Monday, December 19, 2011

Two choices

The world's economies will not survive much longer in their present form.  No one actually knows what will give way first—the collapse of the Euro, the collapse of the absurd Chinese economic contradictions, another crash of the Anglo-American banks, whatever.  The point is that the way the financial business is currently being run, there is no chance for anyone (with the POSSIBLE exception of the .01%) prospering in any meaningful sense.

So either the financial system must reform itself or it must be reformed from the outside.  Personally, I seriously doubt the banksters are going to have some come-to-Jesus moment and decide they would rather be the vanguard of change to finance the peoples of the planet to build the sort of societies that can power themselves on the solar capital they can collect.  The banksters I see in public are absurd, narrow-minded greedheads who think that progress is charging 33% interest on credit cards or selling children into debt slavery in the name of "education." Nevertheless, it would be MUCH preferable if the banksters could reform the system themselves—they know how things can work and besides, reforms from the outside in the form of revolutions are so messy, they take a lot of time, and rarely accomplish much of importance.

Just to prove that the Chinese learned nothing from the housing bubble in USA, here is a picture of China's biggest ghost city: Zhengzhou New District.  Roads without cars or bicycles—houses without people.  Proof that no matter where in the world, if lenders lend, builders build.  China has hundreds of such developments.  By some estimates there may be up to 64 million vacant homes.  The mind reels at the notion that a country that put itself through decades of revolutionary upheaval would wind up copying probably the worst ideas of bankster "capitalism."  So now in a country with millions of people badly housed, there are millions of brand-new empty houses.

It wasn't like Keynes was a 19th free-silver USA farmer with his back to the wall. He was a very establishment (wealthy) Brit investment banker. And yet he saw with utter clarity the problems caused by retarded economics and now another generation will have to learn his insights after 35 years of neoliberal madness.  Of course, he predicted that too in perhaps his most famous quote.

" The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than it is commonly understood.  Indeed the world is ruled by little else. Practical men, who believe themselves quite exempt from any intellectual influences, are usually slaves of some defunct economist."

Well, It Sure Seems Like Keynes Was Right
Henry Blodget | Dec. 17, 2011

After the experience of the past five years, it certainly seems like John Maynard Keynes was right, doesn't it?

It seems hard to conclude anything else.

I'm not an economist, and I'm not born of a particular economic school that I've bet my life's work on, so I have observed the global economic events of the past five years with a fairly open mind.

I've listened to Keynesians like Paul Krugman argue that the way to fix the mess is to open the government spending spigot and invest like crazy.

And I've listened to Austerians like Niall Ferguson argue that the way to fix the mess is to cut spending radically, balance government budgets, and unleash the private sector.

And I've also looked back at history--namely, Reinhart and Rogoff's analysis of prior financial crises, the Great Depression, Japan, Germany after Weimar, and so forth.

And I have to say, the conclusion I keep coming back to is that Keynes was right.

In the aftermath of a massive debt binge like the one we went on from 1980-2007, when the private sector collapses and then retreats to lick its wounds and deleverage, the best way to help the economy work its way out of its hole is for the government to spend like crazy.

Or, rather, if not the "best way," at least the least-worst way.

Because, obviously, piling up even bigger mountains of debt is not a happy side-effect of such spending.

But let's face it: Austerity doesn't work. more
After a whole generation of economists trained to believe that inflation was purely a monetary and that pumping more money into the system was the most certain way to trigger an inflationary outbreak, we now have evidence that it is possible to inject two years worth of GDP of new money into the system and still barely make a dent in DEflation.  Krugman call the the true believers in monetary causes for inflation "inflationistas."  He is being kind.
MARK DOW: Finally, People Are Beginning To Understand That All This Money-Printing Isn't Causing Inflation
Henry Blodget | Dec. 13, 2011

Mark Dow of Pharo Management forwarded us the chart below, which shows the amazing impact Ben Bernanke's post-crisis money-printing has had on inflation and the value of the dollar.

Which is to say: No impact.

The chart shows the trade-weighted value of the dollar (blue) compared to the level of "base money" (red). As you can see clearly, the dollar declined steadily in the years leading up to the financial crisis, and has basically been rock-solid ever since.

How can that be? Isn't Ben Bernanke "printing money" until the cows come home?

Well, sort of.

What Ben Bernanke is really "printing" is bank credit. All that printing has made banks' "excess reserves" explode, which means they have a ton of lending capacity if they want it.

But they don't want it.

This is in part because the banks' customers don't want it: With consumers strapped and reducing their debts, few companies are borrowing money to invest in future growth.

