Archive

Posts Tagged ‘economic growth’

Kicking Capitalism Down the Road: Occupy Wall Street and Debt

October 1, 2012 Leave a comment

The entire point of bourgeois misdirection in this crisis is to convince us that our choices are between debt or unemployment — that is between “growth” and “austerity”, and between taxes and reductions in our pensions, social security, and wages; that is, a choice between “kicking the can down the road”, or “taking our medicine now”.

It is important that the debate be framed this way, because these are the only two options consistent with existing relations of production. Since these choices are both consistent with existing capitalist relations of production, the fascist state does not care which option you choose. Just as Washington does not care whether Obama or Romney wins the next election, it does not care whether this crisis is resolved by debt or unemployment. You are free to make your choice based on what feels right to you — letting people go years without a job, or piling up the public debt.

Your choices are posed in this way because it is assumed you have already accepted the premise of these choices: It is assumed you have accepted the idea that this crisis can only addressed at your expense. You have, therefore, accepted the premise that you must either take the hit to your standard of living now, or in the future. Whether you take the hit now or in the future, you accept that this is the only way forward.

This is why there are so many people running around trying to stock up on guns, beans and gold — assuming the big hit is coming. It is just a matter of time, we are told — shit is going to get funky.

It is absolutely necessary that you never question this premise, and everything is aimed at preventing you from ever questioning this premise. This is not just the message coming from Washington and its servile agents in the media and economics profession; it is also the message delivered on the Left and the Right. On the Right, it is expressed in a demand to end the deficits no matter what the cost, on the Left it is expressed in a demand to end austerity no matter how this ends in more public debt.

It is not just that these contradictory demands appear as polar wings of politics, it is that the demands themselves must be posed as an unbridgeable contradiction. In fact, there is nothing that prevents the Left from adopting the Right’s demand against deficits as well as its own against austerity. And there is nothing that prevents the Right from adopting both a demand against deficits and a demand against austerity. But if this phony contradiction is not maintained, there is no Left or Right — and the point of politics is that there should always be a Left and a Right.

I think this is the revolutionary significance of the Occupy movement’s idea of addressing debt; it breaches this false contradiction. Occupy, which has already clearly taken on austerity, is now adding the question of debt to its argument. With a movement that opposes both austerity and debt, the phony opposition between Left and Right will be ended. Combining a demand against austerity with a demand against debt, announces working people will not pay for this crisis now or in the future. It throws down a gauntlet to Washington and Wall Street in the form of a demand that is not consistent with capitalism or the state.

The significance of these two modest demands against austerity and debt, when combined, are far greater than it may look on the surface. For instance read this quote from David Graeber:

“One realization really startled me when researching the book: that is, the realization that throughout human history, most people have been in debt. Think about it for a second. Could the majority of the human race really be improvident failures unable to manage their affairs, and thus justly dependent on the rich? Of course not. Rather, states and elites have always colluded to ensure that their subjects become debtors; not least, because debt is the easiest way to take a relation of violent inequality, of violent extraction, and make it seem not only moral, but make it seem like it’s the victim who’s to blame.”

How does this describe euro-austerity and the continuing argument that Greece “deserves” austerity now because of its past public profligacy? The fact is the public debt Greece accumulated in the past was just the inter-temporal shift of austerity and nothing more.

And not only private debt, but public debt more so, since Washington can, through its inflationary monetary policy, extend the impact of this austerity throughout the world market. Washington can, therefore, under the pretext of increasing its own debt, impose an austerity on every nation trading in dollars.

Debt, Inflation, Unemployment and Austerity

Consider the problem of debt and austerity from another perspective: In an austerity, unemployment rises, wages and pension are slashed. An increase in debt now is nothing more than the inter-temporal transfer of these same effects over some period of time going forward — wages and pensions are gradually slashed over time. This is accomplished through inflation, and can be made to appear as the result of “natural” forces rather than deliberate policy.

Employment growth slows and persistent high level of unemployment can last for a decade or more. What is accomplished all at once in an austerity regime is, with debt, accomplished over a period of time. All the effects of austerity are still felt by the mass of society, but the torture is extended sometimes a decade or longer.

