How quantitative easing works — or doesn’t (Part Seven: The contradictions inherent in QE2)
Quantitative easing embodies a number of insoluble contradictions. First, that too much work expresses itself as too little employment; second, that unprecedented abundance expresses itself as scarcity; third that the capacity to produce far in excess of human needs expresses itself as poverty; fourth that too much debt expresses itself as too little money.
There is not too little employment, but too much of the labor employed is wasted on unproductive and superfluous activity. There is not a scarcity of goods, but a scarcity of profitable demand for those goods. There is not too few means of production, but too little of it is employed to meet human needs. There is not too little money, but too little of it is created in the form of dollar denominated debt.
Quantitative easing, allegedly undertaken to eliminate unemployment, poverty, scarcity, and debt, must result not in the diminution of these evils, but in their aggressive expansion.
Since, in the simple-minded world of economists, economic growth is induced by the expansion of the quantity of money in circulation — and since this new money enters circulation only as a reflex of the same process by which it is created, i.e., by the creation of new debts — the elimination of poverty is irrationally predicated on its further expansion; on the further indebtedness of the mass of society.
In the same Orwellian fashion, the economist explains that poverty can be eliminated by progressively diverting present public and private income to the servicing of previously accumulated debts; and, that the scarcity of goods can be eliminated so long as companies relentlessly shutter their factories and eviscerate their workforces.
The stupidity of economic policy reaches its logical expression in the mind-numbing, logic defeating, assertion by Saint Paul Krugman that these social evils can be remedied only if the money held by the great mass of society is relentlessly devalued by Washington:
The Case For Higher Inflation
Olivier Blanchard, normally at MIT but currently the chief economist at the IMF, has released an interesting and important paper on how the crisis has changed, or should have changed, how we think about macroeconomic policy. The most surprising conclusion, presumably, is the idea that central banks have been setting their inflation targets too low:
Higher average inflation, and thus higher nominal interest rates to start with, would have made it possible to cut interest rates more, thereby probably reducing the drop in output and the deterioration of fiscal positions.
To be a bit more precise, I’m not that surprised that Olivier should think that; I am, however, somewhat surprised that the IMF is letting him say that under its auspices. In any case, I very much agree.
I would add, however, that there’s another case for a higher inflation rate — an argument made most forcefully by Akerlof, Dickens, and Perry (pdf). It goes like this: even in the long run, it’s really, really hard to cut nominal wages. Yet when you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts. So having a somewhat higher inflation rate would lead to lower unemployment, not just temporarily, but on a sustained basis.
The irrationality of the post-war capitalist economic system is presented in its unvarnished form by our Saint Paul in this excerpt: Employment can only increase under conditions of exchange whereby workers receive nothing for their additional hours of work; output can only rise if this output does not result in any additional consumption by the great mass of society; economic growth can be achieved through a massive infusion of new money into the economy only if that new money reduces the purchasing power of the existing money in circulation.
Quantitative easing meets these three conditions. Washington injects billions of new dollars into the economy which does not create any new output but only drives up money demand for the existing output — thereby reducing the purchasing power of money already in circulation. To the extent this new money actually increases employment, the new wages paid out are only money or nominal wages, since this money does not imply the creation of any new goods. Since no new output accompanies the creation of this new money, and since the successful injection of money into the economy presupposes the expansion of new debt, whatever new output emerges from this new employment rests on the absolute capacity of the worker to convert an increasing portion of his wages into a mere income stream to service this new debt.
Quantitative easing, therefore, is not a new policy, but the expression of the failure of the existing policy whereby the value of wages is continuously depreciated as capitals seek to forestall the fall in the rate of profit. It presupposes the debt saturation of the existing labor force, whose wages have already been exhausted by debt service. It is no longer merely the expansion of debt that Washington seeks, it is the expansion of debt denominated in dollars — to the exclusion of the debt, and, therefore, of the creation of monies, denominated in all other currencies.
Thus, from Tim Duy at the blog Fed Watch, we read this:
The Final End of Bretton Woods 2?
