TIPs
as if it's 1931 and the US and the world was on the gold standard, or it's 1974 and recession is about to take inflation down for
the count. Mike Shedlock does a good job of describing the phenomena here recently in
Industrial Bond Yields Strongly Support Deflation Thesis. The error is mistaking short term for long term inflation pricing phenomena.
The one step deflationists miss the all important second step in the two-step Ka-Poom deflation/inflation process.
King demonstrates the long term correlation between money and inflation in the UK going back to 1885..
Next he shows the correlation between money and inflation in specific national cases where money aggregates grow, and offers
several examples. One inflation case is Israel 1984 to 1987 shown below. This is more or less the level of inflation that iTulip
expects during the inflation phase, not exceeding 30% or so in peak years.
King presents Japan 1990 to 2001 as an example of a country that did not expand money aggregates and experienced modest deflation
but nothing like what occurred in the US in the 1930s.
The heart of King's argument, backed by solid research, is:
[The charts show ] the correlation between the growth of the monetary base and inflation over different
time horizons for a large sample of 116 countries. Countries with faster growth rates of money experience higher inflation. It
is clear from [the charts] that the correlation between money growth and inflation is greater the longer is the time horizon over
which both are measured. In the short run, the correlation between monetary growth and inflation is much less apparent.
King backs up this assertion with solid analysis. Here are a few relevant charts.
Is the US Japan 1990 or Israel 1984?
If past growth in money aggregates in the US spells higher inflation in five to ten years, then why are the bond markets betting
on continued deflation? The TIPs market is signaling sub 1% annual inflation going out five years.
We accept the conclusion of King's research that inflation will eventually follow from money growth. Let's turn our attention to
money aggregates here in the US.
Unfortunately, the Fed in 2006 removed one of the main tools available to measure broad money, M3. The conspiracy minded might find
the timing of the Fed's decision to omit this data as extraordinarily convenient. We think it is intended to keep the bond market
guessing while a range of new policy tools are tried to combat debt deflation.
The Economist in
Inflation or deflation? weighed in July this year with the following assessment.
What makes the situation so obscure is the leads and lags in the economic data. The global economy
is still absorbing the impact of the rise in oil above $100 a barrel, let alone its subsequent gains. And the Federal Reserve's
long series of rate cuts are still working their way through the system. Then there is the American tax rebate, still sitting
in many consumers' bank accounts.
That suggests both the inflationists and the deflationists are going to have plenty of ammunition over the next few months. In
turn, that will make it hard for investors to make a decisive choice, and that means the volatility in financial markets will
continue over the next few months.
Long term, the inflationists look to have a better case.
The world has paper money and the
central bank that runs its reserve currency (the dollar) has repeatedly erred on the side of loose monetary policy, for economic
and financial reasons. Emerging markets, nowadays the drivers of global growth, have
loose monetary policies in aggregate. Treasury bonds may occasionally benefit from flights to safety over the next few months,
particularly as the banking sector continues to struggle. But it is hard to believe that yields
of 4% or so will look good value in five years' time.
Money at Zero Maturity remains, but we worry that it does not include all of the money that was in M3, and through its creativity
entirely new M's have been invented -- call them M4, M5, M6 -- that we cannot see because they are nor reported by the Fed. Still,
even MZM shows 17% growth since the beginning of the crisis in Q1 2007.
Has the bond market gotten it wrong before?
Short term no, long term yes. This makes for interesting trading opportunities if you know can figure out what the bond markets don't
know before they do.
The current parting of company between corporate bonds and Treasury Bills reminds us of the 1973-74 recession. That disconnect was
resolved when inflation fell at the end of the recession along with treasury and corporate bond yields; bond prices increased. That
appears to be what the bond market is saying today and in spades.
As we know now, that didn't last long: the US had a lot of debt to inflate away, and so it did between 1975 and 1980. A few years
later inflation was in the double digits. While the bond markets were "right" in the short run they were "wrong" in the long run.
A great trade then was BAA bonds purchased at 11% in 1974 during the worst of the recession when default rates were highest and inflation
expectations lowest, then sold in 1977 when these bonds increased in value to 8% before inflation picked up again, then bought again
at 17% in 1983 and held to maturity. High corporate yields and treasury bonds in 1974 and 1983 signaling high default and inflation
risk. Will we see a trade like that again?
There are two major differences between this period and that one.
TBills were trading near 9% versus 1% today. Deflationists interpret this to mean that there is no inflation risk priced into
corp. bonds. But how much lower can TBills go before the Fed has to shock the system, if it hasn't already?
Year over year inflation volatility was low then but has been the highest in history since 2001.
Given the lags between money growth, the stickiness of inflation expectations in bond markets, and the Fed's lack of money aggregate
transparency while experimenting with the money markets, and inflation volatility scrambling inflation signals, anyone trying to
forecast inflation by looking at bond yields and spreads or commodity prices under these unusual circumstances is like a pilot flying
through a storm and depending on the airspeed indicator to measure ground speed and calculate future distance.
The Fed won't give us the complete picture of our money supply deflationary or inflationary headwinds. The inflation data that we
do have, a lagging indicator of past money growth as King's research shows, are all over the place. Apparently the bond markets think
deflationary head winds are so strong that the plane is flying backwards and will continue to do so for years. Will we land in the
land of oz? Will we land at all or go up in a ball of deflationary fire?
In this crazy environment what is likely to happen, as has happened in the past, is that the bond market will figure out all at once
that pricing signals it mistook for a long term deflationary headwind were actually the deflationary down draft of a collapsing asset
bubble followed by a powerful inflationary tailwind that started off as Fed induced money growth years before. Anyone caught on the
wrong side of the market when that epiphany finally occurs will suffer the consequences. The deflationistas can take this as their
final warning from the inventors of the original deflation/inflation cycle theory.
Timing? When will bond markets become unstuck?
Impossible. You are betting on a second order effects -- the bond market's interpretation of inflation resulting from past money
growth, mostly hidden -- and network effects -- bond market participant's interpretations of each other's behavior. Even worse from
a timing perspective, if the Fed takes drastic steps to signal an inflation change in the wind to halt deflation, it is not going
to issue a polite warning that permits a quick trade out of portfolios positioned for an ongoing deflation. The resulting bond market
reversal, as occurred in the early 1930s years before the dollar depreciation and reflation, can be tough on unhedged deflation positioned
portfolios.
A popular course, frequently advocated for Japan, is pre-announced devaluation. This would both
raise price expectation and provide a direct stimulus to exports. The biggest problem with this remedy is that it would be
quite inappropriate if the threat of slump were international rather than confined to one country.
Brittan doesn't mean the US, he means Germany or Japan or any country except the US. A future dollar devaluation will not be the
first time the US took "inappropriate" action with its currency to save its own skin, such as in 1934, 1971, twice in 1973, and a
stealth devaluation from 2002 to 2008. Anyone who does not hold inflation hedges is betting that the US government won't behave in
the future according to an established pattern of policy and behavior. That strikes us as unwise.
Flawed Framework
The framework of the inflation versus deflation debate is flawed from our perspective. It comes down to two camps, the inflationists
like Marc Faber and Jim Rogers who claim that the US will some day be unable to sell more bonds and will eventually be forced to
print money to cover fiscal expenses without issuing new debt. These are the Wiemar inflationists. The deflationist camp is represented
best by Roubini who asserts that the US government cannot risk letting the inflation genie out of the bottle via unsterilized money
injections and, anyway, such a policy, besides wrecking the reputation of the Fed, will not work to reduce overall debt levels because
too much US debt is short term and rates will rise to cause repayment of aggregate debt to skyrocket.
Ka-Poom Theory since 1999 occupies a position outside this framework. It asserts that all of the money that the US needs to create
monetary inflation that deflates both its external debts and domestic private debts already resides outside the US in the form of
more than $13 trillion in gross external debt to the tune of 95% of GDP. Most of that debt is in the form of US treasury bonds. All
the US has to do to devalue the dollar is induce its trade partners to sell, perhaps by indicating an intention to monetize debt
wothout actually doing so, causing US creditors to sell some dollar denominated securities for assets not priced in dollars, resulting
in an increase in the global supply of dollars. The effect is the same as the US printing money but without a corresponding issuance
of new debt and the attendant risk of hyperinflation that Roubini refers to.
As the US learned years ago, why devalue your currency when you can get your creditors to do it for you? Nothing halts deflation
like the inflation signals that issue forth from rising import prices. Has everyone already forgotten 2002 to 2006 when oil prices
increased 300%? Since most US debt is held by central banks, the selling is unlikely to be disorderly. Why risk a runaway inflation
if you can turn a knob and order a few percentage points of deflation fighting currency depreciation?
Between the inflation that is already baked into the cake by increases in monetary aggregates over the past year and the opportunity
for the US to enlist its trade partners in the task of sending the dollar back down and inflation up, the second step of the two
step Ka-Poom Theory process hovers somewhere over the horizon. PIMCO recently got back into TIPS. Better early than late.
Depression with inflation? How?
This is by far the most unintuitive part of our argument. Our ongoing unemployment analysis
Unemployment by industry:
Recession or depression? is pointing us to depression-like joblessness over the next couple of years. Where will the money come
from to create inflation if so many are unemployed, borrowing is depressed, and banks are hanging on to the capital lent to them
by the Fed?
The answer goes back to research that produced the graphic to the left. It is the reason why a government will engage in currency
devaluations, if it thinks it can get away with it. From 2002 to 2008 when the dollar declined by 37% and the CRB Raw Industrials
Index rose from a 2001 recession low of 225 to a 2008 peak of 525. Even if 50% of this increase was due to demand, 50% was do to
dollar depreciation. That is a powerful anti-deflation force that also allowed the US to boost exports.