And it is in part because the banks themselves need to deleverage: They need to build up their capital levels relative to their asset (loan) levels. And making new loans won't help them do that.

In other words, most of the money Ben Bernanke is printing is sitting in bank accounts at the Fed, not finding its way into the economy. And because it's not finding its way into the economy, it's not destroying the value of the dollars that are already in circulation.

Will all that money the Fed has printed ever find its way into the economy? Will it ever cause the hyper-inflation everyone dreads so much?

It might.

When the economy finally really cranks up again, the Fed will have to start "un-printing" some of that base money, or lending could explode and inflation really could get out of hand.

But the economy does not appear to be about to crank up fully again.

And consumers — the main drivers of spending in the economy — still have debt coming out of their ears.

And Japan shows us just how long a government can print base money without triggering inflation: The value of the Yen has been appreciating for twenty years. more
One of the more interesting remark Chris Hedges made concerning protests taking over from more normal election activities is that no one has a way in USA to vote out the party of Goldman Sachs.  Well, outsiders are beginning to believe that the Socialists in France are going to offer up an alternative agenda to the neoliberal banksters.  Personally, I'll believe it when I see it actually happen because the rest of Europe's Socialists are some of the worst neoliberal Kool-Aid drinkers.  But here it is—Hope and Change French style.
Here's What Happens If Nicolas Sarkozy Can't Win Re-Election
Wolf Richter, Testosterone Pit | Dec. 18, 2011

Nicolas Sarkozy will be the only French president since World War II with two recessions under his watch, if the forecast by the National Institute of Statistics and Economics (Insee) turns out to be correct.

Recessions are rare in France: between the end of the war and the beginning of the financial crisis, there were two. Then came the four negative quarters of 2008/2009. Now, Insee forecasts another contraction: -0.2% in the fourth quarter of 2011 and -0.1% in the first quarter of 2012.

After an uptick over the summer, economic indicators have gone south. Business confidence has declined. Corporate demand is slowing. Unemployment has risen to 9.3%. Insee expects it to rise to 9.6% through the first half of 2012.

Purchasing power will decline by -0.1% in the first quarter of 2012, the sixth quarter of declines since the crisis. But even when Insee’s purchasing power indicators were rising, the French complained that their actual purchasing power was declining. The bitter irony: Sarkozy, who’d made purchasing power part of his platform during the last election, is now haunted by his old slogans. France will likely loose its AAA rating, which Sarkozy’s most prominent opponent, socialist François Hollande, sees as "a terrible admission of failure."

This is the backdrop to Sarkozy’s reelection campaign. New polls, released on December 16, show just how tough it will be. According to Ifop, during the first round on April 22, Hollande would lead the pack with 27.5% of the vote. Sarkozy would get 24%, Marine Le Pen, president of the right-wing National Front, 20%, and François Bayrou 11%. Everyone else would score in the low single digits. If Hollande faces Sarkozy in the second round, he’d win with 56% of the vote against Sarkozy’s 44%. But as president, Hollande would not follow in Sarkozy’s footsteps regarding the debt crisis and the Eurozone.

"Another Way for Europe," is the headline of Hollande’s editorial in Le Monde on December 16. In it, he outlined his dissatisfaction with the Brussels agreement, which he considered “narrow, vague, and punitive” and vowed to "renegotiate it in order to rebalance and add to the future treaty."

German Chancellor Angela Merkel and Sarkozy are pushing hard to get the text finalized and agreed to by March—before the French election. But it won’t be binding at that stage, and Hollande could do what he vowed in writing he’d do.

Growth is his mantra. Not austerity. While he considers reducing deficits an imperative, “nothing serious will be possible without growth; it's the big missing element in the agreement.”

Democracy is “the other big missing element." Going around the European Parliament as well as national parliaments and granting the European Court of Justice final say over national budgets, as the agreement calls for, "would be unacceptable."

And this: “The Eurozone must arm itself with a veritable financial force de frappe"—the term for France’s land-, sea-, and air-based nuclear strike force. Out: the bazooka. In: maximum force. Specifically, he wants effective means to impact the financial markets:
  • A much more aggressive ECB (while “respecting its independence”).
  • Much more powerful bailout funds to “discourage speculation.”
  • Eurobonds to spread the risk "of at least part of our debt."
  • Interventions by the European Investment Bank (owned by member states, it lends out €50 billion a year to support weaker regions and various projects).
  • A larger European budget with new sources of revenues, particularly a financial transaction tax, to drive industrial policy.
Practically every point of his plan (except for the financial transactions tax) violates Merkel’s dictate. Barring a miracle, Germany is unlikely to fall in line with his desires. A handful of other countries might side with Germany and form a bloc. more

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