The inability of global leaders to address global current account imbalances now truly threatens global financial stability. Perhaps this was inevitable – the dollar has not depreciated to a degree commensurate with the financial crisis. Moreover, as the global economy stabilized the old imbalances made a comeback, sucking stimulus from the US economy and leaving US labor markets crippled. The latter prompts the US Federal Reserve to initiate a policy stance that will undoubtedly resonate throughout the globe. As a result we could now be standing witness to the final end of Bretton Woods 2. And a bloody end it may be.
Rather than a reliance on US financial institutions to intermediate the channel between foreign savers and US households, a modified Bretton Woods 2 – Bretton Woods 2.1 – relied on the US government to step into the void created by the financial mess and become the intermediary, either by propping up mortgage markets via the takeover of Freddie and Fannie, or the fiscal stimulus, or a dozen of other programs initiated during the financial crisis.
In essence, a nasty surprise awaited US policymakers – after two years of scrambling to find the right mix of policies, including an all out effort to prevent a devastating collapse of financial markets and a what Administration officials believed to be a substantial fiscal stimulus, the US economy remains mired at a suboptimal level as stimulus flows out beyond US borders. The opportunity for a smooth transition out of Bretton Woods 2 was lost.
How has it come to this? To understand the challenge ahead, we need to begin with two points of general agreement. The first is that the US has a significant and persistent current account deficit, which implies that domestic absorption of goods and services, by all sectors, exceeds potential output. In other words, we rely on a steady inflow of goods and services to satisfy our excess demand, a situation we typically find acceptable during a high growth phase when domestic investment exceeds domestic saving. The second point of agreement is that high unemployment implies that actual output is far below potential output. We clearly have unused capacity.
The collapse of Bretton Woods 2 was predictable once American workers became saturated with debt, and were unable to service existing obligations, much less expand them. But, this debt sustained the off-shoring of American industry to the low wage exports platforms of China, Brazil and Asia — which, in turn, created the trade deficit. With the debt saturation of the American worker, the entire underpinning of the system, whereby American companies moved their facilities overseas and imported their goods back to the United States to sell to an increasingly impoverished population, is now threatened by the ever declining consumption power of now jobless Americans.
The breathtaking absurdity of the systematic impoverishment of the very population whose consumption is essential to the functioning of the economy — wherein the worker is let go, his job is moved to China, yet he is expected to have the means to then purchase the product he now no longer makes — which rest on conditions that are clearly the product of a psychotic mind — that his wages are to be substituted by extension of easy credit — can only be explained by the incomprehensible delegation of the management of the process of social production to madmen who believe real wealth can be created by changing the quantity of dancing electrons at a computer terminal.
But, this is where the madmen have their last laugh: “Who,” they respond, “is talking about real wealth? We are not talking about real wealth, but social wealth, and this social wealth — this power over billions, expressed as the power to command labor — is denominated in many different currencies. It is not our intention to create real wealth, but merely social wealth!”
We are, it appears, not in the real world, but trapped in the nightmarish world of the insane, the sociopath:
Put simply, the Federal Reserve is positioned to declare war on Bretton Woods 2. November 3, 2010. Mark it on your calendars.
So perhaps Bretton Woods does not end because foreign governments are unwilling to bear ever increasing levels of currency and interest rate risk or due to the collapse of private intermediaries in the US, but because it has delivered the threat of deflation to the US, and that provokes a substantial response from the Federal Reserve. A side effect of the next round of quantitative easing is an attack on the strong dollar policy.
The rest of the world is howling. The Chinese are not alone; no one wants it to end. From Bloomberg:
Leaders of the world economy failed to narrow differences over currencies as they turned to the International Monetary Fund to calm frictions that are already sparking protectionism….
….Days after Brazilian Finance Minister Guido Mantega set the tone for the gathering by declaring a “currency war” was underway, officials held their traditional battle lines. U.S. Treasury Secretary Timothy F. Geithner and European Central Bank President Jean-Claude Trichet were among those to signal irritation that China is restraining the yuan to aid exports even as its economy outpaces those of other G-20 members.
“Global rebalancing is not progressing as well as needed to avoid threats to the global economic recovery,” Geithner said. “Our initial achievements are at risk of being undermined by the limited extent of progress toward more domestic demand- led growth in countries running external surpluses and by the extent of foreign-exchange intervention as countries with undervalued currencies lean against appreciation.”