In countries where currency depreciation runs out of control, the inflationary impact is devastating, even as economic activity and
output collapses. We don't expect that to happen to the US because it's debts are issued in its own currency.
iTulip
Select: The Investment Thesis for the Next Cycle™
Some might be skeptical, but I've seen skilled technical analysts take nebulous-looking stock charts and add lines and descriptions
that suddenly provide a great deal of clarity about what is going on.
While I'm not totally sure how talented he is as a chartist, Mike Shedlock, publisher of Mish's Global Economic Trend Analysis,
draws (yes, that's a pun) some counterintuitive conclusions from a graph that has many inflationistas foaming at the mouth in
"Parents Pull Kids From Day Care (And Other Deflationary Topics)."
Almost every day I get notes wondering, "Why not hyperinflation?"
This is a good question. I'll try and explain why I believe a deflationary debt unwind is now underway, and why I believe
it will be many years before we should start worrying about inflation again. In fact, by the time inflation becomes a legitimate
concern, I expect the vast majority of people will find it as outrageous to worry about inflation then as found it outrageous
last year when I made deflation one of my Five Themes for 2008.
While it is true, as those anticipating hyperinflation argue, the Fed and global central banks are making record amounts
of credit available, that is only one side of the credit equation.
The assumption is that this record-breaking credit expansion means risk assets (stocks, commodities, etc.) will all skyrocket
and the U.S. dollar will get destroyed. But what hyperinflationists fail to realize is that for an inflation (of either the
tame or hyper variety) to take place, one must have both the means (credit from the fed and banks) and the motive (the desire
to take on more debt) for credit expansion. For over a year now we have had record amounts of the former, but none of the latter.
...
The once unthinkable prospect of zero interest rates moved closer to reality yesterday. The US Federal Reserve announced an historic
reduction in borrowing costs, pushing American interest rates to a level below which they have not been since the mid-1950s.
The Fed's decision to reduce its target for the Federal Funds rate, the main rate at which banks lend to each other overnight,
by 0.5 percentage points to 1 per cent, was widely expected by financial markets.
But more striking was the clear accompanying signal from the central bank that it stood ready to lower rates even further in the
face of the most difficult financial and economic climate in decades.
Explaining its decision, the Fed's policymaking Open Market Committee cited a long list of economic woes, from the continuing
credit squeeze to weakness in countries around the world.
Looking to the future economic climate, the policymakers said: "Downside risks to growth remain." This was a hint that the next
move in rates is more likely to be down.
With the cost of borrowing at 1 per cent, that suggests the strong probability that the US central bank will push rates all the
way down to nothing if it has to in the next few months.
The US has not had zero interest rates in its modern economic history, although Japan, faced with a similarly challenging financial
environment in the 1990s, held rates at that level for several years.
Key to the Fed's decision has been the ebbing of the inflation threat in the past month as energy and other costs have fallen
sharply. Perhaps most significant in the Fed's statement was that for the first time in more than two years Ben Bernanke, the central
bank chairman, and his colleagues indicated that inflation was no longer something they were worried about.
After every Open Market Committee meeting since 2006, the Fed has expressed concern in some form about the inflation outlook.
But yesterday it said, in effect, that the war on inflation was over: "In light of the declines in the prices of energy and other
commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels
consistent with price stability."
US market interest rates are now as low as they have been since the Second World War. From mid-2003 the central bank held the
Fed Funds rate at 1 per cent for a year in the wake of fears about deflation after the collapse of the stock market bubble in 2000-2001.
Rates have not been below 1 per cent since 1954, when Dwight D. Eisenhower was President.
With the Fed's aggressive rate cut, attention now shifts to other central banks. Most financial market economists believe the
European Central Bank and the Bank of England both need to cut rates sharply. The world is now in such parlous economic shape and
the leading economies are so interconnected that monetary easing in one country will not suffice to avert a serious recession. US
officials have been gently pressing their colleagues overseas to do more to cushion their economies from the effects of the financial
crisis.
The Fed, the Bank of England and the ECB, along with other central banks, cut rates in a co-ordinated emergency move three weeks
ago. The Bank and the ECB are expected to cut rates again next week. Meanwhile, the Chinese central bank has cut rates several times
in the past month. It, too, is likely to go much farther in an effort to avert a serious slump.
===
If you ever needed proof that the Fed and Paulson represent a greater threat to America than anybody
hiding in a cave in Afganistan this is it. Bottomline; fools who stuff things up are unlikely to fix them.
Stephen Hargreaves, Hobart , Australia
leaders of developed economies are acting like drug addicts willing
to admit their addiction (cheap money) but unwilling to suffer the cold turkey (repaying debt rather than creating
more). hopefully the banks probably won't be so willing to act as the maligned dealer this time around
Rich, Birmingham, UK
I would like to hear from some savers how they feel about earning nothing on their savings.....
If they turn to property for investment, won't that artificially hold up ptices and push us back to where we were?
Everybody is talking about deflation these days as the flavour of the month. Commodities guru Jim Rogers makes the point that
- virtually always - inflation follows monetary stimulus ... buy hard assets he recommends, to deal with the inflation which will
inevitably follow the very significant stimulus being added world-wide to deal with the banking issues/financial crisis.
He says they are printing "gigantic" amounts of money, and "massive" ("terrible") inflation is coming, 6, 12, 24 months down the
road, and the only way to get out of the way of this is to get out of paper assets.
The U.S. dollar fell against the euro and the pound Tuesday as rising stock prices increased investor's appetite for the higher yielding
currencies.
The euro was up 2.8% to buy $1.2999 from $1.2644 late Monday in New York. Earlier, the 15-nation currency rose more than 3% to
a session high of $1.3027, marking the sharpest intra-day rise since the euro's inception in 1999.
The D-word is back. Five years after the last deflation scare, economists are again debating whether the US and other industrialised
nations could see sustained declines in consumer prices.
Some go as far as to predict that much of the industrialised world might
soon resemble Japan in the 1990s, with interest rates at zero, falling prices and no economic growth.
"A deep and prolonged recession could raise the spectre of deflation of the sort that long plagued the Japanese economy," says
Desmond Lachman, a fellow at the American Enterprise Institute.
Erkki Likkanen, a member of the governing council of the European Central Bank, and Janet Yellen, the president of the San Francisco
Fed, have both alluded to the risk of deflation.
Mr Likkanen said there were "historic examples of how financial crisis, when not handled properly, has led in a couple of years
to a deflationary cycle".
That this discussion is occurring at all is striking considering how, until recently, most people were worried about inflation
being too high rather than too low.
It is testimony to the shock inflicted by the intensification of the credit crisis and massive loss of housing and stock market
wealth.
"I am worried about the deflation risk," says Stephen King, chief economist at HSBC.
Nonetheless, while deflation is a potential threat, most economists think it is premature to be worrying
about actual sustained declines in domestic prices.
This remains unlikely because positive inflation is embedded in the US and Europe and the policy response to the crisis is now
vigorous.
"To go so quickly from having concerns about inflation to thinking there is a massive deflation problem is jumping the gun a bit,"
says Jim O'Neil, chief economist at Goldman Sachs.
Indeed, some worry that efforts to avoid deflation will end up fuelling inflation.
Falling commodity prices mean many economies will at some point experience negative year-on-year inflation. But this is nothing
to worry about.
Richard Berner, co-head of economics at Morgan Stanley, says it would just be "payback" for the previous oil-driven surge in
inflation.
The danger is deflation defined as a sustained negative rate of underlying domestic price increases.
Mark Gertler, a professor at New York university, says such deflation makes it impossible to run negative real interest rates
to boost a sickly economy, raising the risk of prolonged stagnation.
It can also create a "debt-deflation trap" in which the real value of debt rises, making it harder for indebted households and
companies to pay down their liabilities.
Monetarist analysis suggests there is cause to worry. The collapse in banks' willingness to lend and the increase in hoarding
of cash might overwhelm central banks efforts to pump out liquidity – putting downward pressure on prices.
However, most experts now rely on a framework that says future inflation is the product of current inflation, inflation expectations,
shocks and the "output gap" (the gap between supply and demand). These models suggest the risk of deflation in the US, UK and eurozone
is low, while Japan remains a special case.
Inflation is above target in every large economy bar Japan. Consumers in these economies expect inflation of at least 2 per cent.
The market expects long-term inflation of roughly 2.25 per cent in the eurozone, 3 per cent in the UK and 1.7 per cent in the
US – though the rate for the US has fallen since September.
"If inflation expectations were to decline sharply that would greatly increase the risk of deflation," says Frederic Mishkin,
a professor at Columbia University.
"But expectations were stable on the way up – when inflation was rising – and there is every reason to believe they will be stable
on the way down."
Given a weak relationship between spare capacity and inflation, unemployment would have to rise very high – to perhaps 9 per cent
or 10 per cent in the US – and stay there for some time to generate deflation.
Left alone, the credit crunch could do this, particularly in the US and UK, which have housing busts, indebted consumers and flexible
prices.
But the authorities are moving aggressively to mitigate its impact with rate cuts, bank recapitalisations and fiscal stimulus.
Olivier Blanchard, chief economist at the International Monetary Fund, says its analysis suggests there is a less than 5 per cent
chance that the US will experience deflation.
Still, there is a larger risk that inflation could fall to 1 per cent or less in some economies within two years.
This could itself create problems, since central banks would lose the ability to run negative interest rates to fuel recovery
or ward off a fresh shock.
But if credit markets are as dysfunctional a year from now as they are today, and inflation a lot lower, deflation would cease
being a theoretical danger and would become a real threat.
They are awfully worried about deflation these days - from coast to coast. Both the New York Times and the Los Angeles Times
have run stories in recent days warning about the danger of falling prices:
Ominously, the world's most popular doomsayer, Nouriel Roubini, is quoted in both.
