How Quantitative Easing really works: Occupy Wall Street Edition
Since Occupy Wall Street appears to be undertaking a concerted push toward addressing the growing debt servitude of the mass of working families to Wall Street banksters, I thought it might be interesting to understand how the Federal Reserve is now doubling down on a policy of manufacturing an even greater debt burden for working families under the guise of stimulating the economy.
Comments and suggestions for improvement to this post are welcomed.
On the myth no one could have predicted this crisis
I am reading a very interesting paper by William White on quantitative easing, who in this paper warns quantitative easing just might be a disaster in the making. White, who has worked as a researcher for the Bank of England, Bank of Canada, and the Bank for International Settlements, is said to be one of the few bourgeois economists who actually predicted the 2008 crisis. Here is a Der Spiegel article on his prediction of the financial meltdown: “The Man Nobody Wanted to Hear”
First, let me say I am not sure if I am buying the mainstream narrative that suggests no one saw the 2008 financial crisis coming but a few wise guys. For instance, people working in many different academic traditions warned a crisis was approaching. Robert Kurz saw it coming in 1995, and the bourgeois heterodox economist Hyman Minsky did as well — both long before the crisis actually erupted. I think that the opposite is rather more likely: everyone knew the meltdown could happen, but figured they could deal with the consequences. That would explain why Bernanke was brought on to the Fed board in 2002 and made chairman shortly thereafter. If true, this implies the Fed has been running policy like a bunch of cowboys since 1971.
Still, I am enjoying this paper because White asks two important questions:
“First, will ultra easy monetary conditions be effectively transmitted to the real economy? Second, assuming the answer to the first question is yes, will private sector spending respond in such a way as to stimulate the real economy and reduce unemployment? It is suggested in this paper that the answer to both questions is no.”
The problem with White’s criticism of quantitative easing, however, is that he treats it as a matter of a policy preference, not as an act of desperation. He should be familiar enough with the corridors of power to know people are entirely aware of the insanity of this “policy”. If, as White states, the Fed has a choice between “the unpalatable and the disastrous” logic implies they have chosen the unpalatable. Which implies a policy that risks hyperinflation or deflation is preferable to one that offers an even worse outcome.
I do not think it is rational to assume the Fed is deliberately choosing a course of action that ends in disaster, which means the Ben Bernanke’s Fed chose a third round of quantitative easing knowing that it risks disaster but considering this action was better than not acting at all.
White gives us two questions to consider: 1, Will the policy be transmitted to “the real economy”, 2. will it generate employment? There is a third, unasked question: does the Fed have a choice in the policy it sets, or is this policy imposed on it? Anyone who has been in a car sliding out of control on ice knows the absence of effective braking does not make not braking an alternative. You keep your foot on the brakes and pray for traction before you reach that tree. That is basically what the Federal Reserve is doing with quantitative easing.
I think the analogy of a car sliding out of control is apt in White’s argument for a very good reason: Marxists and the Left in general have a theory of capitalist stagnation that I have criticized in the past here. This stagnation theory argues capitalism has now entered a phase of permanent stagnation marked by slowing employment and output growth and stagnant wages. The stagnation thesis would lead us to believe the policies of the fascist state are designed to “jump start” or stimulate growth. Once this stimulation has succeeded, capitalism would (the theory argues) return to a path of normal accumulation.
This is not, in fact, a theory consistent with Marx’s labor theory of value, it is a slightly warmed over version of bourgeois economics. The opposite is true: rather than suffering from stagnation, capitalism is hurtling toward its demise as the fascist state frantically tries to prevent total collapse. The so-called stimulative policies of the Federal Reserve, are actually policies designed to maintain existing relations of production that are being undermined by the development of the productive forces.
By treating capitalism as having entered a phase of stagnant growth, Marxists are actually importing bourgeois economics into labor theory. This view simply treats the Federal Reserve as White does: as an incompetent manager of capitalism. More important considering where we are today in this crisis, this view measures the development of productive forces of society in terms of the growth of employment and output — exactly reversing Marx’s approach to the analysis of the mode of production. The question posed by this dominant Marxist view is how to restart employment growth, not how to wrest the disposable time of the mass of society back from commodity relations.