At the same time, officials from emerging economies including China complained that low interest rates in the U.S. and its developed-world counterparts mean investors are pouring capital into their markets, threatening growth by forcing up currencies and inflating asset bubbles. The MSCI Emerging Markets Index of stocks has soared 13 percent since the start of September…
…“Near-zero interest rates and rapid monetary expansion are geared at stimulating domestic demand but also tend to produce a weakening of their currencies,” Mantega said Oct. 9. As a result, developing countries will continue to build up reserves in foreign currency to avoid “volatility and appreciation.”
Consider the enormity of the situation at hand. The Federal Reserve is poised to crank up the printing press for the sake of satisfying their domestic mandate. One mechanism, perhaps the only mechanism, by which we can expect meaningful, sustained reversal from the current set of imbalances is via a significant depreciation of the dollar. The rest of the world appears prepared to fight the Fed because they know no other path.
Bad things happen when you fight the Fed. You find yourself on the wrong side of a whole bunch of trades. In this case, I suspect it means that Bretton Woods 2 finally collapses in a disorderly mess. There may really be no other way for it to end, because its end yields clear winners and losers. And the losers, in this case largely emerging markets, [are] not prepared to accept their fate.
Stated simply, the collapse of all other currencies is being engineered by Washington, because Washington has no other choice. If it is to continue feeding off the unpaid labor of others, the cartel in Washington must expand the pool of potential debtors. The inherent contradiction expressed in QE can be temporarily held at bay only by the collapse of the dollar’s competitors.
Bottom Line: The time may finally be at hand when the imbalances created by Bretton Woods 2 now tear the system asunder. The collapse is coming via an unexpected channel; rather than originating from abroad, the shock that sets it in motion comes from the inside, a blast of stimulus from the US Federal Reserve. And at the moment, the collapse looks likely to turn disorderly quickly. If the Federal Reserve is committed to quantitative easing, there is no way for the rest of the world to stop to flow of dollars that is already emanating from the US. Yet much of the world does not want to accept the inevitable, and there appears to be no agreement on what comes next. Call me pessimistic, but right now I don’t see how this situation gets anything but more ugly.
If we are generally accurate in the analysis presented above, the coming period will see a series of currency crises sweeping the globe, as one currency after another falls victim to the Federal Reserve Bank’s quantitative easing program. The unsustainable trade deficits of Bretton Woods 2, which were only made possible by the now unsustainable debts borne by American working people, can only be resolved one of two ways: either these imbalances must give way to a global depression centered in China and other surplus generating exporters and the accompanying devaluation of their dollar denominated assets. Or, they must accept the increasing dollarization of their economies.
They do not have much time to decide.
How quantitative easing works — or doesn’t (Part Six: Austerity)
The loss of sovereign control over the national economy is experienced by every nation once the production process becomes globalized. While the United States experiences this as a relative loss of policy independence — it can no longer exercise control over its national economy without exercising control over monetary policy within the world market as a whole — for every nation other than the United States this loss is absolute.
Those who mourn this loss on the part of Brazil, Greece, Ireland, China, etc. are fools, who no more understand the nature of sovereign economic policy than they do capital in general. For these progressive simpletons, national economic policy exists in some sterile vacuum where there is no conflict between working people and a class of parasitic blood-sucking vermin who wage war against them with every tool at its disposal.
Sovereign national economic policy has never been anything more than a weapon employed by national capitals to bludgeon the working classes of every country into submission. It has always been a weapon by which these national capitals have sought to increase the extraction of unpaid labor from working people, as well as from the working classes of their trading partners.
What is it exactly that you are mourning?
The wanton brutality and naked economic violence with which the Argentine national capital, in collusion with Washington and the IMF, plunged the working people of that nation into abject poverty — and left them turning over garbage for something they could sell to recyclers?
The vicious and unconscionable assault on the working people of the Soviet Union as the elite managers purloined the national infrastructure and turned over the population to the tender embrace of KGB thugs, and, US and European finance capital?
As that failed Tea Party hopeful Christine O’donnell might say: “You muthafuckin’ leftists had better put your man-pants on!”
All that has occurred here is that the collusion between national capitals — as, for instance, in the case of Chinese state capital — and Washington, that marked the long period of economic expansion prior to this crisis, has, with this crisis, broken down as former partners now seek to minimize their share of the losses created by it.