It's as if the whole world is about to fall into some sort of a deflation vortex where we will all be transported back into a
black-and-white 1930s breadline if prices fall.
Maybe we will. From the left coast, Tom Petruno writes:
Investors are constantly reminded to think about inflation when making decisions about their money.
Now there's a new wrinkle: the possibility of deflation. We've already had severe deflation -- falling prices -- in housing,
stocks and commodities this year. The question is whether that could spill into prices of goods and services across the board,
as well as into wages, as the economy worsens.
...
Declining inflation is good for the economy, and consumers, in the long run. And in some businesses, such as tech, prices are
always falling.
But if the CPI were to go negative for an extended period, that would signal that a potentially dangerous deflation had kicked
in. It would suggest that demand was so weak that companies were slashing prices to a level that would gut their earnings,
in turn fueling massive layoffs and wage cuts.
Could it happen?
Tom Higgins, chief economist at investment firm Payden & Rygel in L.A., isn't predicting a drop in the CPI in 2009. But he
believes the risk of outright deflation is higher today than it was in 2002-03, the last time there was serious talk about
a broad-based decline in prices taking hold.
Because the double whammy of falling home values and plummeting stock prices over the last year has sharply eroded many people's
net worth, "I'd be much more worried about deflation today than in 2003," Higgins said.
It never ceases to amaze me how so many writers and economists place so much emphasis on the government's dubious consumer price
index, extrapolating from that severely flawed representation of prices to predict all sorts of possible futures.
As noted here many times before, if you put home prices back in the inflation measure instead of the nefarious "owners' equivalent
rent", you could argue that we've had deflation even with soaring energy prices for the better part of the last year.
Substituting
a severely flawed and much maligned proxy for the biggest single component of the consumer price index will surely come to be
recognized as one of the worst transgressions by economists in the post-war era.
It reduces talk of CPI "deflation" to something that is almost nonsensical, but the talk continues nonetheless.
In the New York Times, Peter Goodman notes:
As dozens of countries slip deeper into financial distress, a new threat may be gathering force within the American economy
- the prospect that goods will pile up waiting for buyers and prices will fall, suffocating fresh investment and worsening
joblessness for months or even years.
The word for this is deflation, or declining prices, a term that gives economists chills.
Deflation accompanied the Depression of the 1930s. Persistently falling prices also were at the heart of Japan's so-called
lost decade after the catastrophic collapse of its real estate bubble at the end of the 1980s - a period in which some experts
now find parallels to the American predicament.
...
Through much of the 1990s, prices for property and many goods kept falling in Japan. As layoffs increased and purchasing power
declined, prices fell lower still, in a downward spiral of diminishing fortunes. Some fear the American economy could be sinking
toward a similar fate, if a recession is deep and prolonged, as consumers lose spending power just as much of Europe, Asia
and Latin America succumb to a slowdown.
"That's a meaningful risk at this point," said Nouriel Roubini, an economist at New York University's Stern School of Business,
who forecast the financial crisis well in advance and has been warning of deflation for months. "We could get into a vicious
circle of deepening malaise."
Most economists - Mr. Roubini and Mr. Barbera included - say American policy makers have tools to avert the sort of deflationary
black hole that captured Japan. Deflation fears last broke out in the United States in 2003, but the Federal Reserve defeated
the menace with low interest rates that kept the economy growing. This time, the Fed is again being aggressive, dropping its
target rate to 1 percent this week. And the government's various bailout plans have also pumped money into the economy.
"If you print enough money, you can create inflation," said Kenneth S. Rogoff, a former chief economist at the International
Monetary Fund and now a professor at Harvard.
Dr. Rogoff's thesis is now being put to the test. They say that "persistently falling prices" were at the heart of the worst economic
contractions of the last century, but is that really true?
Isn't it interesting to note that all
prior bouts of feared or realized deflation came after the bursting of massive asset bubbles - the U.S. in the
1930s, Japan in the 1990s, the U.S. again in 2003, and the entire world today?
Deflation is not to be feared - bursting asset bubbles are.
I really don't understand these deflation concerns at all unless they are some sort of propaganda attempt to make people feel
safe with cash. We've managed to create trillions of dollars out of thin air, everybody is getting bailed out with massive cash
injections and we have a Federal Reserve and government that think the printing press is the answer to every problem. I've heard
recent quotes of the entire credit and housing crunch costing something in the neighborhood of 55 trillion USD.
I mean, doesn't that strike anyone as just a little inflationary?
The only way out of this debt is to print the money to pay for it, especially since foreigners are finally realizing
we haven't the slightest desire or ability to pay back the debt we already owe them.
And once the dollar loses its role as reserve currency... I don't even want to think about that. It will be, as the joke goes,
getting Weimar in here.
The trick with beleiving in an inflationary bout is not that you think the govt won't try to print, but
that it will FAIL to do so successfully. Printing by itself isn't inflationary, you've got to get that money out into the economy.
What the Fed is suffering from right now is a classic liquidity trap. It lowers interst rates but banks hoard cash, hence its
primary money transmission mechanism is broken.
The only way to fix that is to restore transparency, also known as trust, to the system. The problem is that has all sorts of
unpleasant corollary effects. These are exactly what the Fed has fought a viciously socialist rear guard action to stop.
On the other hand world net worth has dropped $29T during this crisis, so far. The US has "printed" about
$2T, Europe about the same and kick in another $2T for everyone else.
That's a total of $6T. Actually a lot of that it is borrowed against reserves abd savings, so wasn't printed per se.
When we compare that to $29T of losses, we need to remember many of those losses were fictional; i.e.,
taken against unrealized or non-monetized gains.
Regardless, we are destroying it faster than we're printing it, which his why people are talking about deflation. Once this decline
has abated, however, what will all that money go looking for?
Governments are hosing down the markets with bailout money. Central banks, meanwhile, are making sure the cost of borrowing is
as close to zero as possible. We smell another bubble in the making…and another inevitable crash. Talk about priming the pump for
the next bout of excessive exuberance.
– Even Japan is racing to become the next Japan. Today,
Japan announced it's joining the global bailout bonanza. Prime minister Taro Aso says he will pump $275 billion of public funds
into world's second-largest economy. This will go toward expanded credits for small businesses and a cash payback to every household.
Senior Bush administration officials are discussing a plan that could help up to three million homeowners struggling to pay
their mortgages to stay in their homes, three people briefed on the proposal said Wednesday.
The initiative could be the most sweeping government effort directed at mortgage borrowers since the financial crisis began
last year. Under the plan, the government would agree to shoulder half of the losses on home loans if mortgage companies agreed
to lower borrowers' monthly payments for at least five years, according to the people briefed on the plan who asked not to be
named because details were still being negotiated.
– U.S. stock futures pointed to strong gains this morning ahead of data that will likely show that GDP is contracting - further
evidence, if any were needed, that Mr. Market doesn't give a hoot about the 'real' economy. Yesterday the Fed handed the market another
rate cut. And there's nothing the market loves more than a rate cut…all that easy money to play with.
– "Talk about priming the pump for the next bout of excessive exuberance," says a commenter on Paul Kedrosky's
Infectious Greed blog. "If the next big problem isn't hyperinflation, it will mean that we have crashed and burned. I believe there
is a movie called No Way Out that basically says it all! Nothing good can come out of where we are at the present moment economically."
– We're already seeing
a massive rally in commodities, just one day after the Fed cuts. "Gold, crude oil and corn extended the biggest surge in commodity
prices in five decades on speculation interest rate cuts in the U.S. and China may revive demand for raw materials consumption,"
reports Bloomberg.
The Reuters/Jefferies CRB Index of 19 raw materials jumped 5.9 percent yesterday, the most since at least 1956, when the data
begin. The index is still down 24 percent this year. China, the world's largest industrial-metals user, trimmed interest rates
for a third time in two months, and the Federal Reserve slashed bank borrowing costs in the U.S., the biggest oil user, to 1 percent.
There are plenty of things to worry about in the current economic situation. But deflation isn't one of them.
Greg Mankiw had a
great article last weekend in which he challenged the view that macroeconomists have learned enough to prevent a repeat of the
Great Depression. Greg notes some disturbing similarities between our current difficulties and the problems of the 1930s:
From 1930 to 1933, more than 9,000 banks were shuttered, imposing losses on depositors and shareholders of about $2.5 billion.
As a share of the economy, that would be the equivalent of $340 billion today. The banking panics put downward pressure on economic
activity in two ways. First, they put fear into the hearts of depositors. Many people concluded that cash in their mattresses
was wiser than accounts at local banks. As they withdrew their funds, the banking system's normal lending and money creation went
into reverse. The money supply collapsed, resulting in a 24 percent drop in the consumer price index from 1929 to 1933. This deflation
pushed up the real burden of households' debts....
Deflation across the economy is not a problem (yet), but deflation in the housing market is the source of many of our present
difficulties. With so many homeowners owing more on their mortgages than their houses are worth, default is an unfortunate but
often rational choice. Widespread foreclosures, however, only perpetuate the downward spiral of housing prices, further defaults
and additional losses at financial institutions.
Greg is certainly correct that house price declines have a potential to cause similar problems today as we saw in the 1930s. But
I believe it is more than an academic distinction whether we are talking about a relative price change (house prices go down but
the dollar price of most other items goes up) or a true deflation (the dollar price of almost everything you buy goes down). The
reason is that the latter problem is absolutely one that the Federal Reserve could fix, whereas the former problem may not be.
In a general deflation, the purchasing power of a dollar bill goes higher and higher, and as Greg
notes, this can produce big economic problems, as it did for the U.S. in the 1930s or Japan in the 1990s. But it is
absolutely a problem that the Federal Reserve can fix. If you increase the quantity of dollar bills fast enough, you're sure to create
inflation, not deflation. And the Federal Reserve has unlimited power to increase the quantity of dollar bills.