The Marxist error also explains why heterodox economists, like Steve Keen, freely intermix this distorted application of Marx’s theory with Austrian economics. In order to really understand White’s critique of Federal Reserve policy, it is necessary to understand both White’s and mainstream Marxism’s approach is based on a model that completely inverts what is actually happening. The Federal Reserve is not trying to stimulate growth — i.e., facilitate expansion of the productive forces — but trying to retard them. In particular, White’s critique assumes that if the Fed does nothing (or as little as possible), capitalism will stabilize.
With this in mind, let’s look at White’s critique.
According to White, central banks across the advanced industrial economies are now engaged in ultra-easy monetary policy. This policy is the result of encountering the “zero lower bound” of “conventional” monetary policy practiced since the Great Depression. Central banks have been forced to hold rates lower for a longer period than at any time since monetary policy was first undertaken.
The zero lower bound of interest rates is the lowest interests rates can go in conventional monetary policy — zero rate of interest; after this 0%, interest rates policy is seen to be no longer enough. If we think of interest rates as the “price” of loaned capital, it will make it a bit easier to understand what is going on. At a zero interest rate, loaned capital is essentially being handed out free of charge.
If, as White explains, the Fed encountered the zero lower bound of policy, he is suggesting even capital loaned out free of charge is too expensive. White is saying, even free loaned capital has no takers, and the financial system must actually pay capitalists to borrow capital. Since the interest on the loaned money is paid from the total surplus of productively employed capital, this suggests even at zero interest rates there is not enough profit left over for productively employed capital.
This argument tends to support the claim of Andrew Kliman against Dumenil and Levy that the profit rate has been falling. not rising. Moreover it suggest, the profit rate generally is near or even below zero right now. Which is to say, capitalism is now teetering on the edge of collapse.
After passing the phase of contraction of credit in 2008-2009, which threatened the collapse of the financial system, the Federal Reserve made a new argument for keeping interest rates at zero. The policy was now necessary to “to restore aggregate demand”, i.e., to stimulate employment growth.
White gives two reasons for this policy: 1. historical scholarship alleged interest rates had been too high during the Great Depression; and, 2. Governments were concerned about the use of state sector fiscal demand on the accumulation of public debt during the crisis. Models of the economy, however, suggested that if monetary policy was to be relied upon, interest rates had to be negative.
It should be noted here that “interest rates” mean “real interest rates”, that is, nominal rates plus inflation. If the nominal interest rate is zero and inflation is 2%, the “real interest rate” is minus 2%. This is why that darling of the progressive “Left”, Paul Krugman, keeps demanding the Fed do more to target the rate of inflation.
For what it is worth, “targeting the rate of inflation” basically means more forcefully depreciating the purchasing power of the currency by printing it. Printing money is essentially what is done whenever new currency is created through debt. The question is who will incur this debt? If states are unwilling to create it, then citizens must be encouraged to do it. This is what ultimately led to the subprime crisis and the great financial crisis in the first place. The fascist state basically tried to facilitate private accumulation of debt until the whole Ponzi scheme collapsed in 2008. Assuming my argument is true, the Federal Reserve is currently engaged in doubling down on an already failed policy.
It should also be noted here that so-called fiscal policy has not been completely silent — federal debt accumulation has more than doubled. For all the noise about deficit control, the state has been forced to expand its debt just to keep capitalism on life support.
For White, this raises profound questions about the long term impact of the current policies. In the long term, it is generally agreed that ultra-easy monetary policy is not sustainable, so the argument for it focuses on short-term advantages. In the long term, according to the Austrian school this will lead to what they call malinvestment, and others argue it might even lead to a “balance sheet” recession itself. According to White, research suggests it can even lead to financial instability, and unpredictable systemic breakdown, which would result, eventually, hyperinflations or deflations.