This battle, as in every battle of this sordid kind, is decided by the advantage of position and historical circumstance — which advantage lies with Washington owing to the fact that the previous period of collusion (in which Chinese manufacturers fed the hungry maw of American consumption) was made possible by the dollar’s role as world reserve currency. So long as the United States owned the world reserve currency it could run unlimited trade deficits and, thus, act as consumer of last resort for ill-made, defective, and dangerous Chinese output.
The entire history of the previous expansion consists of the transfer of worthless American debt assets to nations that, in turn, transferred their badly made manufactured products to the US in return. This expansion was only a veil behind which these nations concealed their actual loss of sovereign economic policy with a flood of worthless dollar denominated dancing electrons.
The predatory, vile, and despicable nature of this collusion is only gradually being uncovered when, as in the case of Greece, billions in now worthless public debt is being used to extract a still greater magnitude of unpaid labor from the European working classes, and as working people, so deeply damaged by the meat-grinder of endless sweatshop labor, would rather throw themselves from the rooftops of Chinese factories than endure one more minute of this relentless torture.
The unconscionable press of globalization has broken the bodies of millions of working people, left them destitute and mired in poverty, and rendered them depraved of both moral shame and social empathy — it has turned Eastern Europe into the brothel of Germany, France and Britain, promoted the sale of Southeast Asian children to sexual predators, and given birth to Africa’s latest contribution to the lexicon of inhumanity: the blood diamond. A year after Haiti was demolished by an earthquake her working people remain in tent cities surrounded by human waste and cholera infested waters.
Is there any wonder that after the collapse of global production we now find this little snippet from today’s Financial Times in which London, in a fit of Tea Party-inspired austerity, proposes to press the unemployed into work gangs:
Unemployed face compulsory labour
By Jim Pickard, Political Correspondent
The long-term unemployed could be forced to carry out manual work to retain their benefits under plans to be announced within days.
Iain Duncan Smith, work and pensions secretary, will announce the plan as part of his welfare shake-up to be set out in a white paper on Thursday.
Under his idea, those who have been out of work for a certain time may have to take up four-week placements – at 30 hours a week – to get them used to having a full-time job. If they refuse to take the programme, or fail to complete it, their jobseekers’ allowance of £64.30 a week would be stopped for three months or more. The jobs are likely to be provided by a mix of private companies, councils, charities and other voluntary groups.
However, it is not clear yet whether officials have worked out the potential cost of the scheme, which will inevitably involve a high level of bureaucracy and administration.
The US-inspired idea is part of major reforms by Mr Duncan Smith to reduce the welfare bill and cut a “culture of dependency” in some parts of the country.
”The message will go across; play ball or it’s going to be difficult,” Duncan Smith told the Telegraph newspaper. “One thing we can do is pull people in to do one or two weeks’ manual work — turn up at 9am and leave at 5pm to give people a sense of work, but also when we think they’re doing other work.”
However, the minister will stop short of the American system where benefits are withdrawn entirely after a certain period.
The plan is part of a wider scheme to simplify the complex web of benefits available, to reduce errors and inefficiencies.
His new “universal credit” will roll benefits such as housing, income support and incapacity into a single welfare payment. Key to this is a desire to prevent a “dependency trap” whereby it is more lucrative for some to stay out of work.
Mr Duncan Smith has said the existing system was regressive and not giving people the right incentive to work.
”We will shortly be bringing forward further proposals on how to break the cycle of dependency blighting many of our communities and make sure work always pays,” a spokeswoman for the Department for Work and Pensions said.
With France and Greece extending the working lifetime, with Spain and Portugal introducing “flexibility” in work rules, and government around the world selling public assets to balance their budgets, how soon will a proposal surface for a return to the virtuous manners of the Victorian Age, and the resurrection of the workhouse.
Here is the future of national economic policy — here is the future of progressive economic thought: the unyielding press to reduce consumption to the narrowest possible confines in order to fill the coffers of a bankster mafia cartel headquartered in Washington.
Naked Capitalism: Some form of global central planning may be necessary…
In an ironic twist to the growing realization that this crisis is far from over despite the glad-handing in Washington on having barely escaped Great Depression II, Yves Smith, of Naked Capitalism, yesterday suggested that some form of central planning – similar to the collapsed Soviet Union – may be necessary to avoid the economic calamity separately predicted by Peter Boone and Simon Johnson, and by Martin Wolf.
