31 October, 2020

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Forget Marx: What Does Smart Bourgeois Money Say?

By Kumar David

Kumar David

Forget Marx: What does smart bourgeois money say? The cognoscenti discuss their predicament

This piece is different from the usual stuff I write; I have locked-up Marx in the attic. Today I summarise what well respected bourgeois commentators say of prospects for the American and global (capitalist) economy. Of course I am pleased that these folk, through empiricist groping, reach the same conclusions the man in the attic did, methodologically, 150 years ago. This piece summarise the evaluation of US economic prospects by five significant bourgeois intellectuals. The sources are: A March 2013 New York Times op-ed, a 2013 book, a web piece by the President of a financial firm, and a report in the leading US Commodities agency. Hence I can reasonably claim to summarise what the brighter lot in the bourgeois world is saying, about its own prospects.

The theme that threads all five (David Stockman, Paul Craig Roberts, Peter Schiff, Chris Martenson and Philip Gotthelf) is undisguised pessimism about the medium and long term economic future. They contend that loose money policy has led to a liquidity trap and is preparing the ground for a collapse more massive than Q4-2008. They agree are that off-shoring has triggered a massive irreversible distortion in the US economy, that a collapse in the bond and asset markets is where the shipwreck will start, and that serious commodity price inflation is in progress.

It is gratifying that this is consonant with the thesis I have been pushing in this column for nearly five years. Readers may recall that I was the first to term the 2008 financial crisis a New Depression, and propose a diagrammatic representation, a prolonged Wobble-U. This is a shape that sputters along the bottom, jerking up for a while, and falling back again. It supplements familiar U, V, L and W shapes associated with conventional recessions and recoveries.

The nadir of capitalism

David Stockman, a former Republican congressman, Reagan’s budget director from 1981 to 1985, authored “The Great Deformation: The Corruption of Capitalism in America.” These quotes are abbreviated from his New York Times piece of 31 March 2013.

 “Sooner or later this latest Wall Street bubble, inflated by an egregious flood of phoney money from the Federal Reserve (Fed) rather than real economic gains, will explode. Since March 2000, the mad money printers at the Fed have expanded their balance sheet six fold (to $3.2 trillion from $500 billion). Yet during that stretch, economic output has grown by an average of 1.7 percent a year; real business investment has crawled forward at 0.8 percent per year; and the payroll job count has crept up at a negligible 0.1 percent annually. Real median family income growth has dropped 8 percent, and the number of full-time middle class jobs, 6 percent. The real net worth of the “bottom” 90 percent has dropped by one-fourth. The number of food stamp and disability aid recipients has more than doubled, to 59 million, about one in five Americans”.

“So the Main Street economy is failing while Washington is piling a soaring debt burden on our descendants, unable to rein in either the warfare state or the welfare state or raise the taxes needed to pay the nation’s bills. The Fed has resorted to an uncharted spree of money printing, but the flood of liquidity, instead of spurring banks to lend and corporations to spend, has stayed trapped in the canyons of Wall Street, where it is inflating yet another unsustainable bubble”.

“When it bursts, there will be no new round of bailouts like the ones the banks got in 2008. Instead, America will descend into an era of zero-sum austerity and virulent political conflict, extinguishing even today’s feeble remnants of economic growth”.

Stockman sees the crisis as a failure of policy, not an inevitable unfolding of the normal life cycle of capitalism. Be that as it may, he sharpens his barbs as follows. (For ease of reading I have not used dots to separate phrases selected from different sections of his piece).

“Mr. Greenspan’s loose monetary policies didn’t set off inflation only because domestic prices for goods and labour were crushed by the huge flow of imports from the factories of Asia. By off-shoring America’s tradable-goods sector, the Fed kept the Consumer Price Index contained, but also permitted the excess liquidity to foster roaring inflation in financial assets. Soon Americans stopped saving and consumed everything they earned and all they could borrow. Within weeks of the Lehman Brothers bankruptcy in September 2008, Washington, with Wall Street’s gun to its head, propped up the remnants of this financial mess in a panic-stricken melee of bailouts and money-printing that is the single most shameful chapter in American financial history. Without any changes, over the next decade or so, the gross federal debt, now nearly $17 trillion will hurtle toward $30 trillion and soar to 150 percent of gross domestic product from around 105 percent today. The United States is broke — fiscally, morally, intellectually — and the Fed has incited a global currency war”.

“Without any changes” Mr Stockman says, but he concedes elsewhere, that there is no power that can force change. The captains of finance capital (Wall Street, banks, hedge funds and derivatives supervisors) are supreme; they cannot be subordinated by Fed, treasury or President. They are the system; the real power that lives out there in the objective world.