The state must impose this austerity on behalf of capital because it nothing more than capital organized as the state, but the question is whether the population will accept it all at once, or whether it must be stretched out. This is politics — how much pain can the proles take, and it is a practical question. If people surround the government and demand it resign, this government can be replaced by one “committed to growth”, i.e., the accumulation of even more public debt.

Although this new government only promises to stretch austerity over a decade, instead of imposing it all at once, it is sold as compassion. Twenty five percent unemployment now, or ten percent over the next decade; slashing wages and pensions now, or inflating away their value and compelling people to work longer — make your choice, folks. In either case, the mass of society suffers the effect of unemployment and reduced subsistence through state policy.

Occupy is taking on precisely this policy in both of its possible manifestations. It is combating both an immediate imposition of an austerity regime and an inter-temporal imposition of this regime through debt.

We have to consider also the relationship between unemployment and wages: the reduction of wages is the aim and unemployment is the means. In a market where there is low unemployment, there is less competition among the working class — it has the opportunity to organize itself. Moreover, even where there is some unemployment this occurs against a backdrop where this unemployment is unevenly distributed — in specific sectors or regions of the world market the demand for labor power may even exceed the supply. The impact this has on profits is obvious, and the capitalist class responds to this with all the means at its disposal — introducing new machines, reducing wages, layoffs.

What Keynes explained to the capitalist class is that its typical response to this condition — slashing wages — is counterproductive. Since the Great Depression, profitability cannot be restored simply by slashing wages — as Greece and Spain is demonstrating graphically. What is gained by slashing wages, is lost when the working class goes into the market to purchase goods. The state, Keynes argued, can accomplish the task far more efficiently than capitalists in slashing wages. This is because the method employed — debt — has the effect of subsidizing profits even as the purchasing power of wages fall.

Of course, Kurz explains, this results in the accumulation of debt that cannot be paid off — but that is the can that must be “kicked down the road”. In the long run the debt cannot be paid off, but in the interim it can transfer the product of labor from wages to profits. And, as Keynes observed, in the long run you will be dead after having slaved your entire life away to service that debt.

It is not just private debt that transfers the product of labor from one class to the other, state debt has this very same effect. Your take home pay doesn’t change, but the prices of what this take home pay buys spirals out of sight. In the choice between austerity and debt, debt is actually the preferred option because the state doesn’t provoke people into the streets. As Keynes explained in his General Theory, unions will fight a cut in their wages, but not one imposed through debt and inflation.

“Thus it is fortunate that the workers, though unconsciously, are instinctively more reasonable economists than the classical school, inasmuch as they resist reductions of money-wages, which are seldom or never of an all-round character, even though the existing real equivalent of these wages exceeds the marginal disutility of the existing employment; whereas they do not resist reductions of real wages, which are associated with increases in aggregate employment and leave relative money-wages unchanged, unless the reduction proceeds so far as to threaten a reduction of the real wage below the marginal disutility of the existing volume of employment. Every trade union will put up some resistance to a cut in money-wages, however small. But since no trade union would dream of striking on every occasion of a rise in the cost of living, they do not raise the obstacle to any increase in aggregate employment which is attributed to them by the classical school.” (my emphasis)

I bet you could count the number of major demonstrations against inflation in the past forty years on a single hand — I know of no strikes produced by it. Nobody ever surrounded the congress to demand a reduction in inflation nor fought the police in the streets with firebombs because of it. As a matter of fact, the prima facie silliness of the euro-austerity regime in Spain, Greece, Ireland, Portugal etc., suggests the states and ruling classes of those nations are now trapped and cannot employ debt to meet their aims.

By taking on the issue of debt Occupy is in fact taking on one of the most powerful tools in the state’s arsenal for imposing austerity — debt. Occupy is showing that it is not just a matter of austerity versus debt, but also of austerity through debt. The debt campaign is big because it calls bullshit on both the Democrats and the GOP and can appeal to whatever healthy elements remain in the Tea Party.

*****

As a side note I also want to point out that not one Marxist critic of David Graeber was able to uncover this hidden connection between debt and austerity that Occupy has discovered purely through its practical activity alone. This includes that asshole over at Jacobin, Mike Beggs; that “humanist marxist” Andrew Kliman; Dean, Deseriis, and a host of other imbeciles. Nor does it appear in the writings of Marxists who feel an obligation to repair capitalism, such as Dumenil, Levy, Saad-Filho and that sorry lot.

What good is a goddamned theory if the people using it are idiots.