China, the United States, and 20 million zombies
(Revised)
The relationship between these two big guns of global market has been covered by many writers, and, inevitably, their examination boils down to one of two classes of observations:
- Buyer and Seller: This is a simple, straightforward relation: China sells us 42 inch high definition wide screen plasma televisions; we sell them Boeing 757s. The only thing remarkable about the relationship is that the total value of plasma televisions seem to be consistently greater than that of 757s, which is to say, the US runs a persistent trade deficit.
- Creditor versus Debtor: This relationship is based on the above relationship: because the US runs a persistent trade deficit with China, China accumulates IOUs, in the form of US treasuries and other financial instruments.
Everything economics has to say about this relationship seems to rest on these two facts. However, as we have seen in the case of our prodigy Raj Chetty, assumptions regarding these two facts can miss much of reality.
In your case, if you are unemployed, economic models assume it would be better off for the economy if you were left to starve and die. Chetty has countered with the obvious objection: “But, who would pay their bills?”
(We’re talking Nobel Prize stuff here, people.)
After note on “The confirmation of Saint Paul”
A chart stolen from Mish’s blog:
Saint Paul finishes his piece on a dreadfully ominous note:
And despite the praise being handed out to those who helped us avoid the worst, we are not handling the crisis well: fiscal stimulus has been inadequate, financial support has contained the damage but not restored a healthy banking system. All indications are that we’re going to have seriously depressed output for years to come. It’s what I feared/predicted in that 2001 paper: “[I]ntellectually consistent solutions to a domestic financial crisis of this type, like solutions to a third-generation currency crisis, are likely to seem too radical to be implemented in practice. And partial measures are likely to fail.”
We should point out that it is only intellectually consistent to demand ever greater US public and private debt if ever greater debt is a possible route out of this mess.
It isn’t. Krugman’s statement never addresses the underlying problem, which is only superficially a financial one.
Properly restated, the Krugman model requires that one nation – the owner of the world reserve currency – must function as the net importer of the global surpluses being generated in those nations whose the national governments seek to pursue some economic policy goal. For instance, if China is to pursue its internal development with export-led growth, the United States has to accommodate this by converting Chinese exports into American imports. By the same token, if the US wants to pursue unrivaled military supremacy, Full Spectrum Dominance in global relations, it must accept that its manufacturing base will eventually be forced offshore – that, in the words of Peter Dorman, the less developed regions of the planet must be turned into export platforms – low-wage industrial parks for American capital.
The relationship is not, therefore, a one-way street. While it is true that China must constantly extend to the United States ever larger sums of credit, which are then wasted on newer and more horrible means of destroying life, it receives, in exchange, the means to increase the productive power of Chinese labor – which increase adds to the profits of both American and Chinese capital. The United States is exploiting China, but China is given, by this exploitation, enhanced capacity to exploit Chinese labor in the exchange.
(Both sides profit by it, and all the Academy Award level performances by Chuck Schumer – condemning China’s manipulation of its currency – which never quite reach the level of actual legislative action despite his vociferous finger wagging, are staged for your enjoyment alone. It is great T.V., but little more than that, since Schumer, as much as anyone, knows how necessary it is for China to subsidize the US Empire, so that the US Empire can subsidize the Zionist apartheid state).
The result of this economic circle jerk between the various states of the world market and the United States was/is the constant increase of global productive capacity, which augmentation has to be met by ever increasing flows of credit to the United States, generating swelling asset prices, and permeating the economic environment with the most sordid ponzi schemes. The dependence of growing productive capacity on ever increasing levels of debt is a flaw, a fault line running along the economic landscape which had to give way, sooner or later.
This appears to explain both the steepening upward curve in the addition of consumer credit seen from the late 1950s forward (and which suddenly exploded upward during the mid-1990s) and, the proliferation of a confusing assortment of new financial instruments packaged to move the risk of this dangerously volatile debt off the books of the big investment houses of Wall Street and into the hands of “dumb” money – pension plans, endowments, and the like.
