As a contribution to Occupy Wall Street’s efforts against debt, I am continuing my reading of William White’s “Ultra Easy Monetary Policy and the Law of Unintended Consequences” (PDF). I have covered sections A and B. In this last section I am looking at to section C of White’s paper and his conclusion.
Back to the Future
It is interesting how White sets all of his predictions about the consequences of the present monetary policies in the future tense as if he is speaking of events that have not, as yet, occurred. For instance, White argues,
“Researchers at the Bank for International Settlements have suggested that a much broader spectrum of credit driven “imbalances”, financial as well as real, could potentially lead to boom/bust processes that might threaten both price stability and financial stability. This BIS way of thinking about economic and financial crises, treating them as systemic breakdowns that could be triggered anywhere in an overstretched system, also has much in common with insights provided by interdisciplinary work on complex adaptive systems. This work indicates that such systems, built up as a result of cumulative processes, can have highly unpredictable dynamics and can demonstrate significant non linearities.”
It is as though White never got the memo about the catastrophic financial meltdown that happened in 2008. If his focus is on the “medium run” consequences of easy money that has been practiced since the 1980s, isn’t this crisis the “medium run” result of those policies? Why does White insist on redirecting our attention to an event in the future, when this crisis clearly is the event produced by his analysis.
Barry Eichengreen and Kevin H. O’Rourke have been updating us on the progress of this depression by comparing it to the big one, The Great Depression. Their original post on April 6, 2009 captivated their audience, and we also ran some commentary on it here.
One thing that struck us was that we might compare the two events to the totally overlooked depression of the 1970s – The Great Stagflation. The reason why this one is missing and, perhaps, lost from official economic history is that it did not resemble the widely accepted official definition of a depression. For instance, as shown in the graph below, year over year Gross Domestic Product enjoyed an unbroken expansion during the entire period.
This is the 1970s Depression all over again – this time on a global scale. Governments are going to fall.
This puts the wind to the sails. It is the type of action I would expect, demand, in fact, from the humanity in Europe. If this can be coordinated correctly it will bring government to this point: ordering the goon squad to keep whacking her citizens with tear-gas and sticks until they go back indoors, or, seeing the gathering grim determination of active citizens collectively finding their Archimedean Point, the goons themselves will beg to stand down. They may even join their fellow citizens. After all, these are not Indonesian goons we are talking of here, these are European goons. And, they are Unionized. They have an undeniable stake in this. Perhaps they themselves will glimpse a New Horizon.
What a moment. We hold our breath as “The Whole World is Watching,” and, though through sheer exhaustion of spirit we may have come to believe otherwise, we now know beyond question that we continue to live in interesting times.
“The whole world is watching.
The whole world is watching.
The whole world is watching.
The whole world is watching.” Chicago Transit Authority, 1969
Europe’s unions caught between members and markets
European trade unions are facing up to a difficult choice: acquiesce to austerity measures and infuriate members, or fight them with strikes and risk a market backlash that could make the economic situation worse.
At one extreme is Ireland, where unions have avoided widespread industrial action over existing cuts — some of the earliest and sharpest in Western Europe — in part because the resulting market reaction would hurt workers more.
Trade union congress leader Jack O’Connor told Reuters last week that he feared foreign investors would interpret serious strikes as a sign Ireland might not be able to push through cuts and meet debt obligations, leaving it unable to borrow.
“Even if you win (the strike campaign), you could end up losing,” he said — but he said the decision was costing him sleepless nights and would not rule out further strikes if the government pushed through new cuts.
At the other extreme is Greece — where the European Union and International Monetary Fund (IMF) are demanding harsh spending cuts — where unions say they will strike in June and push for Europe-wide action against austerity measures.
“We’ll be pushing until the end to prevent the worst,” GSEE union head Yannis Panagopoulos, promising maximum resistance to a bill that raises the retirement age and curtails early pensions.
Panagopoulos says he is already talking to other European unions and hopes they can work together to hold back a wave of austerity measures as governments pull back on stimulus spending and start to address deficits.
No comment needed.
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As we surmised in our examination of the Krugman model and our subsequent examination of Richard Alford’s analysis, Washington engineered the housing bubble to cover up the pernicious effects of capital flight from the United States. This charge is now being explicitly circulated in the investor community:
Our US economists make the very interesting point (similar to Marc Faber) that peaks of income skewness – 1929 and 2007 – tell us there is something fundamentally unsustainable about excessively uneven income distribution. With a relatively low marginal propensity to consume among the rich, when they receive the vast bulk of income growth, as they have, then the country will face an under-consumption problem (see 9 September The Economic News ?- link. Marc Faber also cites John Hobson’s work on this same topic from the 1930s).