Some of my colleagues still talk of the possibility of a
liquidity trap, in which
the central bank supposedly has no power even to cause inflation. Their theory is that interest rates fall so low that when the Fed
buys more T-bills, it has no effect on interest rates, and the
cash the Fed creates with those T-bill
purchases just sits idle in banks.
To which I say, pshaw! If the U.S. were ever to arrive at such a situation, here's what I'd recommend. First, have the Federal
Reserve buy up the entire outstanding debt of the U.S. Treasury, which it can do easily enough by just creating new dollars to pay
for the Treasury securities. No need to worry about those burdens on future taxpayers now! Then buy up all the commercial paper anybody
cares to issue. Bye-bye credit crunch! In fact, you might as well buy up all the equities on the Tokyo Stock Exchange. Fix that nasty
trade deficit while we're at it! Print an arbitrarily large quantity of money with which you're allowed to buy whatever you like
at fixed nominal prices, and the sky's the limit on what you might set out to do.
Of course, the reason I don't advocate such policies is that they would cause a wee bit of inflation. It's ridiculous to think
that people would continue to sell these claims against real assets at a fixed exchange rate against dollar bills when we're flooding
the market with a tsunami of newly created dollars. But if inflation is what you want, put me in charge of the Federal Reserve and
believe me, I can give you some inflation.
Notwithstanding, I think Greg is raising a very valid point. Allowing the overall deflation in the U.S. in the 1930s and Japan
in the 1990s was one quite fixable policy error. But perhaps modern macroeconomists have deluded ourselves into thinking that if
this policy error had not been made, the whole episodes could have been avoided. How bad would the Great Depression have been if
the price level had not fallen? Not as bad as it was, I'm convinced, but maybe still pretty bad.
Is 2008 Our 1929? No. It is not. The most important reason it is not is that Bernanke and Paulson are both focused like laser
beams on not making the same mistakes as were made in 1929....
They want to make their own, original, mistakes..
Comments
Basically, Professor, what should the Fed do and when should it do it?
Posted by: David Pearson at October 29, 2008 08:21 AM
Whose Afraid Of Deflation?
In my last post, William Gross said this:
"They must also take another bold step: outright purchases of commercial paper. They
should also cut interest rates to 1%, because we are experiencing asset deflation, and the threat of headline inflation is long past."
Via Greg Mankiw, who wasn't convinced, came the following:
"In a previous post, I expressed surprise that yields on inflation-indexed Treasury notes are rising. Readers have emailed me
a variety of hypotheses, the most common of which is deflation. As one smart economist put it:
Here's one possible answer -- the credit crunch has precipitated a massive expansion of money demand -- a scramble for cash. Despite
its best efforts, the Fed has not matched this with a sufficient expansion of money supply. As simple IS-LM would predict, this surge
in money demand has raised real interest rates (indicating that monetary policy is perhaps still too tight).
Rising real rates on inflation-indexed bonds and falling rates on nominal bonds also tell us that markets expect this surge in
money demand to result in near-zero inflation or even deflation in the years ahead. It's starting to look more and more like 1990s
Japan, though hopefully for not as long."
From Michael A. Fletcher's story today in the Washington Post:
"The confluence of trends has some economists worried that the country could be headed for a debilitating cycle of deflation:
a period in which weak consumer demand, falling prices and tight credit ignite a downward spiral of still weaker demand and still
lower prices. Under this scenario, as some businesses are strangled, joblessness increases, feeding the cycle.
"It was just a few months ago that everyone was obsessed with inflation. Now it's deflation," said Bill Gross, co-chief investment
officer at Pimco, an investment management company. "I think it's a possibility."
And:
"Some economists note that a period of price adjustments does not necessarily signal the start of a deflationary spiral.
"Deflation is not the problem we should be worrying about," said Adam Lerrick, an economist at Carnegie Mellon University. "A
drop in the level of prices for some goods must be distinguished from a continuous fall of prices. Oil is down to $90 from $140,
but does anyone expect it will be $55 a year from now and $35 in 2010?"
Analysts said that a few months of price declines should not be a problem for the economy.
But if prices continue to fall across the board for a prolonged period, the declines will weigh heavily on businesses and consumers,
particularly those juggling a lot of debt, which must be paid back even as money is harder to come by.
"For a few quarters, I say bring it on, but not for too much longer," Gross said of deflation. "Capitalism depends on mild inflation.
Unless we get it, the dynamics of capitalism sort of move in reverse."
But then, there's this:
"In the United States, policymakers have been much quicker to respond to deflationary threats. Five years ago, as inflation approached
1 percent, spawning deflation concerns, Alan Greenspan, then the Federal Reserve chairman, cut the Fed's benchmark lending rate to
1 percent and the threat was never realized. It is an outcome that gives assurance to some economists.
"As long as governments print money and run deficits, you cannot have deflation," Lerrick said."
So, in the end, doesn't that mean inflation is the only real problem?
Once again the Fed, the mainstream media, and Bubblevision continue to relentlessly propagate the myth that the slowing
U.S. and global economy will ease inflationary pressures. In addition, the current Credit Crisis and the ongoing collapse in commodity
prices have encouraged deflationists to reiterate their beliefs that deflation is inevitable. These views represent two different
approaches of the same myth. Investors should not fall for it.
Given the recent fall in prices in a broad range of commodities, we are assured that inflation is no longer a problem,
indeed that the real threat is deflation; inflation is supposedly transitory and inflationary expectations are "well anchored". We
are led to believe that "recessions cure inflations."
Nothing can be further from the truth. On the contrary, given the current macroeconomic
environment, the massive government stimulus of hundreds of billions of dollars in rebate checks and a series of bailouts will most
certainly translate in much higher inflation and little or no economic growth. One must prepare for the reality that
the government's "cure", as Peter Schiff has repeated so often, will be worse than the disease.
In coming years, investors must expect a lot more inflation and adjust their portfolios
accordingly – their survival depends on it. Our job here is to outline the importance of the inflation-deflation debate,
interpret its meaning, provide some historical evidence, and present the arguments for future economic development with its investment
implications.
August
[Aug 15, 2008] Core inflation
The Bureau of Labor Statistics reported yesterday
that its primary consumer price index CPI-U rose 5.6% over the last year. That's the highest inflation rate in 17 years, the newspapers
all call to our attention. Just how concerned
should we be about these numbers?
Of that 5.6% year-over-year price increase, 1.9% came within the last two months alone. And there's no question that the big story
driving that 2-month increase has been energy prices.
NewJerseyGasPrices.com reports that the average
retail price of gasoline sold in the United States rose from about $3.78/gallon in the middle of May to $4.12 in mid July, a 9% increase.
That's in line with the 10.6% 2-month increase that BLS reported in their seasonally adjusted consumer energy price index between
May and July. Energy prices have a weight near 10% in
the total CPI. That means that if energy prices had held constant between May and July but all other price increases had been the
same, the year-over-year CPI number would have been more like 4-1/2% rather than 5-1/2%.
But does it make any sense to ask, What if energy prices hadn't gone up between May and July? There are certainly
good reasons why the Fed should not be taking as much comfort in "core inflation" as it has in recent years. But in this case,
there is a clear need to net out the May-to-July energy price increase-- it's already been reversed. The US national average gas
price is back to $3.78/gallon, right where
it was in mid-May. Thus, even without any further drop in the price of gasoline-- and personally, I do expect further drops-- the
4-1/2% number is a better summary of where we stand right at the moment than 5-1/2%.
So no, I don't think that yesterday's CPI numbers will cause the Fed to panic. Because yesterday's news is already way of out
of date.
Interesting analysis regarding core inflation and the volatility of energy.
The main problems I see with it are that the Fed (and
Bernanke in particular) claims to be concerned with "inflation expectations", whatever those are. Clearly, volatility in energy prices
affect these expectations, which are really just inflation incarnate. That energy moved up and then back down seems sort of moot
in this regard. We all experienced the spike in gas prices, which in turn means we all experienced higher inflation. If anything,
the magical "inflation expectations" are certainly worse today than they were prior to the volatility in energy prices we experienced
in recent months.
What is there in the water that professional economists drink that is causing them to keep trying to explain inflation away? It isn't
enough that the CPI has been mucked up as a measure with all the hedonic/owener's equivalent manipulation? Inflation x-inflation.
The Fed & central banks around the globe continuously create fresh money/credit at a faster pace than their economies can create
GDP on which to spend it. It's called inflating. Why do economists strive to obscure this most important of truths?
Burgeoning inflation in the teeth of recession is remarkable, but let's just ignore it.
Wonder what effect the seasonal adjustment played in the 5-1/2 inflation jump. Earlier months the adjustment dampened the increase
and was due to go the other way in June or July.
Algernon: How is JDH explaining inflation away? It's a measurement issue being raised. Is your suspicion is that he
wouldn't bring up this point if it went the other way? Unless that is what he'd do, I don't see how the intent here is to "explain
away" anything.
Consider this important truth: if the money supply was constant and GDP growth was zero, and everyone increased
the prices of their goods, we'd have inflation.
Justin makes a good point, JDH: the rise and fall of gasoline prices may not have symmetric effects on inflation
expectations (you appreciate economic asymmetry, right?). Certainly there were myriad production and labor decisions made while gasoline
prices were taking off -- these might exert inflationary pressure going forward. And I don't think the relapse in gas prices will
do the same thing in the opposite direction.
Posted by: sjp at August 15, 2008 10:32 AM
Apparently the 12-month core inflation rate was 2.5%.
'Consider this important truth: if the money supply was constant and GDP growth was zero, and everyone increased the prices of their
goods, we'd have inflation.' SJP are you serious?
Consider this important truth: if the money supply was constant and GDP growth was zero, and everyone increased the
prices of their goods, we'd have inflation.
sjp,
Don't disengage your logic. If the money supply remains constant but everyone increased their prices how could we have inflation?