The dangerous dependence on consumer and public debt to finance economic growth, the astonishing inflation of asset prices, and the proliferation of derivatives – what Buffet called financial weapons of mass destruction – were only symptoms of the most staggering expansion of the productive power of labor yet seen in human history, which expansion is today sounding the death knell for work itself. And all the filthy muck – the avarice, exploitation, and parasitism which passes itself off as high society – will die with it.
Work is dead, we think. And events in China and the United States will demonstrate this.
Death spiral…
A good piece by Robert Reich on the dilemma of the US-China relationship, which reiterates the point we made in our letter to Jo Jordan: Disaster is inevitable, because export oriented nations like China and Germany will not reduce their hours of work, and the debt-soaked US Empire will not stop absorbing the surplus produced by the former, which makes its own too long work week possible.
Both America and China are capable of producing far more than their own consumers are capable of buying. In the U.S., the root of the problem is a growing share of total income going to the richest Americans, leaving the middle class with relatively less purchasing power unless they go deep into debt. Inequality is also widening in China, but the problem there is a declining share of the fruits of economic growth going to average Chinese and an increasing share going to capital investment.
Both societies are threatened by the disconnect between production and consumption. In China, the threat is civil unrest. In the U.S., it’s a prolonged jobs and earnings recession that, when combined with widening inequality, could create political backlash.
(Side note: For Reich the problem in China is capital, while in the US the problem is income. What the American pundit can admit with regards to other nations – that the share of social product going to capital is far too large – can never be admitted with regards to the identical problem in the United States. Here, the problem is merely too much income going to the very richest Americans – discreetly disconnected from the fact that these richest Americans own the very largest companies of the global markets. They too are capitalists, but to acknowledge what is clearly obvious would immediately stamp Mr. Reich as a god-damned dirty communist! Understand also, that this is evidence of the ideology we here at the blog have correctly labeled fascism to the great consternation of the occasional indoctrinated reader. Above all the fascist state does not recognize class differences within the nation, preferring only to emphasize the common national identity of all internal classes.)
What is so fascinating in this article is Reich’s identification of the culprit on both sides of this unsustainable relationship:
Even as the U.S. government was bailing out General Motors and Chrysler, the two firms’ sales in China were soaring; GM’s sales there are almost 50% higher this year than last. Proctor & Gamble is so well-established in China that many Chinese think its products (such as green-tea-flavored Crest toothpaste) are Chinese brands. If the Chinese economy continues to grow at or near its current rate and the benefits of that growth trickle down to 1.3 billion Chinese consumers, the country would become the largest shopping bazaar in the history of the world. They’ll be driving over a billion cars and will be the world’s biggest purchasers of household electronics, clothing, appliances and almost everything else produced on the planet.
Ahhh! Your tax dollars at work. A shit-sandwich prepared for you by Uncle Sam using your own bread. (Pun intended.)
We have indeed moved beyond the point where production was moved to maquiladoras in Mexico so that low cost products could be sold into the American market at a considerable markup to displaced former workers, now employed by McDonalds. This phase of globalization, coming on the heels of a rising flood of unemployed in the United States, has made itself at home in low wage China expressly to exploit its fast growing consumer market, subsidized by your tax dollar.
But, you knew why wages were low in China don’t you? No?
It is because the US is so productive and the cost of labor so insignificant, that China can only be competitive if its own wages are abysmal.
But, now your wages are headed face first into the toilet, and that means you won’t even be able to afford the low cost goods produced in China at the increasing rate you did before. So American companies have been forced to focus on the Chinese consumer in order to salvage their profit margins. Companies will now produce in China for both the American and Chinese markets, and watch their profits fatten as your wages shrink.
American firms are now helping China build a “smart” infrastructure, tackle pollution with clean technologies, develop a new generation of photovoltaics and wind turbines, find new applications for nanotechologies, and build commercial jets and jet engines. GM recently announced it was planning to make a new subcompact in China designed and developed primarily by the Pan-Asia Technical Automotive Center, a joint venture between GM and SAIC Motor in Shanghai. General Electric is producing wind turbine components in China. Earlier this month, Massachusetts-based Evergreen Solar announced it will be moving its solar panel production to China.
Capacity in China is rapidly increasing, but despite a growing consumer market there is no outlet for most of this newly produced capacity at present.
