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)

A Typical Day in an English Workhouse

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.