The balance of the argument for quantitative easing, therefore, has been on the short-term advantages, that are argued to be greater than the long term calamities.
According to White, this may be a grave mistake:
“…the arguments presented in this paper then logically imply that monetary policy should be tightened, regardless of the current state of the economy, because the near term expected benefits of ultra easy monetary policies are outweighed by the longer term expected costs. Undoubtedly this would be very painful, but (by definition) less painful than the alternative of not doing so.”
From our point of view, of course, White is doubly correct in this assertion, since the only short-term advantage to Fed policy is to extend the life of outmoded capitalist relations of production.
There is nothing “traditional” about monetary policy
Any time someone speaks of “traditional” or “conventional” monetary policy, you should understand they are living in a dream world. “Traditional” clothing like the Nigerian Boubou dates back to the 8th Century according to Wikipedia. Traditional teachings of the ethical and philosophical system of Confucianism is said to date from an even earlier 551 BC according to the same source. By contrast, what is often referred to as “traditional” monetary policy, and indeed monetary policy itself, ‘dates back’ to the middle of the 20th Century. There are people discussing “traditional” monetary policy of central banks who were born well before such a “tradition” even existed. The phrase “traditional monetary policy”, therefore, is about on par with the phrase “traditional television sitcoms”. It dates, in other words, to the emergence of the fascist state from the rubble of World War II.
William White employs this construct as if it is not an historical absurdity; he wants to treat monetary policy as if it is some ahistorical thing that has more or less existed since mankind stood upright. As a result, we are not required to consider how and under what circumstances monetary policy becomes both possible and necessary.
Indeed, even the absence of monetary policy itself in the Great Depression is portrayed as a defect. White writes:
“In part, this was a response to the prevailing orthodoxy that monetary policy in the 1930′s had not been easy enough and that this error had contributed materially to the severity of the Great Depression in the United States.”
In fact, at the time of the Great Depression there was no monetary policy to think of, since money had not yet split into the antithetical forms of fiat currency and commodity money — only during the Great Depression did this occur. And this split was not completed until 1971 when the Bretton Woods agreement finally collapsed freeing fiat currency entirely from gold within the world market.
“Monetary easing” as such did not exist as a policy, and prior to the Great Depression was called by its “traditional” name debasement. What is today called monetary policy was prior to the Great Depression called fraud or debasement of the currency, and considered a form of theft from the rest of society. How and under what circumstances this debasement, a fraud practiced by the state and banksters, but also by ordinary citizens, became “policy” is a question that deserves examination.
In section B of his paper, White treats this fraud as a permanent state policy concerning the value notionally represented by fiat currency. And he discusses how it works and the problems it encounters following the financial crisis of 2008. While this fraud is commonly labeled Keynesian, Keynes himself never thought such policies could, by themselves, end a depression. Since Keynes did not believe currency debasement had this capacity, two questions have to be answered. Can debasement of the currency be effectively transmitted to the “real economy”? And, if it can, will this debasement “stimulate” business activity and reduce unemployment.
First we know, from the examination of White’s previous section, debasement is not designed to “stimulate” anything, rather it is designed to slow the process of capitalist collapse and redistribute wealth from the mass of society to the fraudsters. And we can surmise from White’s own questions that this slowing takes the form of increased business activity and hiring. Given this, we can assume debasement of the currency is designed to increase business activity and employment, in order to slow the collapse of capitalism itself.
Since capitalist business activity and hiring is solely regulated by profit, the question is how debasing the currency improve profitability. So what we will be looking for in section B is exactly how the fascist state subsidizes profits to slow the collapse of capitalism through currency debasement.
How Washington subsidizes profit though currency debasement
The first question White addresses is can Federal Reserve debasement efforts be realized in an actual debasement of the currency? To address this problem, White looks at the so-called transmission channels of monetary policy, which can be summarized in six questions:
- Will efforts to lower short-term interest rates paid by the fascist state lower longer terms interest rates it pays?