Assuming spending preferences do not change we would have to sell less of everything. There would be no more money to purchase
goods at the higher prices.
At first retail inventories would increase and merchants would have to decrease orders. Manufacturing inventories would build
and manufacturing would have to decrease. Depending on the severity of the decline unemployment might increase. Generally this would
bring on a recession.
You do raise an interesting scenario though because this is almost exactly what happened to precipitate the Great Depression right
after the market crash in 1929. The crash only lasted 11 days, but Hoover over reacted and called the business leaders into his office
as it was still going on to ask them not to lower wages and prices. The result was that inventories grew as production slowed and
people lost their jobs. Hoover continued his foolishness of keeping wages and prices higher than the market would bear, attempting
to offset the consequences with government welfare, but the economic decline drove unemployment higher than 20%.
Posted by: Anonymous at August 15, 2008 12:21 PM
Sure, Professor, given the drops in the price of gasoline over the last weeks, yesterday's price increase news is out of date.
But, we are from from out of the woods. Just wait until the Japanese, Chinese, and sheikhs tire of seeing their Treasury holdings
decrease in value. When they rush for the exits -- next year seems plausible, as the U.S. economic fundamentals will be terrible
through 2012, given the off-the-charts household debt to GDP ratio, and such prognosis will become widely apparent next year -- and
dump those Treasuries, we'll see the pent-up effects of our inflationary policies since '81.
Enjoy the respite, and save what you can, now.
Posted by: jg at August 15, 2008 12:28 PM
The real point is not about whether the correct inflation is 4 1/2% vs 5 1/2%.
In April, when seasonal adjustments got the numbers disconnected from reality, all one could hear was inflation is low.
When eventually, the data catches up, it's explained away as old data.
So there seems to be this great obfuscation by methodology - when methodology produces low inflation, the result is rationalized,
and when methodology produces high inflation, the result does not matter.
So there is never any inflation.
That trick works, until it wont. Credibility will be lost, if not already.
This is almost as good as the ole: "it's not really inflation because employees don't have bargaining power." I wonder if that originated
with the Bank Of Zimbabwe.
Why even bother reporting data? Simply have the BLS regularly declare deflation or low or no inflation
- whichever suits them. You know, "heckuva job, Benny."
The power of orthodoxy, even in the 21st century is quite remarkable. Either that or a simple desire for access and/or social
acceptance in professional circles.
Posted by: Anon at August 15, 2008 01:34 PM
The BLS publishes many special-purpose indices. The one Jim's re-created here is "all-items, less energy" or SA0LE. No need to do
the back-of-the-envelope re-weighting that you did here. We've done it for you.
Go to http://data.bls.gov/cgi-bin/srgate and enter
"CUUR0000SA0LE".
Posted by: BLS Lackey at August 15, 2008 01:58 PM
algernon and Anonymous: I am seriously engaging my logic. Inflation is about the price level moving up.
I am bringing
this up because the true mechanics of inflation must be a combination of (among other things) the extension of money/credit that
algernon refers to and the raising of prices that I posited. One can't just point the finger at money supply expansion as
the root of inflation. It is clearly an important part, but not the complete picture.
Posted by: sjp at August 15, 2008 02:56 PM
There has never been an inflationary period when housing prices declined and gold prices declined. Both are down significantly. Additionally,
money velocity is trending down (people are holding cash), and wages are not rising significantly. OK, oil has been up, but, so what?
The word "whining" comes to mind. We are not in an inflationary period. And when its all analyzed with historical perspective, we
will find yet more faults in the CPI reporting of our government. Economists of the future - here's another opportunity.
To aver that we are not in an inflationary period strains credibility: The massaged-to-understate CPI of 5.6% was a year-over-year
measurement.
Wages not keeping pace does not change the fact of what the consumer has faced. One doubts that wages are much of a factor in
the inflations of Zimbabwe or China.
In addition to transportation & food costs, medical costs (which inspite of being 17% of GDP only count 6% in the CPI), property
taxes, utilities, natural gas, parking fees, postal costs & gardening supplies are all up noticeably in my particular experience.
Mr. Laird, do you not encounter these?
Housing & gold are correcting from huge inflations in their prices (neither of which was captured in the CPI when they occured).
Gold will likely move higher, if not in the near future, then later when the US gov't must print its way out of the SS/Medicare promises
it can't keep.
We will see a great deal of shifting to Wal Mart, unbranded gasoline, and Corian (from granite) etc. Declining housing (sale) prices
should bring rents down. We will see "getting the best deal" glamorized on the new reality TV shows replacing the most glamorous
kitchen remodel. Assuming no really beligerent actions in the mid east or the Caucuses, oil prices should continue to decline (on
a cyclical basis). So a reasonable bet is that inflation will be declining in the next year.
Those expecting diminishing inflation, please contemplate CD rates of 3%(on which the holder must pay income tax) when the reported
CPI is 5.6%. What person would lend his savings in such a money-losing proposition? Is this the result of a free market or of a central
bank lending out money that has never been saved but created out of thin air? MZM & M2 are growing a lot faster than GDP & have been
for some time.
The central banks of China, Russia, India, Saudi Arabia, et al are behaving similarly. The global credit bubble,
Bernanke's savings glut, will collapse in due course. But it seems to me we aren't there yet & therefore are beset by inflation.
...not only, but also... FED shouldn't panic because:
1. Rent inflation seems under control (It was slower in July than in June)
2. Households & Investors inflation expectations are going down after the commodities prices burst (See: the yield of the Treasury
Inflation Protected Securities & the latest results of the Consumer Sentiment Survey released by the University of Michigan: they
are consistent with a moderation of the inflation scare).
If past FED speeches are any guide, this excerpt from the 06/09/2008
Bernanke Speech (At the Federal Reserve Bank of Boston) will help shaping the prospects for the near term future:
Here is the link to the website:
http://www.federalreserve.gov/newsevents/speech/bernanke20080609a.htm
Posted by: OER at August 15, 2008 10:49 PM
sjp wrote:
Inflation is about the price level moving up.
I am bringing this up because the true mechanics of inflation must be a combination of (among other things) the extension of
money/credit that algernon refers to and the raising of prices that I posited. One can't just point the finger at money supply expansion
as the root of inflation. It is clearly an important part, but not the complete picture.
sjp,
I will pass on your incorrect definition of inflation as price increases to stay on topic.
Can you give me the mechanism where prices can increase with a constant money supply without reducing consumption? If you have
an economy of $5 and 5 things how can the price of the each thing move to $1.10 and consumers still consume 5 things with a $5 money
supply?
Posted by: DickF at August 16, 2008 02:28 PM
DickF - they'd put it on their visas!
When economists talk about wage demands being muted, they don't seem to understand how much American households have gotten into
the habit of taking their future wages out as borrowed money. If I have the ability to pay 1.10 with a credit card, I can overlook
that shortfall in my real income. By using behavioral patterns which were true in the 70s but are not true today to connect commodity
prices to wages, economists are overlooking a central feature of the economy they have wrought. In fact, dissolving limits on credit
has been the only way that the "grand moderation" could be swallowed by the American public at large. If they had to live within
their real incomes, the increases in the compensation of the wealthiest group - the CEOS, the hedge funders - would simply be politically
impossible. As credit is squeezed and Americans have to live within their real incomes, look for inequality to become a much hotter
issue. It is the credit squeeze more than inflation that is going to jumpstart pressure to raise wages.
from the Fed Website: "Consumer credit rose at an annual rate of 5 percent in the second quarter. Both revolving and nonrevolving
credit increased 5 percent in the quarter. In June, consumer credit rose 6-3/4 percent at an annual rate."
The pace of growth of Consumer Credit in June has been a surprise, a puzzle.
DickF: my definition of inflation is a rise in the price level. The only point I'm making is to dispute algernon's point;
I took algernon's point to be that inflation comes solely from money supply expansion. I say that's not true.
I believe that the
problem subsequently raised with my thought experiment (0 growth, 0 money supply growth, price increases) is that it is non-equilibrium.
What Anonymous suggested makes sense. On the other hand, the economy might realize that the price increases weren't warranted and
drop the price back down -- this might be the outcome DickF sees for his scenario. I thought a non-equilibrium thought experiment
might be worth considering, though, since the jumping off point for this post is that the oil price increases we saw in the summer
have been followed by price decreases: we are talking about fluctuations about the equilibrium.
I am most interested in Justin's point, that these oil price fluctuations might inordinately affect consumers' inflation expectations.
It makes me wonder if certain high-profile products are weighted highly in consumers' belief formation mechanisms. Have oil price
shocks been associated with shocks to consumers' inflation expectations, and is this association stronger than the association with
other commodities?
Posted by: sjp at August 17, 2008 02:21 PM
DickF asks "Can you give me the mechanism where prices can increase with a constant money supply without reducing consumption?"
Simple, the rate of circulation of money can increase or decrease. Thus even if the supply of money remains the same prices can change.
And of course, there are many types of virtual money that can step into the gap, taking the place of money, debit accounts, credit
accounts, loans of all descriptions etc.
Your comment about Visas did make me laugh, but understand that credit works within an economy unless the government facilitates
credit expansion with an increase in the money supply so credit in itself does not create inflation.
sjp,
Inflation is a decline in the value of money. It may lead to a rise in the price level, but a rise in the price level is not inflation.
This is a huge misconception in economic circles that leads to serious misunderstandings.
If you introduce other elements into your thought experiment such as consumption preferences then yes you can create a scenario
where such price increase might be accomodated, but the thought process must be deeper than a fixed money supply with rising prices.
That simply is not possible without external input meaning consumption preferences, saving preferences, etc.
This is important to understand because without the complicity of the monetary authorities an economy cannot experience inflation.