Oh yeah. And fuck Zizek too!

Cat Brain at Work: How Chris Harman explains the “Marxist theory of stagnation”

April 6, 2012 Leave a comment

As part of my continuing occupation of the Marxist Academy, I have been looking at various Marxist theories of the crisis of neoliberalism. I am now reading the late Chris Harman’s “The rate of profit and the world today”, written in 2007, just prior to the big crash. This is part two of my examination.

*****

Before we go any further, let me reiterate one thing: In Marx’s theory, the law of the falling rate of profit is not expressed in “stagnation of economic growth” directly or indirectly. The so-called “stagnation thesis” appears no where in the body of Karl Marx’s works on the capitalist mode of production spanning more than 40 years. Nor does it appear in any of Frederick Engels works on the same subject spanning nearly fifty-five years. It is not even an indirect result of the laws of motion of the capitalist mode of production. Moreover, in addition to the idea of “stagnation“, no Marxist can point to a single reference in the collective body of work by these two writers — together amounting to a century of research and publication — where either the terms “financialization” or “globalization” appear.

So, why the fuck are Marxist academics trying to explain these nonexistent phenomena? I think the answer to that question is simple: they are trying to explain stagnation, financialization and globalization because they can’t explain this:

Read more…

Chasing Unicorns: Chris Harman and the “Marxist theory of stagnation”

April 4, 2012 2 comments

"Friesian Unicorn" by Katrina Lasky

As part of my continuing occupation of the Marxist Academy, I have been looking at various Marxist theories of the crisis of neoliberalism. I am now reading the late Chris Harman’s “The rate of profit and the world today”, written in 2007, just prior to the big crash.

*****

Harman appears to be one of a group of the influential Marxist thinkers in the last quarter of the 20th Century, and especially the period leading to this crisis, who helped refocus Marxist academic attention to Marx’s rate of profit theory. In this paper, to some extent an outline of his book, published in 2009, on the same topic in the middle of the crash, Harman presents the result of his research on the rate of profit and offers some ideas to explain his findings.

In Harman’s view Marx’s argument that the rate of profit falls over the life of capitalism has far reaching implications because it argues capitalist crises result, not from some sort of failure in the mode of production, but from its successes:

The very success of capitalism at accumulating leads to problems for further accumulation. Crisis is the inevitable outcome, as capitalists in key sections of the economy no longer have a rate of profit sufficient to cover their investments. And the greater the scale of past accumulation, the deeper the crises will be.

For some reason Harman does not follow up on this very interesting argument — if in fact capitalism’s crises are not a sign of failure but a sign of success, this indicates capitalist crises themselves should not be the focus of attention when studying the mode of production.

Crises are no more than a interval during which the mode of production resolves the contradictions produced by its previous successes. As such, these crises cannot be the reason why Marx labeled the mode of production a relative, historically limited, form of development. While the recurrent crises of increasing scale demand our attention because they momentarily bring economic activity to a near standstill these crises in no way are the source of processes leading Marx to his conclusion regarding the fate of the mode of production.

The conclusion resulting from this realization are pretty staggering: for all of its social consequences, the depression of 2001 is not the harbinger of the demise of capitalism, but an interval during which the mode of production prepares for its further expansion. This may explain why Marxists, when looking at the recurrent explosions of capitalism, see no reason why they cannot continue indefinitely.

They are looking at the wrong thing.

Read more…

Marxist Academic Error 101: “A term is undefined and has no properties”

March 29, 2012 1 comment

As part of my continuing occupation of the Marxist Academy, I have been looking at various Marxist theories of the crisis of neoliberalism. This is the final part of my critique of Andrew Kliman’s “Neoliberalism, Financialization, and the Underlying Crisis of Capitalist Production” (PDF).

*****

As can be seen in the chart above, most bourgeois economists look at fascist state economic data and conclude we are experiencing nothing like the sort of economic event that occurred in the Great Depression. The Great Depression was just that — a depression — while what we are experiencing is perhaps a more severe than normal recession generated in the aftermath of a financial crisis. For the bourgeois economist this description of the situation may or may not be entirely satisfactory.

For anyone attempting to understand the fascist state economic data using Marx’s theory of the capitalist mode of production it is less than worthless — it can turn Marx’s theory into a useless glob of shit that describes nothing — least of all what is occurring within the capitalist mode of production.

