Japanese Monetary Policy under Quantitative Easing:
Neo-Wicksellian versus Monetarist Interpretations - The other side of the earlier posts story.
Stephen Kirchner
School of Economics
University of New South Wales
PO Box 646 Edgecliff NSW 2027 Australia
Ph. +61 (0)2 9385 1346
stephen_kirchner@institutional@economics.com
Saturday, October 22, 2005
Sunday, October 16, 2005
A Modern Dilema - Fiat Money
I would suggest reading all these recent posts, about fiat money and the currency problem. The knowledge is here - we need to circle the wagons, and truly solve our serious problems - quickly!
"The Great Dollar Standard Era is a direct result of the removal of gold as the underpinning of the world's currencies. The vast overprinting of currency will inevitably debase the value of the U.S. dollar and, because so many foreign currencies are pegged to the dollar, the currency of those nations as well. Fiat money, simply put, is created out of nothing. A future promise to pay has never supported monetary value for long and the United States is so overextended today that it is doubtful it could ever honor its overall real debts." ...
"The Great Dollar Standard Era is a direct result of the removal of gold as the underpinning of the world's currencies. The vast overprinting of currency will inevitably debase the value of the U.S. dollar and, because so many foreign currencies are pegged to the dollar, the currency of those nations as well. Fiat money, simply put, is created out of nothing. A future promise to pay has never supported monetary value for long and the United States is so overextended today that it is doubtful it could ever honor its overall real debts." ...
Deflation's Revenge On Illusory Wealth
This one's important! - A speculated strong dollar collapse?
...When the workout teams tote up assets and liabilities, the post-mortem will show that America’s economic engine had been running on fumes for years and that most of our supposed wealth was merely a credit-induced mirage. Hard to believe? Then ponder this: Derivative debt instruments currently in play total $248 trillion, according to the most recent figures from the Bank of International Settlements. This compares with a global economy in real goods and services amounting to a little less than $40 trillion. It’s not a case of the tail wagging the dog, but of the tail wagging an entire financial cosmos...
...Even before these factors emerged, however, Buffett, Soros and a few other Masters of the Universe were shorting the dollar in size. But as the chart makes clear, they have all been on the wrong side of the trade – not because their logic was terribly flawed, but because they failed to understand that it is financial speculation that has been driving the dollar, not the relatively puny dynamics of the world’s goods-and-services economy. Despite being in prodigious oversupply, the dollar is strengthening simply because it’s where all the leveraged action is. Who cares about the perfect storm. Leveraging dollars is still where it’s at -- the hottest game in a global casino that, even with an earthquake rumbling beneath it, remains eager and able to extend hundreds of trillions in credit to the players...
...When the workout teams tote up assets and liabilities, the post-mortem will show that America’s economic engine had been running on fumes for years and that most of our supposed wealth was merely a credit-induced mirage. Hard to believe? Then ponder this: Derivative debt instruments currently in play total $248 trillion, according to the most recent figures from the Bank of International Settlements. This compares with a global economy in real goods and services amounting to a little less than $40 trillion. It’s not a case of the tail wagging the dog, but of the tail wagging an entire financial cosmos...
...Even before these factors emerged, however, Buffett, Soros and a few other Masters of the Universe were shorting the dollar in size. But as the chart makes clear, they have all been on the wrong side of the trade – not because their logic was terribly flawed, but because they failed to understand that it is financial speculation that has been driving the dollar, not the relatively puny dynamics of the world’s goods-and-services economy. Despite being in prodigious oversupply, the dollar is strengthening simply because it’s where all the leveraged action is. Who cares about the perfect storm. Leveraging dollars is still where it’s at -- the hottest game in a global casino that, even with an earthquake rumbling beneath it, remains eager and able to extend hundreds of trillions in credit to the players...
Signals of the End of the Dollar Standard
Signals of the End of the Dollar Standard
....I was never an advocate of any form of gold standard, unlike the current Fed Chairman, now ironically testing the fiat money system to destruction.
However, in recent years the scales have fallen from my eyes. As Voltaire said in 1729 “paper money eventually goes down to its intrinsic value – zero.” Every fiat paper currency before or since has confirmed to this prediction. A fiat paper currency that is also the global reserve currency becomes this problem writ large. A US Treasury official of old - Sam Cross - put it this way: “if you postulate a system that depends on one country always following the right policies, you will find that sooner or later no such country exists. The system is eventually going to break down”. In my view the Dollar Standard system is irretrievably breaking down, as signaled by four recent developments described below: ....
....I was never an advocate of any form of gold standard, unlike the current Fed Chairman, now ironically testing the fiat money system to destruction.
However, in recent years the scales have fallen from my eyes. As Voltaire said in 1729 “paper money eventually goes down to its intrinsic value – zero.” Every fiat paper currency before or since has confirmed to this prediction. A fiat paper currency that is also the global reserve currency becomes this problem writ large. A US Treasury official of old - Sam Cross - put it this way: “if you postulate a system that depends on one country always following the right policies, you will find that sooner or later no such country exists. The system is eventually going to break down”. In my view the Dollar Standard system is irretrievably breaking down, as signaled by four recent developments described below: ....
The Dollar’s Problems Haven’t Gone Away
Good-By to Marshall Auerback- and good luck.
...As net foreign debt balloons, the size of any future adjustment grows apace. One is invariably driven to the conclusion that at some point, as an addition or alternative to crude protectionism, exchange controls will be necessary in order to manage the rising tide of private sector dollar sales that grow ever larger, swamping the ability of even the largest economies such as Japan to absorb them. This would indeed be ironic as the American government has waged an increasingly aggressive stance against countries which have not fully liberalized their own capital accounts. One wonders whether the anticipation of this eventuality would trigger huge capital flight a la Asia in 1997/98. Less noticed, but equally apparent is that informal controls already exist in certain realms of the American economy (the difficulties created by both regulatory and tax authorities in the purchases and holding of physical gold is but one small instance of this; even the much-vaunted ESF has unresolved tax issues which have yet to be resolved definitively by the IRS and the SEC).