Understand that a change in consumption preferences is not inflationary.
bill j,
A change in circulation of money does not exist in a vacuum. There must be other changes such as consumption preferences for this
to happen. Dig deeper.
The markets have become incredibly volatile as investors vacillate between these outcomes
The first two weeks of July were
dark indeed, as investors feared that high oil prices were both heralding recession and preventing central banks from taking action
by cutting interest rates. That environment was pretty bleak for risky assets, with equities falling and credit spreads rising. The
repeated falls in the share prices of Fannie Mae and Freddie Mac added to the sense of crisis.
Two things then changed the tone. The first was a fall in the oil price from its $147-a-barrel peak. The second was the rescue
of Fannie Mae and Freddie Mac and some better-than-expected results from the banking sector. The market's economic and financial
worries were eased at the same time; equities rallied sharply (particularly bank stocks) and credit spreads narrowed again. The ten-year
Treasury bond yield rose in a week from 3.83% to 4.15%.
But on July 24th, the markets suffered a relapse. A set of negative economic data in Europe and America, together with fears about
the health of Washington Mutual, sent the Dow Jones Industrial Average down 283 points and pushed the ten-year Treasury bond yield
back down to 4.02%.
All this volatility has led to some contradictory-looking moves. Normally gold is seen as a hedge against inflation. You can thus
count on the bullion price to rise as Treasury bond yields are increasing. But as the chart shows, this has not been happening since
mid-July. Gold has been moving hand-in-glove with oil (as part of the commodity asset class) and in the opposite direction of the
dollar (since it is seen as an alternative currency).
This market chaos is understandable; the trade-offs are complex. The fall in the oil price will eventually bring the headline
inflation-rate down. That sounds like good news for both equities and government bonds.
But what if the decline in the oil price is the result of a global recession? That
would hardly be positive for stock markets. And what if a falling headline inflation rate gives the green light for the central banks
to cut interest rates? Coupled with the willingness of the authorities to rescue the banking system,
that would suggest a long-term inflationary bias in the economy and thus be bad news for Treasury bonds.
"Investors should not be distracted or trapped into dismantling portfolio inflation defences by either
the current growth slowdown or by the vagaries of the spot oil price,"
says Tim Bond, head of global asset allocation at Barclays Capital, in his latest note.
Despite Mr Bond, investors show every sign of being distracted by the details of the current slowdown. The latest euro-zone purchasing
managers' survey, for example, appeared to point to a second-quarter fall in GDP. The highly erratic British retail sales numbers
for June wiped out the strong gain recorded in May. American initial jobless claims jumped to 406,000 in the latest week, while existing
home sales dropped to their lowest level in a decade. As Alan Ruskin of the Royal bank of Scotland remarked, this was a contest among
the G7 nations to see who could post the worst numbers.
What makes the situation so obscure is the leads and lags in the economic data. The global economy is still absorbing the impact
of the rise in oil above $100 a barrel, let alone its subsequent gains. And the Federal Reserve's long series of rate cuts are still
working their way through the system. Then there is the American tax rebate, still sitting in many consumers' bank accounts.
That suggests both the inflationists and the deflationists are going to have plenty of ammunition over the next few months. In
turn, that will make it hard for investors to make a decisive choice, and that means the volatility in financial markets will continue
over the next few months.
Long term, the inflationists look to have a better case. The world has paper money
and the central bank that runs its reserve currency (the dollar) has repeatedly erred on the side of loose monetary policy, for economic
and financial reasons. Emerging markets, nowadays the drivers of global growth, have loose monetary policies in aggregate. Treasury
bonds may occasionally benefit from flights to safety over the next few months, particularly as the banking sector continues to struggle.
But it is hard to believe that yields of 4% or so will look good value in five years' time.
all good posts below guys. the american led manufactured boom in the world economy was a result of the economic impasse which threatened
at every turn. loosening the money supply and turning a blind eye to irresponsible lending (greenspan-bernanke)was the impetus for
growth in the last 20 years. by priming the pump, inflation was always going to be the outcome.because of the massive over-production
of commodities in the world economy, the central bankers have no choice than to keep the money flowing, to keep the people spending-thanks
dode bush-(i"m scottish!), who would have believed that capitalism would have been so fatally injured, it had to return some of the
"surplus value" stolen, back to the masses to keep them spending!!! wouldn"t it be better if the workers recieved the entire result
of their labour-power to spend???
after the inflationary crisis and crash, as a direct result of the above mentioned overproduction, prices will come down expedentially
as the capitalists desperately try to off-load their wares to a general populace who are now paupers. the china syndrome-which has
been key to the cheap-price deflationary binge, which in reality has held inflation in check in the west- will become the motor force
of the international socialist revolution. millions of chinese workers will be thrown on the scrap-heap as factories close in their
droves. these workers-with no social security- will reproduce the events of russia in october 1917, BUT ON A FAR HIGHER SCALE.history
is repeating and the tendency will be from the lower to the higher.
AS "Help is on the way" had no means of commenting, I will do it here. It relates to this story.
Adjectives and adverbs fail me. The filth that is the new "housing bill" saving Fannie Mae and friends (many of them financial
friends of this venal administration)is an abomination. It panders to the whiners of America, the same people who lie on loan applications
and subsequently say they "didn't understand" that they'd actually have to pay back the borrowed funds.
The people of the United States are focused on the entitlement concept. A concept that underscores the fact that none need fulfill
their contractual obligations if they find them difficult. A concept that gives those who borrow huge funds at any cost, backed up
with any story of woe, the right to recluse themselves from "doing the right thing".
A person who saves their money, pays their bills on time, and generally lives by the standards of a America that apparently no
longer is, is a fool.
I'm a fool.
What this nation, the USA, needs right now IS a recession. Up the interest rates, put value into the dollar, let the whiners lie
and steal without the benefit of Federal largess. Perhaps then we can arrest them. While it may cost us to pay the higher interest
on our national debt, at least it will go to those who actually gave up value for their lent money.
Central bankers fear deflation much more than inflation. Deflation eats away at the value of everything. No one wins. Indeed the
winners, in this scenario, will be the ones who lose the least! I expect the central bankers will turn on the paper printing presses
and go to great lengths to stave off deflation. This will of course cause significant inflation (possibly hyperinflation) followed
by a deflationary bust.
Even if the Fed starts raising rates now, the inflationary damage has already been done over the last 20 years. It will come out
of the closet eventually.
Good article, but I disagree with this statement: "Then there is the American tax rebate, still sitting in many consumers' bank accounts."
I don't know anyone whose tax rebate is sitting in a bank account. It has paid for the difference in the gas and food prices.
It seems clear that, as with the credit-fuelled boom that preceded it, the bust has taken on a life of its own.
Mere mortal investors and their professional colleagues are (at least if they are honest and have a modicum of sense) a bit confounded
as to what to do at this juncture. By all measures, inflationary pressures are gaining strength, and yet recessions lower aggregate
demand and with it, price pressures. Ah, but what about the Chinese? Even if things get bad here, they aren't fully in lock-step
with the US economy and have plenty of firepower. And what happens when Helicopter Ben throws cash at the problem? Won't lots of
money creation debase the currency and by definition produce inflation?
It's very easy to get a headache from this sort of thinking.
Michael Panzner offers a useful post, "The
Wrong 'Flation" on this topic, arguing for the deflationary outlook. The most powerful evidence for this view comes from the
fact that the monetary authorities have lost control of credit generation (broader money, the old M3) as observers ranging from
market mavens
like Michael Shedlock to
Serious Economists like Mohamed El-Erian have pointed out. The credit crisis means credit contraction, a process the Fed will
likely be unable to staunch. That in turns points to deflation.
However, "unlikely" does not necessarily mean "unable". Bernanke is a well known expert on the Great Depression, and well schooled
in the dangers of letting contractionary processes feed on themselves. So he and his colleagues will be doing everything in their
power from keeping a vicious circle from setting in. The Term Auction Facility was a creative measure that managed to stave off a
crisis in the money markets. Perhaps he will be able to use a combination of novel measures, liquidity injections, and smoke and
mirrors to keep confidence at a reasonable level (confidence and willingness to extend credit are what really is at risk here).
The problem, ultimately, is that credit extension (witness no-doc loans, mezzanine CDOs, speculative real estate lending, and
"cov lite" LBO deals) went well beyond sustainable or sensible levels. There will need to be a reduction in credit, which will inevitably
lead to a contraction. But what shape will that take? How far down is down? While I think a financial meltdown is a real possibility,
I guesstimate the odds at 30%. That is dangerously high by any standards, but also says the greater likelihood is that a crisis will
be averted.
While I am still generally pessimistic about the near-term prospects, the powers that be may be able to forestall a crisis (and
by that I mean a credit crunch a la 1990-1991, not a real calamity) and instead engineer a fairly ugly recession (I'd prefer a short
and very nasty one, but given the housing crisis, we are more likely to get a prolonged sluggish period). Not pretty, particularly
for middle and lower middle income consumers, who will take the brunt of it, but the alternative (most likely a Japan-style deflation
due to refusal to realize losses on inflated asset values) would be even worse.
From Panzner:
Those of us in the very small group that has correctly anticipated that past excesses would eventually come home to roost generally
fall into two camps: the deflationists, who believe that another Great Depression is on the cards -- at least initially -- and
the inflationists, who argue that hyperinflation -- where prices spiral rapidly higher -- is the most likely near-term outcome.
While there are more than a few reasons for the contrasting perspectives, in my view it largely comes down to a difference of
opinion about how the U.S. reached the "tipping point" to begin with. That is, was it "printing presses" that fueled the housing
and other bubbles, the malinvestment and imbalances, and the widespread belief in "something for nothing," or was it excessive
credit creation?