Read more…

Theories of the Current Crisis: David Harvey and the Left’s search for a new master

March 4, 2012 1 comment

I have been reading David Harvey’s “Organizing for the Anti-Capitalist Transition” (2010). Harvey’s theory of the current crisis differs somewhat from the other Marxists I have been following. I actually rather enjoyed reading Harvey because he is simple to read without being simplistic like Wolff’s and Resnick’s piece. Harvey gave this originally as a talk to the World Social Forum in 2010,

Harvey opens his talk by stating boldly:

The historical geography of capitalist development is at a key inflexion point in which the geographical configurations of power are rapidly shifting at the very moment when the temporal dynamic is facing very serious constraints.  Three percent compound growth (generally considered the minimum satisfactory growth rate for a healthy capitalist economy) is becoming less and less feasible to sustain without resort to all manner of fictions (such as those that have characterized asset markets and financial affairs over the last two decades). There are good reasons to believe that there is no alternative to a new global order of governance that will eventually have to manage the transition to a zero growth economy.

I liked his argument here, but, I think, he could have clarified things by explaining what he meant by “three percent compound growth…” Growth is one of those terms from bourgeois economics that has been adopted into the lexicon of Marxism as a category without critical examination. When Harvey then proposes that “compound growth” must sooner or later give way to “zero growth”, he unwittingly injures his own argument.

Read more…

Quantitative easing may be a dead end for the Federal Reserve … So, Washington will be coming for you to foot the bill

November 24, 2010 Leave a comment

According to James Rickards, the Federal Reserve Bank likely has no way to exit from its money printing effort known as quantitative easing:

Disasters sometimes sneak up in small steps, each of which appears unthreatening at the time but which cumulatively spell collapse.  The Fed is leading the United States to ruin in ways that are claimed to be well intentioned and benign viewed in isolation but which take us finally into a locked room reminiscent of the Sartre play “No Exit.”

He takes us through the steps of the process by which the Federal Reserve has already found itself in a quagmire, and insists on pushing deeper into it:

How does the Fed print money? It’s easy; they simply buy bonds from the market and credit the seller’s bank account with electronic cash that comes out of thin air.  When they want to reduce the money supply, they do the opposite; that is, they sell bonds and the buyer’s bank account is reduced by the sale price and that money disappears.  So, printing money is just a massive program of bond purchases.  The Fed intends to concentrate the current bond buying program in the intermediate sector of 5 to 10-year maturities.

A massive program of bond purchases, yes. But, more important, a program of swapping fictitious assets for fictitious money in a series of fictitious transactions that superficially resemble real transactions but result in the exchange of no real economic values. There are, for instance, the utterly worthless purchases of mortgage backed securities and various junk from the failed financial sector. The intricacies of this garbage need not be understood in order to understand Rickards’ point: it is all junk, worthless, pieces of paper that have not an iota of value, and which will never be worth anything ever into the distant future beyond the point where the planet itself is no longer habitable.

The point is, none of this crap will ever be sold again for more than a fraction of its face value. It is toxic. You could back a truckload of it up to a recycling plant and walk away with no more than a week’s worth of groceries. And, the Fed has so much of this crap on its books, if it actually had to state its market value, the bank’s balance sheet would implode:

As a result, the Fed is coming to resemble a highly leveraged hedge fund with an inverted pyramid of risky, volatile and junk debt balanced on a slim layer of capital.  Recall the Fed owns the Maiden Lane portfolio of junk from Bear Stearns and $1.4 trillion of mortgages whose value is in serious doubt because of strategic defaults, lost notes and halted foreclosures.  Treasury notes may be of good credit quality if you don’t mind getting paid back in debased dollars but even Treasury notes have market risk.  If interest rates go up, the value of Treasury notes goes down; it’s that simple.  The Fed is taking both credit risk and market risk on its balance sheet in unprecedented amounts.

Under QE2, the Federal Reserve hopes to double down by adding Washington debt to its mix of toxic sludge. And, this is where the game gets really interesting.

To buy Washington’s debt, and force down interest rates, the Federal Reserve essentially has to outbid all other players in the public debt market. It can do this simply by entering the required digits at a computer terminal — and keep entering them until every other bid is taken out. At the end of the day, the Fed has pushed everyone else out of the market by paying more for Washington’s debt than anyone else in their right mind would be willing to pay.