China’s capital spending is on the way to exceeding that of the U.S., but its consumer spending is barely a sixth as large. Chinese companies are plowing their rising profits back into more productive capacity—additional factories, more equipment, new technologies. China’s massive $600 billion stimulus package has been directed at further enlarging China’s productive capacity rather than consumption. So where will this productive capacity go if not to Chinese consumers? Net exports to other nations, especially the U.S. and Europe.
The result, a rising floating population of unemployed in the United States, but rising even faster in China.
Each year, tens of millions of poor Chinese pour into large cities from the countryside in pursuit of better-paying work. If they don’t find it, China risks riots and other upheaval. Massive disorder is one of the greatest risks facing China’s governing elite. That elite would much rather create export jobs, even at the cost of subsidizing foreign buyers, than allow the yuan to rise and thereby risk job shortages at home.
This is an explosive process which could be averted simply by reducing working time.
But it won’t, so hang on.
Saint Paul loses it…
Paul Krugman had a little fascist temper tantrum today in the New York Times.
The object of his inflamed state is China, who, Paul tells us, is depreciating the yuan to gain an unfair advantage over its competitors.
How is it engaged in this unfair competition?
It is linking its currency to the dollar, and as the United States lets the dollar depreciate against its competitors, China is profiting from this unfair advantage-seeking by the US.
It is all so unfair.
China has always done linked the yuan to the dollar, and it is completely understandable, since, as Paul admits:
There’s nothing necessarily wrong with such a policy, especially in a still poor country whose financial system might all too easily be destabilized by volatile flows of hot money. In fact, the system served China well during the Asian financial crisis of the late 1990s. The crucial question, however, is whether the target value of the yuan is reasonable.
Saint Paul is being disingenuous: It was okay for China to accumulate reserves of US dollars back in 1997 when one nation after another was going belly up for lack of dollars, but its continuing accumulation at this point is somehow wrong today.
And, pray tell us, Mr. Krugman, what was the result of the financial meltdown? Was it not that numerous countries were starved of dollars again, and needed to be bailed out by Washington? Was it not that China, and a handful of other countries, having accumulated dollars well in addition to what was seen as reasonable, were able to stabilize their national economies in the midst of this crisis by drawing down on those accumulated reserves?
Of course it was.
Was China supposed to stand by and hope that, as the US bailed out not only it biggest banks and it preferred partners, it would also get around to bailing out China’s swollen export sector – an export sector which had spent the last few years providing consumer goods to the US free of charge?
If, as the dollar lost value, China exports cut through Euro-zone capacity like a hot knife through butter, who’s fault was this – China, who was seeking only to insulate its industry from vagaries of US monetary policy, or the US, who was using dollar devaluation to impose an imperial tax on its trade partners?
According to Krugman:
If supply and demand had been allowed to prevail, the value of China’s currency would have risen sharply. But Chinese authorities didn’t let it rise. They kept it down by selling vast quantities of the currency, acquiring in return an enormous hoard of foreign assets, mostly in dollars, currently worth about $2.1 trillion.
Now this is coming from an economist who has called on the US to further flood global economy with dollars above the $2.8 trillion already spent to bail out Goldman Sachs, the auto industry, and state governments. Note the amount: $2.8 trillion – which is provided by CNN – spent so far on the crisis. In other words, in less than two years, the US has pumped more dollars into the global economy than entire accumulated reserves of China, and this (unlike China) without producing a single new object that could be eaten, worn, or occupied by a human being!!!
A flood of worthless paper greater than the accumulated wealth of the largest single holder of American fiat in roughly 18 months!!!
*****
Again from Paul:
Many economists, myself included, believe that China’s asset-buying spree helped inflate the housing bubble, setting the stage for the global financial crisis. But China’s insistence on keeping the yuan/dollar rate fixed, even when the dollar declines, may be doing even more harm now.
This is typical of the American Fascist argument: The US floods the world with worthless fiat dollars, but it is China that is responsible for the American housing bubble.
How the fuck did that happen?
Who the fuck in Compton or Saddleback went to China and financed their sub-prime home purchase with dollars earned by China through the sale of tainted sheet-rock?
Let’s find that mother-fucker and string him up.
And, let’s also find and beat the asshole who called for a housing bubble to replace the collapsed internet bubble.