- Will lower interest rates paid by the fascist state lower interest rates for non-state borrowing?
- Will lower interest rates be offset by lower inflation (remember real interest rates equal interest minus inflation — so lower inflation actually increase real interest rates).
- Will debasement result in greater exports by weakening the currency against other currencies — making imports more expensive and exports cheaper?
- Will debasement result in higher prices for “assets” like homes and claims to future profits like stock shares.
- Finally, will different policies by various central banks offset each other in a world market that is growing in influence.
White thinks the answers to all of these questions makes it unlikely Federal Reserve efforts to debase the currency will be effectively transmitted to the rest of the economy. The real question raised by White’s analysis, however, is not why he thinks the policies will be ineffective, but why the Federal Reserve thinks they might work. Behind quantitative easing is the assumption that debasing the currency will lead to higher prices for assets, imports and commodities. The further assumption is that higher prices for assets, imports and commodities will subsidize the profitability of wage slavery. In the case of each category, assets, imports and commodities, of course, White offers some specific reasons why this may not be true.
The real worth of White’s examination, however, is how debasing the currency actually works as a subsidy to capitalist relations of production. He shows, in other words, why inflation has never been an accident, but a deliberate policy of the fascist state to slow the collapse of capitalism; and this exposure comes not from a rather mediocre blogger with too much time on his hands, but from an insider who has been in policy circles his entire career.
Next White turns to the question of whether debasement of the currency will actually produce “economic growth”. According to White:
“Conventional thinking is that lower interest rates will encourage households to save less (and consume more) and will encourage companies to invest more.”
Which is to say, debasement of the purchasing power of the currency forces working people to spend more of their income and save less and encourage companies to increase their investment. Both of the effects working families and the effects on businesses are treated as working together in response to higher prices, but this is actually misleading. Higher prices do not by any means have the same impact on businesses as they have on the workers employed by those businesses.
If we assume no change in the wages of the workers, higher prices mean wage costs to businesses remain flat, while the prices businesses charge for their commodities purchased by these same workers increase. Debasement, under these conditions, would itself result in the redistributive shift of the total social product from labor to capital. But since this shift is the entire aim of Federal Reserve policy in the first place, this is not considered by White to be a problem.
It is interesting in this section of White’s paper that he deals with the effect of debasement in forcing working families to save less and spend more, not just because it reveals the source of the collapse of the savings rate just prior to this crisis, but also because it reveals how the savings of the worker is also a potential source of profits for capital. The life saving of the working class, whether in the form of a personal saving account, 401Ks, defined pensions, or social security each represent a potential source of surplus value that, in the present crisis, can be raided by the fascist state to subsidize profits. All that is required is an effective set of monetary, fiscal and administrative policies to wrest these savings from the working class. These include not only deliberate debasement of the currency, but also include administrative efforts like raiding the Social Security trust fund, and raising retirement.
What makes White’s argument so fascinating and illuminating is that he is not some “emoprog” crying over the betrayal by the Fascist State of some nonsensical notion of fairness and social justice. Essentially he is a cold blooded technocrat who would likely have no problem with forcing 70 year old grandmothers back into the workforce if he thought it could produce another penny of profit. His argument suggests even if the fascist state could get seniors back assembling automobiles, while sitting in their Hoverounds, it would likely not fix the problem. White states:
“To summarize, there are significant grounds for believing that the various channels through which monetary policy might normally operate are at least partially blocked. Moreover, there are also grounds for belief that neither household nor corporate spending would react as vigorously as in the past, even if the traditional transmission channels were functioning properly.”
In other words, since quantitative easing was only undertaken because deliberate debasement of the currency through working class debt accumulation alone collapsed in this crisis, it is not likely this debasement can be revived with ultra-easy money policies like quantitative easing driving working families to accumulate even more debt.
If this conclusion is accurate, White warns, quantitative easing will only have negative results; an aspect I will turn to in the next segment.