When people say the action of the Federal Reserve is nuts — because the Fed is deliberately paying more for the debt than it is worth, and because the Fed is inundating the economy with worthless currency — the Fed has two responses:

When critics raise the issue of mark-to market losses, the Fed has a simple answer, which is that they will hold to maturity.  The Fed does not have to mark to market; they can simply hold the assets to maturity and collect the full proceeds from the Treasury or other issuers.  Just ignore for the moment the fact that some of the junkier assets and mortgages will not pay off, ever.  That’s years away; for now, let’s just give the Fed the benefit of the doubt and say that mark-to-market losses don’t matter because they don’t have to sell.

Critics also raise the issue that this much money printing will result in inflation at best and maybe hyperinflation if velocity takes off due to behavioral shifts.  The Fed is also very reassuring on this point.  They say not to worry because at the first signs of sustained and rising inflation they will reverse course and reduce the money supply by selling bonds and nip inflation in the bud.  But also note that the world in which the Fed wants to sell the bonds is also a world of rising inflation and therefore rising interest rates.  This is the world of huge mark to market losses on the bonds themselves.

To the first concern the Fed says, “Oh, sure we’re paying too much for this debt, but we will just hold onto it until we can sell it without taking a loss.”

To the second concern the Fed says. “Oh, sure this will cause inflation, but we can fix that by selling this debt and soaking up the excess money.”

Rickards isn’t buying this bullshit. If the Fed is successful and inflation takes hold, he points out, interest rates will be rising — and if interest rates are rising, the price of Washington’s debt will be collapsing. The Fed will suffer massive losses if it tries to sell the debt to siphon off the excess money in the economy that is driving up prices:

The Fed is saying don’t worry about mark to market losses because we will hold the bonds.  The Fed is saying don’t worry about inflation because we will sell the bonds.  Both of those statements cannot be true at the same time.  You can hold bonds and you can sell bonds but you can’t do both at once.  You will want to sell when rates are going up but that’s when losses will be the greatest.   So the time when you most want to sell is the time when you will most want to hold. The Fed may say they can finesse this by selling shorter maturities only to reduce money supply and holding onto longer maturities.  But that just further degrades the quality of the Fed’s balance sheet and turns it into a one-way roach motel for highly volatile and junk assets.

Monetary policy is dead — stick a fork in it — and so is the Fed:

So, here’s the bottom line on money printing, or QE if you prefer.  If nothing happens, the whole thing was a waste of time.  If inflation takes off, the Fed will have to choose between holding bonds and letting inflation get worse or selling bonds and going bankrupt in the process.  Since no entity goes down without a fight, the Fed will naturally hold the bonds and let inflation take off.  Do not ask about the exit strategy from QE; there is no exit.

End of story, right?

No! Not by a long shot. We’re just getting to the really really interesting part — the part where you get royally screwed.

You see, even if the Fed cannot exit from its quantitative easing program, there is still all this fictitious money sloshing around the economy, driving up prices, and bidding up everything that isn’t locked down. The Fed may be effectively frozen, but there is still a way to drain the economy of all that excess money.

Washington simply takes it from you. Your elected officials down in Washington can perform a type of monetary policy to drain all the excess liquidity from the system by raising your taxes and cutting the programs you rely on. According to Billy Mitchell, a prolific modern monetary economist who writes at Billy’s blog:

It is a good practice to think of taxes as just draining liquidity from the non-government sector reflecting the Government’s desire for that sector to have less spending capacity.

Now, you know why Washington is debating deficit reduction in the middle of the worst recession since the Great Depression: if the Federal Reserve is able to get the debt creation process moving again, and the economy starts to expand, they intend to withdraw the excess liquidity in the economy by taking it from you.

You will pay more taxes.

You will pay higher prices for everything.

You will retire when you are dead.

The bottom line for you: you will be forced to work longer hours for less pay just to keep the same standard of living, because inflation will be rampant, and your after tax income will be plummeting.

They assume that by the time you figure this out it will already be too late for you to do anything about it.

If Washington gets its way, you are going to suffer the most massive wage income collapse in human history.

How quantitative easing works — or doesn’t (Part Seven: The contradictions inherent in QE2)

November 12, 2010 Leave a comment

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.