Russia’s terrible miscalculation…
The extent of the Russian miscalculation in Georgia is completely revealed by the following excerpt:
[T]he Russians have backed the Americans into a corner. The Europeans, who for the most part lack expeditionary militaries and are dependent upon Russian energy exports, have even fewer options. If nothing else happens, the Russians will have demonstrated that they have resumed their role as a regional power. Russia is not a global power by any means, but a significant regional power with lots of nuclear weapons and an economy that isn’t all too shabby at the moment. It has also compelled every state on the Russian periphery to re-evaluate its position relative to Moscow.As for Georgia, the Russians appear ready to demand the resignation of President Mikhail Saakashvili. Militarily, that is their option. That is all they wanted to demonstrate, and they have demonstrated it. The war in Georgia, therefore, is Russia’s public return to great power status.
This is not something that just happened – it has been unfolding ever since Putin took power, and with growing intensity in the past five years. Part of it has to do with the increase of Russian power, but a great deal of it has to do with the fact that the Middle Eastern wars have left the United States off-balance and short on resources. As we have written, this conflict created a window of opportunity.
The Russian goal is to use that window to assert a new reality throughout the region while the Americans are tied down elsewhere and dependent on the Russians. The war was far from a surprise; it has been building for months. But the geopolitical foundations of the war have been building since 1992. Russia has been an empire for centuries. The last 15 years or so were not the new reality, but simply an aberration that would be rectified. And now it is being rectified.
The writer believes the Americans to be outmaneuvered by the Russians, owing to the American problem wars in Iraq and Afghanistan.
Nothing could be further from the truth.
The role of the dollar is key here, as we will show this when we return to the piece. With the dollar, Washington command not only the economic strength of the US, but of all countries which use the dollar to complete trade transactions.
Obama has promised to increased the military by 90,000 troops, McCain has promised an equal measure of increase. Added to this is Secretary of Defense Robert Gates plan to “counterbalance what the secretary sees as the U.S. Defense Department’s natural tendency to focus excessively on winning conventional conflicts rather than ‘irregular wars’ such as those in Iraq and Afghanistan.”
The actual increase will likely be much more than this. Why?
As you know from this little series we have been writing, business is good for war.
The present cascade of economic difficulties the US is now experiencing would have been diagnosed by Keyserling, the economic architect of NSC-68, as resulting not from too much military spending, but too little.
Keyserling estimated the US timidity to go all out with a really aggressive military build-out resulted in the loss of “…8 trillion dollars worth of GNP and about 85 million hours of civilian unemployment…” between 1953 and 1981.
The American economy is hollow, consisting of nail salons, restaurants, real estate and financial speculators, and millions of employees who spend all day moving emails from their inbox to folders under their inbox.
Increasingly, China and the rest of the world provide an ever larger percentage of what Americans consume; and, the dollars exported through trade return to the American economy as loans for ever more consumption.
The Americans can, in other words, provision themselves with very little effort, while amassing astonishing military power. There are sufficient manpower resources to undertake a massive military buildup without causing the slightest impact on American consumption.
The self-deluding Russia leadership believe it is confronting the United States at the limits of the latter’s power – that the US will back down owing to its draining wars of occupation. They have, in fact, merely positioned themselves to be an object lesson for China and any other challengers.
Russia has tragically misread global power relations; it has engaged in a hopeless battle against the economic power of an entire planet which effectively sit in hands of Washington.
Did Washington crash the economy trying to quietly support the export of manufacturing jobs?
China's share of the US trade deficit
Replacing Paul Krugman’s incomplete model of why governments pursuing their domestic economic policy goals must have a trade surplus, with our own model – that Krugman can only be correct if there is one country – the holder of the reserve currency – that can act as the global net importer of global surpluses – we have tried to show, at least in theory, that the result of this essentially imperial model of global trade is the loss of manufacturing jobs in the United States, as these jobs are forced off shore by a growing glut of capacity in places like China.
Now, Yves Smith has posted an important article to Naked Capital trashing Chairman Ben Bernanke’s justification for Federal Reserve policy in the run up to the Great Recession, which, we believe, lends further credence to our model of the American Dollar Empire, and which points to the Wall Street financial crisis as a massive collapse of the essential mechanism funding that empire. Read more…