Outsourcing and the irreversibility of decline

Paul Craig Roberts argues in “The Failure of Laissez-Faire capitalism and the Dissolution of the West” that technology and labour costs motivate American corporations, to produce off-shore, goods and services for consumption in the US domestic market. First low level jobs, soon design, research and middle class professional employment moved out.

“For most Americans, income has stagnated and declined for the past two decades. Much of what Americans lost in wages and salaries as their jobs were moved offshore came back to shareholders and executives in the form of capital gains and performance bonuses from the higher profits that flowed from lower foreign labour costs. The distribution of income worsened dramatically with the mega-rich capturing the gains, while the middle class ladders of upward mobility were dismantled”.

Robert’s dwells on how expansion of credit, low interest rates and an unrealistically low taxation regimen became an opiate US sustaining consumption. Growth of consumer debt substituted for missing growth in consumer income. Low interest rates fuelled a real estate boom. House prices rose dramatically, permitting owners to monetize the rising home equity by refinancing mortgages. Consumers kept the economy alive by assuming larger mortgages, spending more, and accumulating large credit card balances. The explosion of debt was securitized, given fraudulent investment grade ratings, and sold to unsuspecting investors at home and abroad. Though the real income of 90% of Americans was falling, or static, for two decades, consumption was sustained by deepening debt.

Robert’s then makes a seminal point that deserves to be underlined: The reason why policy intervention is having no success in reducing unemployment, this time, is because millions of jobs have moved offshore. After ordinary recessions, laid-off workers return when demand recovers, but this time it is different. Jobs once moved abroad, no longer exist latently. Workers cannot be called back to factories and to professional jobs that have moved abroad; economic dislocation is irreversible and structural. RIP American capitalism.

Liquidity traps and a soon to collapse bond market

Peter Schiff, President of Euro Pacific Capital is at pains to explain why America is unable to climb out of a liquidity trap, in ‘The Stimulus Trap’, which appeared on his personal blog-site on 27 March. A liquidity trap is when, fearful of the future, or averse to risk, consumers do not increase consumption and producers hold back from investing. In this climate, even if a central bank holds down interest rates and injects large amounts of money into the economy, consumers and producers remain immobile, the economy does not get a move on. Central banks (Fed) can inject money into the economy by purchasing corporate and treasury bonds, and pushing mortgages for house purchases. Furthermore the Fed, Bank of England and ECB benchmark lending rates are so low that real rates are negative. (Bank of Japan’s nominal interest rate is near zero, so oddly, the real rate positive thanks to deflation!) Nevertheless, production and employment in all these countries, sputter momentarily when a stimulus package is announced, but soon, settle back to somnambulance – a liquidity trap.

“Beginning in 2001, the Bank of Japan unveiled a series of unconventional policies, “quantitative easing,” which pushed interest rates to zero, flooded commercial banks with liquidity, and bought unprecedented quantities of government bonds, asset-backed securities, and corporate debt. Conditions in Japan have deteriorated further and the underlying imbalances have gotten progressively worse. The United States is following Japan into the mire. After the crash of 2008, we implemented nearly the same set of policies. In the past two years, despite the surging stock market and apparently declining unemployment rate, the size and scope of these efforts have increased. But as is the case in Japan, we can clearly witness how the stimulus has perpetuated stagnation”.

Where then is all the ‘quantitatively eased’ money going? Chris Martenson says in ‘The Risk of Cascading Corrections in Bond Markets’, in Business Insider, that the excess liquidity is chasing the bonds, equities and mortgages, not investment in real production. It’s almost like arbitrage? Banks borrow from the Fed at zero interest; investors help themselves to this liquidity to bubble up excessive leverage, and channel into a bond and equity bubble and mounting house prices. The global bond market (sovereign and corporate) is enormous, about $100 trillion Martenson estimates; so when the bubble bursts, every 1% loss in bond values is a trillion dollars up in smoke.

Philip Gottheif in “Commodity Prices Still to High”, in Commodity Futures Forecast, (21 March), argues that despite slow economic growth, commodity prices are about three times higher than they were in 1994, and again the culprit is the printing presses at the world’s central banks which are burning the midnight oil. He argues that the future of oil is hard to predict, given the instability in the Middle East on one side, and the shale oil and gas bonanza in North America, on the other. He opines that the Obama Gamble (endeavouring to politically influence MENA) is still in play and should be watched for the remainder of his term.

I must thank my old friend Professor Harsha Sirisena in New Zealand, who sent me these pieces with unfailing, “There, didn’t I tell you so, years ago”, annotations all over them

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