Hence, while governments preside over economic policies which make the very rich even richer, national consumption needs to be boosted in some way to avoid underconsumption ending in outright deflation. In addition, the middle classes also need to be thrown a sop to disguise the fact they are not benefiting at all from economic growth. This is where central banks have played their pernicious part.
I recalled seeing another article from John Plender on this topic back in April 2008. His explanation for why there had been so little backlash from the stagnation of ordinary people?s income at a time when the rich did so well was simple: ?”Rising asset prices, especially in the housing market, created a sense of increasing wealth regardless of income. Remortgaging homes over a long period of declining interest rates provided a convenient source of funds via equity withdrawal to finance increased consumption” – link.
Now you might argue central banks had no alternative in the face of under-consumption. Or you might conclude there was a deliberate, unspoken collusion among policymakers to rob the middle classes of their rightful share of income growth by throwing them illusionary spending power based on asset price inflation. We will never know.
But it is clear in my mind that ordinary working people would not have tolerated these extreme redistributive policies had not the UK and US central banks played their supporting role.
What we have written here is all speculation based on our understanding of how the economy works. Please do not construe it to imply you have been wasting your life in a job which produces nothing, creates nothing, and only serves to empty your remaining years on this earth into a black hole of worthless activity.
For the past seventy to eighty years, an increasing portion of transactions in our economy have been based on the exchange of some real thing for a notional placeholder – a valueless piece of fancy paper with a picture of a dead president on it – and, worse, by some promise of future payment in the form of this fancy piece of paper.
That real thing – a single family home, car, 42 in wide screen high definition plasma television, or pair of shoes – has long since suffered the ultimate end that all such goods suffer: It was consumed through days, months or years of use, until nothing remained of its original utility to us.
Shoes wear out, cars die by the side of the road, the television goes on the fritz right in the middle of American Idol.
Even a house, the most durable of our goods, eventually succumbs to old age.
It is what things do.
But, of all the goods mankind has ever created, there is one exception to this rule: Money.
Money is never consumed because it exists simply to serve as the medium by which goods circulate in our society until these goods fall out of circulation to be consumed.
For instance, it has been estimated that eighty-five percent of all the gold mankind has ever pulled from the ground and stripped of its impurities lies somewhere in some vault of a central bank, or around the neck of some rap artist.
And, here is where it gets really interesting:
What is true for gold, is true for money in general. And, we believe, this also has to be true for the chain of incomplete transactions waiting to be completed since the Great Depression: Every transaction where someone made a purchase on credit that was not eventually completed with the creation and sale of a new good, is still hanging out there in our economy waiting to be completed- every home mortgage, car note, or bag of groceries, whether repaid or outstanding.
These incomplete transactions are sitting as an asset on the books of some financial institution or on the computer in the basement of some central bank.
Mind you, we’re not talking only about debt which has not yet been repaid with the fiat money in your wallet: even debt which has “officially” been repaid with dead presidents, but has not been replaced by a real good, must be considered incomplete.
The reason is simple: The dollar is a valueless piece of paper, which, while it can stand in the place of real money (gold or other precious metals) for purposes of facilitating transactions, cannot itself complete those transactions, i.e., can not do what real money does: replace the value of the good that has been transferred from seller to buyer.
Thus, in any such transaction, the seller has accepted, in return for his/her good, not the money equivalent of that good, but a pretty piece of paper.
This point must be understood: Should there arise a circumstance where real money is called for, where paper can no longer serve as a representative of this real money, because it has no value in and of itself, the aggregate value of all such transactions, all the way back to the moment the dollar was debased from gold, will vanish, as if they never occurred.
All of the “wealth” allegedly created by, and predicated on those transactions, collapses in a massive catastrophic implosion.
If these transactions expire without being completed – without the previously consumed good being replaced by a new good – the economic value of the transaction vanishes, in much the same way as the ledger value of your mortgage vanishes when you default and are foreclosed.
Since the great mass of these incomplete transactions will never be completed owing the the very structure of our economy, where superfluous work composes the great bulk of economic activity, and only adds to the volume of incomplete transactions. the only thing standing between current valuations of assets in the economy and this massive implosion is the relentless addition of even more such transactions.