If the answer is the former, then the dollars that were and continue to be created remain in circulation, stoking inflationary
expectations and exerting a relentless upward push on prices. As economists put it, there is too much money chasing too few goods.
If the answer is the latter -- which is what I believe has been and is the case -- then logic and history suggest that when
the jig is finally up, it leads to relentless, liquidation-driven downward pressure on asset and other prices. As opposed to paper
currency (or even digitally-created "money" that did not come about as a result of central bank buying and selling of government
and other securities), much of the credit-money that was created out of thin air ends up "disappearing" (e.g., through default),
diminishing overall demand.
In "Worried
about Inflation? Just Wait," Reuters columnist James Saft lends further weight to the deflationist perspective and puts paid
to growing worries over rising commodity and consumer prices.
Never mind inflation, the powerful and long-lasting effects of the credit crisis will rein it in soon enough.
With oil, gold
and other commodities at very high levels and U.S. producer prices up 6.3 percent last year -- the most since 1981 -- fears
have risen that an aggressive round of rate cuts by the Federal Reserve will embed inflation.
Consumer price inflation for December was up 0.3 percent and has risen 4.1 percent since a year earlier.
But these are likely to prove lagging indicators, even if demand from emerging markets remains strong for raw materials.
If credit is being strictly rationed and asset prices falling -- as they are in housing and in stocks -- investment, consumption
and just about anything else that can be put off will be put off.
"The strong probability is that we will get at least disinflation in 2008," said George Magnus, senior economic advisor
to UBS.
"I'm not aware of any banking crisis in history, almost without exception, that was not accompanied by falling inflation.
"When balance sheets are shrinking and credit restriction is being applied, the whole effect is to cause people either to
not be able to make spending decisions or to defer them. It puts a downer on aggregate demand," Magnus said.
A round of poor data, notably unexpectedly weak retail sales, prompted rumors of a highly unusual inter-meeting rate cut
by the Federal Reserve, whose next scheduled meeting is January 29-30.
The Fed declined to comment. Traders were roughly evenly split on Wednesday in betting on a 50 basis point or a 75 basis
point cut this month in the Fed benchmark, currently 4.25 percent.
But even aggressive cuts in interest rates will have a limited and painfully slow impact on demand under these circumstances,
according to Magnus. He contrasts the current crisis, which is fundamentally about the solvency of borrowers and the banks
that lent to them, with other crises, such as 9/11 or the stock market crash of 1987.
"When solvency is involved and asset prices are declining, monetary policy can help but can't solve the problem."
Yen carry trade and credit cards next?
Ominously for the economy, the Baltic Dry Index BADI of shipping capacity suffered its biggest one day drop since records
began on Wednesday, down 5.74 percent and following similar heavy falls on Friday and Tuesday. The index is down almost 20
percent since January 1.
Because trade travels on ships, the Baltic index is often a good indicator of forward demand, both for natural resources
and finished goods. Interestingly, the Baltic index continued to climb as the credit crisis unfolded through the summer, supported
by strong economic growth in emerging markets.
Tim Lee of pi Economics in Greenwich, Connecticut, thinks prices of many assets and commodities will fall strongly in what
he calls an "incipient deflation".
"Ignore gold, ignore oil: they are lagging indicators of the excessively loose central bank policies we had in the past,"
Lee said.
"The leading edge that is really telling us what is going on is the government bond market and property prices."
Yields on 10-year U.S. treasuries have fallen as low at 3.69 percent, down almost a half a percent since late December.
The credit crunch is breeding new areas of concern, such as credit cards and commercial loans. Another round of losses in
a new area would further dampen credit.
Citibank has more than doubled its loan loss reserve ratio on U.S. consumer debt since the end of the second quarter, with
the sharpest move in the past three months.
Then there is the risk that cuts in U.S. interest rates will unravel what is perhaps the world's biggest leveraged bet,
the use of carry trades, according to Lee of pi Economics.
Estimated at as much as $1 trillion, carry trades involve borrowing cheaply in yen or other currencies such as Swiss franc
that have low interest rates in order to invest in higher yielding currencies, or indeed in anything else the borrower hopes
will go up.
Both the yen and the Swiss franc have rallied sharply against the dollar in recent days driven by expectations of much lower
rates in the U.S.
If funding currencies like the yen and franc continue to rise, borrowers could sustain big losses. For example, many Hungarians
have taken out mortgages in Swiss francs and many Korean corporations have funded in yen. Strong moves upward in the currency
they borrowed may leave them unable to carry the debt.
"As the carry trade unwinds, liquidations and asset sales will push prices (down) further," Lee said.
It seems clear that, as with the credit-fuelled boom that preceded it, the bust has taken on a life of its own.
Instead, the Smart Money is looking to the Forex markets, where the penultimate inflation gauge -- the value of
the US dollar -- gets measured.
"Since the value of the dollar is the single biggest determinate of prices, it is amazing that Wall Street can celebrate a victory
over inflation based solely on one month's data despite the poor monthly performance of the dollar itself.. If the dollar continues
to lose value, it's only a matter of time before sellers demand more of them in exchange for their wares. If they fail to raise their
prices, the net effect is that they suffer a price reduction. So while Wall Street looks to the bond market as evidence that inflation
is well contained, the smart money looks at the forex markets to realize just how much worse inflation is likely to get. Remember,
bond yields do not reflect what future inflation actually will be, only what bond investor think it will be. Action in the
currency markets will reveal just how wrong these bets are likely to be. (emphasis added)
As the Federal Reserve fiercely debates how to reduce inflation within the
United States, economists are warning that trends outside the country may soon make the Fed's job much harder.
In recent years, global integration has made things easier for the Fed in two ways. An explosion in low-cost exports from
China and other countries helped keep prices of many products low even as Americans spent heavily and loaded up on debt.
At the same time, China and other relatively poor nations reversed the normal patterns of global investment by becoming net lenders
to the United States and Europe. Analysts estimate that this "uphill'' flow of money from poor nations to rich ones may have reduced
long-term interest rates in the United States by 1.5 percentage points in recent years - a big difference when home mortgage rates
are about 6 percent.
But as Fed officials held their annual retreat this weekend here in the Grand Tetons, a growing number of economists warned that
those benign international trends could abate or even reverse.
For one thing, they said, China's explosive rise as a low-cost manufacturer does not mean that prices will fall year after year.
Indeed, China's voracious appetite for oil and raw materials has aggravated inflation by driving up global prices for oil and many
commodities.
Beyond that, new research presented this weekend suggested that the United States could not count on a continuation of cheap money
from poor countries. Those flows could stop as soon as countries find ways to spend their excess savings at home.
"Medium- and long-term interest rates are set outside of the country,'' said Kenneth S. Rogoff, a professor of economics at
Harvard University and a former director of research at the
International Monetary Fund. "It's very important to think about what to do if the winds of globalization change.''
The warnings come as the Fed's new chairman,
Ben S. Bernanke, faces widespread skepticism among economists about his forecast for a "soft landing" - a mild slowdown that
will tame inflation without costing many jobs.
Inflation is already running above Mr. Bernanke's unofficial target - 2 percent a year, excluding energy and food prices - and
few analysts here say they believe the Fed will raise rates and slow growth enough to bring inflation down to its target anytime
soon.
"They are in a box, and they know it," said John H. Makin, an economist at the American Enterprise Institute and a hedge fund
manger. "It's an awkward position for them to be in."
Economists presenting papers at the Fed retreat said that the central bank may be hindered as global trends that have kept inflation
and interest rates lower than they would otherwise be turn less favorable.
The biggest change could be an increased reluctance by foreign investors to finance the United States' huge trade gap, now more
than $700 billion a year.
"What happens if foreign investors decide they don't want to accumulate American assets any more?" asked Martin S. Feldstein,
economics professor at Harvard and president of the National Bureau of Economic Research.
"Something has to change to make the debt more attractive - an increase in interest rates in the U.S. or a decline in the exchange
rate of the dollar,'' he continued. "In the short term, the Fed will face slowing output growth, possible with higher inflation."
For the moment, bond investors appear to accept the Fed's view that inflation will remain low. Long-term interest rates have actually
edged down slightly since the Fed decided on Aug. 8 not to raise overnight rates.
But economists, including some leading bond investors, predict that inflation will creep higher even if oil prices stop climbing.
"The consensus among people here is that the Fed's real target is not 2 percent but about 2.5 percent,'' said David Hale, an economic
forecaster in Chicago. Looking ahead 12 months, if Fed members do not make progress bringing inflation down, "it's going to call
into question their credibility,'' he said.
Members of the Federal Open Market Committee, which sets monetary policy, appear torn. In a sign of uncertainty this weekend,
Mr. Bernanke and all other senior Fed policymakers were unusually tight-lipped about any of the issues - wage trends, the ability
of companies to pass higher costs on to customers, or the plunge in home sales - that are at top of their agenda.
Mr. Bernanke has been arguing that inflation will cool as annual economic growth slows to 2.5 percent, from about 3.5 percent.
But some Fed officials, worried that inflation pressures are becoming more entrenched, want to take tougher action. Jeffrey M. Lacker,
president of the Federal Reserve Bank of Richmond, voted against the pause in rate increases.
Michael H. Moskow, president of the
Chicago Fed, strongly suggested last week that he favored higher rates and declared that the risks of higher inflation were greater
than the risks of an unexpectedly sharp slowdown. Mr. Moskow is not currently a voting member of the policy committee, which rotates
the regional bank presidents, but he participated in the debates.
Ethan S. Harris, chief United States economist at
Lehman Brothers, said the Fed's focus on core inflation understated the challenges posed by international shifts. The focus,
he said, includes the price-lowering impact of China's expansion but excludes the impact of higher oil prices. "They've included
the part that makes things look better and thrown out the part that makes things look worse," he said.
Officially, the Federal Reserve does not set explicit targets for inflation. But Mr. Bernanke, a longtime champion of inflation
targets, has said that his own definition of price stability is to keep core inflation between 1 percent and 2 percent a year.
The Fed's job is not made any easier by the upcoming midterm elections, in which
Republicans are struggling to keep from losing control of both the House and Senate.
The Fed has two policy meetings, in late September and late October, before the November elections. The central bank often likes
to avoid any interest rate changes immediately before an election, for fear that it will be accused of interfering on behalf of one
party or another.
Regardless of what Mr. Bernanke does in the next few months, economists at the conference here said
that globalization and the United States' growing foreign debt could make his job more difficult.
Raghuram G. Rajan, the International Monetary Fund's current head of research, presented new research to explain why many poorer
countries are now net lenders to rich countries - and why they might change course. He argued that fast-growing poor countries relied
less on foreign capital than many nations, and that they saved much more than they invested.
One example is Chile, the most prosperous country in Latin America. Thanks to soaring copper prices in recent years, Chile has
paid off its government debt and is running a budget surplus equal to about 7 percent of its gross domestic product. Chilean leaders
are putting the surplus into a long-term stability fund, part of which is invested in foreign securities, that will be used to maintain
full government operations if copper prices plummet.
Mr. Rajan said many countries might not have a way to channel their excess savings because their banking systems were too underdeveloped.
If so, the savings rates of those countries may decline as people become more accustomed to rising incomes and as banks find ways
to rechannel savings into consumer and business loans.
Even though capital is flowing uphill to rich countries like the United States right now, Mr. Rajan said, "it doesn't mean these
flows are optimal, safe or permanent
FT.com Willem Buiter's Maverecon After the Crisis Macro Imbalance, Credibility and Reserve-Currency
-- The US will most likely face a long period of stagnation... In the horizon of the coming years no
domestic fiscal policy will be capable of revitalizing the central economies... Inflation and the devaluation
of the dollar, presently, are not a concrete threat in a world on the verge of deflation.
The Last but not LeastTechnology is dominated by
two types of people: those who understand what they do not manage and those who manage what they do not understand ~Archibald Putt.
Ph.D
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To
stabilize the banking system and restore normal lending,
additional TARP funds will be required ... Banks
are not going to increase their lending until they feel comfortable with the amount of capital they hold. That's not going to
happen for a while.
At the moment, they could probably increase the base money without limit. All that cash would just sit in the banks.
What they should do is print a lot of money, now that is seems to be possible to do so without adverse effects, and then set the reserve requirements to a whole lot higher level. That way we would have the system, when it finally recovers, on a healthy liquidity-constrained basis.
After that, they should let the markets handle the price of money, and focus instead on keeping the money supply aligned with the overall size of the economy.
Looks to be a long road ahead ...
I would also point out that each time a recovery seems to appear oil moves right up ...I agree with the entire post but with the added caveat that a peak oil scenario is in play as well ... If this scenario happens sooner rather than later the world will be looking at stagflation and further economic contraction ... the exact consequences related to the size and duration of the spike in oil prices ...
At the moment the US does look like going toward deflation and there is little that the FED can do about those things outside of its control. There are however tipping points, triggered by either borrowing too much money or printing too much money that can flip things into an inflationary environment. The mistake that Hoisington Investment seems to be making is of looking at the US economy in isolation from the rest of the world. My worry is that the FED can not do enough to prevent deflation and congress will force the FED and Treasury to ratchet up their actions to such an extent that one of the tipping points will occur. Having a reserve currency means the US can do a lot more than other countries but the scope is not unlimited and testing those limits would most likely be unwise.
Go right ahead, 'deflationistas', plough into US Treasuries while the market across the ocean in the UK mirrors the US failed market. Gordon Brown and Obama would be proud! What's money? It will be worth more every day, right?
See Martin Hennecke, Tyche Investments, for some real commentary.
Be wary about the "can't have price inflation without wage inflation" argument. Zimbabwe recently printed their currency to destruction with unemployment at 80%. Wages was not enough of a brake on inflation there.
rc
The word velocity is defined in terms of two other variables. It is not an independent variable. All of that discussion section is an attempt to find meaning in what is just a definition. Typical of the weaknesses of neo-classical economics.
Major inflation could easily occur if the dollar were to drop substantially in value. We do not live in a closed economic system. There is no necessary conflict between inflation and unemployment and poverty. Consider events in some third world countries in recent decades, and the German experience after WWII.
Some inflationists argue that the increase in money supply will eventually lead to inflation, with a time lag of a few years that assumes some economic recovery first. The Hosington analysis also seems to ignore this time delay effect. Others have pointed out that inflation is sometimes a psychological rather then money phenomenon; it happens when people believe it will happen.
I still do not really understand money. I still have no opinion on whether inflation or deflation will develop, and the neo-classical analysis presented did not really help me.
The problem is that once deflation grips the U.S. and global economy, it is like a virus that constantly mutates and is very hard to cure.
The Fed knows this. They also know that deflation will wreak havoc on the banking sytem which is why they will keep rates extremely low for a very long time.
Importantly, the Fed would rather err on the side of inflation than risk getting mired in a deflationary spiral.
Some of you have commented that the U.S. is an open economy and that the U.S. dollar will tumble, thus causing inflation. Be careful here because currency movements are all about expected shifts in growth and real interest rates.
If traders expect the U.S. to lead global economic growth and higher rates to start in the U.S., then the greenback will slowly gain relative to other major currencies over the next few years.
Also, the Chinese will continue to fund the U.S. current account deficit as long as they have to. Their exports just plummeted and they need U.S. consumers to start consuming again.
But watch developments in China very closely because if they decelerate further, they might devalue their currency and flood the world with cheap goods again, which is deflationary.
Let's not forget there are powerful deflationary forces out there: high consumer indebtedness, banks and shadow banks that are cutting leverage and lending, the internet, an ageing population in Europe and Japan and baby boomers in the U.S. who are increasingly worried about their retirement (and hence saving more).
And then there are mature pension funds that are shifting their asset allocation to buy more bonds.
All this to say that I am not convinced that inflation is inevitable and maybe the big surprise of the next decade will be how bonds outperform stocks.
Stay tuned, macroeconomics just got a whole lot more interesting!
Regards,
Leo
> Stay tuned, macroeconomics just got a
> whole lot more interesting!
Now there's an understatement.
I used to think the words "Pension" and "Pulse" were diametrically opposed.
Now, they're Cliffhangers!
Great post.
Tim in Sugar Hill
P.S. I'm thinking of changing my moniker from Harlem Dad to Predatory Saver.
Failing that, I'm looking forward to buying a fancy condo on 5th Ave for 100k cash. :)
Vinny GOLDberg
As many will recall, output by producers increases when prices rise and thus it simply makes sense to help rocket gas prices back towards $5.00 per gallon and to help wheat and other basic foods shoot as high as possible, because this will be good for the global corporations that need to make profits to make up for the recent loss of several Trillions in bad bets they made at the unregulated casino.
Once we get these corporate engines back up and running at high speed, we can then encourage robots, I mean production workers to spend their capital on homes that will also need to increase in price, so that they will have places to park their new SUVs, which allow them to buy $7.00 cups of coffee, and so on and so on.
I feel like Roubini here, but this too has passed, but I would like an opportunity to also add that in order for dividends to be increased at financial institutions, fees will have to increase and greater profit margins will need to be engaged, which will mean greater efficiency through the use of unregulated derivatives, i.e. global financial networks will have to pool resources to create scale and leverage to take over the world and to thus make sure that our robots are burdened by another tsunami wave of cheap and easy credit.
I need a plaster cast...
the "monetary base" is not a base for the expansion of money & credit
is inflation coming???? it is mathematically impossible to miss and economic forecast
economics deserves to be called the dismal science
I think we are already in a period of deflation. Its speed would be even greater than it is if the government were not trying insanely to re-inflate busted bubbles. BTW peak oil and supply-demand have nothing to do with the current rise in oil prices. This is the same speculative game we saw last year funded by taxpayer dollars going to BINO banks, like Goldman and Morgan Stanley.
I agree with those who say we need to look at the US economy as it fits into the world economy.
The article has a significant tell in that its only reference to indebtedness is to government debt. But it is really the overall high debt load not just the government but the whole country has that is the real killer.
Debt deflation may be what is happening now in some sectors but it hard to see how inflation more generally down the road is not going to be a significant part in how those debts are going to be dealt with.
I would be careful to claim outright that monetary policy and QE have totally failed. The effects typically show up with a lag of 6 to 12 months. However, you are right, deflation has already arrived in some asset classes like housing and the stock market, both way off their peaks.
Q1 foreclosures hit a record in the U.S., which is not supporting the thesis that housing has stabilized in any way, shape or form.
We need to see housing stabilize and unemployment stop creeping up before we can claim things have truly stabilized.
Will the U.S. inflate away its debts? They are sure trying hard but this is not going to be easy.
Meanwhile, let's not forget that the shadow banking system is just a shell of what it used to be with significantly less leverage as both investment banks and hedge funds trim it down.
Deflation will roil private equity and commercial real estate. The only true hedge against deflation is government bonds.
I will say it again, if inflation does eventually become the problem, it could be particularly nasty, because governments will be far too slow and timid about taking the hard decisions needed to remove liquidity as aggressively as they are currently expanding it.
Regards,
Leo
Finished goods start with commodities as the basic inputs in many goods. Mines that take commodities out of the ground are coming up against cost constraints that the price isn't supportive of further mining operations going forward. Already in gold you see declining mine production yearly due to the low price depressing exploration and development of new fields and the fields they do know of generally do not support development at current prices. This is occurring in other types of mines as well.
Time will tell who's right on inflation. However, I do have my money where my belief is - 100% gold in etfs, miners, and physical.