For all these years, Washington has forced the use of fiat money in place of money, because of the one attribute of money for which fiat cannot be substitute: money’s irreconcilable antagonism to superfluous work, to work that that is meaningless and has no productive value.
The costs of this meaningless work is now embedded in the price of every good sold in our economy, every asset held, and, most of all, in the very employment of millions across this nation.
To evaporate, all that is now required is a trggering event: an event, we believe, that has already happened…
The leverage we speak of is that set against your free time, your time to be human, your moments on this Earth which can either be spent enjoying your life or sitting in a meeting discussing the synergies arising from the company’s relationships with its vendors and customers, given rapidly changing technological interfaces.
You know: bullshit…
The leverage they speak of is also this choice, but couched in the obscuring discussion of consumer confidence; household, corporate, and public debt; and, complex financial instruments.
In fact, in all of this discussion of leverage there is only your free time.
Everything else can be measured in the moments you can be diverted from enjoying your free time to focus on your confidence as a consumer, your debt, and how you might be convinced to take on more of the latter to boost the former.
As we stated, our concept of leverage differs from that of economists in that they assume the debt incurred in a transaction whose completion is delayed indefinitely will eventually be paid in full with worthless, valueless, pictures of dead presidents.
Bear with us a moment as we peer into this dubious assumption – really, it will only hurt for about the rest of your working life.
Inspired by the Messiah, I decide it is time to trade in my clunker for a spanking new 2009 Toyundai Skeezer, which gets 44 mpg, and has a factory installed diamond-laced-thingamajig-doohickie-where-am-I-now, with built-in turbo-thrusters, and a halo ring.
Thanks to the debt guy at the dealership, I incur only $20,000 of debt for this new monster of fuel efficiency, and, thanks to the Messiah, the Federal government incurs an additional $4,500 of debt, which, according to economists, I will pay in taxes over time.
Of course, both my $20,000 and Washington’s $4,500 merely exist as dancing electrons on some computer in the basement of the Federal Reserve – but, no worry! I am good for it.
You see, I have a job: Every day I rise from bed, and commute an hour to a desk, where my job is to inhale oxygen, and exhale carbon dioxide – break for lunch – and continue the process in the afternoon until exactly 4:15 pm.
Rinse and repeat for five years, and the car is mine.
The economists are satisfied with this transaction, so I am satisfied as well.
There is, however, a small problem: I have just purchased a 2009 Toyundai Skeezer, which gets 44 mpg, and has a factory installed diamond-laced-thingamajig-doohickie-where-am-I-now, with built-in turbo-thrusters, and a halo ring, in return for five years of shallow breathing – interrupted by trips to the water cooler to discuss this weekend’s football game.
I get a car, the economy gets a lot of carbon dioxide.
Every week in return for several thousand shallow breaths, my employer gives me dancing electrons which exists mainly on some computer in the basement of the Federal Reserve.
I, in turn, send some of those dancing electrons to the bank which financed my loan, and they accept it as payment for the car loan.
On any normal planet – or previous period of human history – where people would not elect Sarah Palin as governor, nor blow up Afghan wedding parties to make a political point – the exchange of a bit of dancing electrons for a 2009 Toyundai Skeezer, which gets 44 mpg, and has a factory installed diamond-laced-thingamajig-doohickie-where-am-I-now, with built-in turbo-thrusters, and a halo ring, might seem like fraudulent transaction.
People on those planets, or, in those periods of human history, might object that the exchange is not only fraudulent and unacceptable, but also indicative of an unbalanced mind.
They might strenuously object that the exchange of some part of five years of shallow breathing for a 2009 Toyundai Skeezer, which gets 44 mpg, and has a factory installed diamond-laced-thingamajig-doohickie-where-am-I-now, with built-in turbo-thrusters, and a halo ring, is an economically unsustainable transaction; and, that an economy built on such exchanges is doomed to collapse.
At this point, an economist would step in and explain:
So long as this incurred debt is replaced by another, larger, quantum of debt, the chain of transactions where something is sold for nothing can continue indefinitely.
If corporate debt is not enough, we can rely on consumer debt, and, after that, international debt, and finally, government debt.
And, when we have exhausted all the sources of debt, we can rely on that little computer in the basement of the Federal Reserve, which creates money out of dancing bits of electrons…