Ultimately, it would not surprise us to see various restrictions imposed in regard to the holding of foreign currencies and gold. As recently as the early 1970s, Arthur Burns, then Fed Chairman, railed against the “unsound practice” of Americans having foreign currency bank accounts. This notion may seem far-fetched in today’s high-tech financial world, but the story of the US, particularly post-9/11, has been a steady erosion of economic and political freedoms. As virtually every encroachment on personal liberty in the US these days is rationalized on the grounds that it constitutes a necessary measure in support of the “war on terror”, we have little doubt that any such future restrictions would likewise be justified in this manner....
...As net foreign debt balloons, the size of any future adjustment grows apace. One is invariably driven to the conclusion that at some point, as an addition or alternative to crude protectionism, exchange controls will be necessary in order to manage the rising tide of private sector dollar sales that grow ever larger, swamping the ability of even the largest economies such as Japan to absorb them. This would indeed be ironic as the American government has waged an increasingly aggressive stance against countries which have not fully liberalized their own capital accounts. One wonders whether the anticipation of this eventuality would trigger huge capital flight a la Asia in 1997/98. Less noticed, but equally apparent is that informal controls already exist in certain realms of the American economy (the difficulties created by both regulatory and tax authorities in the purchases and holding of physical gold is but one small instance of this; even the much-vaunted ESF has unresolved tax issues which have yet to be resolved definitively by the IRS and the SEC).
Ultimately, it would not surprise us to see various restrictions imposed in regard to the holding of foreign currencies and gold. As recently as the early 1970s, Arthur Burns, then Fed Chairman, railed against the “unsound practice” of Americans having foreign currency bank accounts. This notion may seem far-fetched in today’s high-tech financial world, but the story of the US, particularly post-9/11, has been a steady erosion of economic and political freedoms. As virtually every encroachment on personal liberty in the US these days is rationalized on the grounds that it constitutes a necessary measure in support of the “war on terror”, we have little doubt that any such future restrictions would likewise be justified in this manner....
Tuesday, October 04, 2005
A Unified Balance of Law Systems Is The Imperative of Global Solutions
L.A.Gillespie - Link
{My goal - Write an international constitution to create a law and money standard based on the fundamental laws of nature.}
"You must think big ideas to advance." L.G.
"The fundamental law of the law is the constitution, and the fundamental laws of the constitution are the fundamental laws of nature, science and logic - or mind and person." L.G.
I have had a breakthrough, and discovered a new path, to scientific natural law logic. I have discovered scientific logic systems that can and will change the world. I have discovered scientific logic systems large enough to destroy or save the world. I have discovered how to create scientific moral logic systems of newly discovered natural law. I have discovered a scientific logic system superior to the "existing." Using the cognitive intellectual logical faculty, and adhering to absolute equilibriated objectivism... Scientific logic systems can be built from the fundamental natural laws to solve the world's problems. I can show you how to use scientific natural law's moral equilibrium logic to best Boolean, machine logic and the "existing" natural law logic. I tore the whole system apart, and put it back together with the scientific natural laws. I can prove beyond any reasonable doubt, that the separation of commercial powers and state powers is required, to safely advance all nations, by new scientific natural law logic systems. A superior scientific natural law argument can be based on philanthropy, entropy and equilibrium. The scientific natural laws can be used as a logic system proof, of John Nash's equilibriums, superiority over Adam Smith's supply and demand, and David Ricardo's comparative advantage natural laws. In other words, a democratic scientific logic system can be built to best the "existing" natural law, and state law logic systems... In order to advance civilization, scientific logic requires, the separation of state financial powers, and commercial financial powers.
"To develop the skill of correct thinking is in the first place to learn what you have to disregard. In order to go on, you have to know what to leave out; this is the essence of effective thinking." Kurt Godel
A U.S. Constitution Completeness - The U.S. Constitution requires a XXVIII'th amendment, to solve America's and the rest of the world's problems. This amendment is necessary because of the incompleteness of the existing U.S. Constitution. The present state of capitalism and U.S. Constitutional law can be proven mathematically incomplete, by natural equilibrium law, first discovered by John Nash, around 1950. A completed constitution is one where the greatest good is best served by the highest equilibrium possibe, of new constitutional laws. This certainly is not now the case. The natural law of equilibrium is the highest of all the natural laws, thus should be respected so... Only your deepest soul sees the world truly, and the above can be clearly seen by any honest person. The incompleteness of human understanding can only be enhanced toward completeness by truly realizing America needs a 28'th amendment based on the natural law of absolute equilibrium.
The natural law of philanthropic equilibrium can produce superior systems of universal economic justice. The power of the above's natural law ideas, creates law with teeth, as ideas connected to the natural laws have real teeth and true power. You see, the rudimentary problem is the U.S. Constitution's incompleteness, from our founding fathers on. Both Jefferson and Franklin offered completeness solutions, in their day, but these ideas did not make it into the original document - They should have. Franklin's works offer an international bank to manage the offshore tax havens, and Jefferson's works offered the 11'th amendment against monopolies. Many throughout history have offered these same solutions, from Plato to Keynes and our own Paul Davidson, but they have not been instituted, as they should have been. Isn't it about time?
The natural law of equilibrium demands an evolution of the U.S. Constitution. Natural equilibrium law demands a separation of powers to balance the U.S. Constitution in a perfect universal competition of markets, to create a true universal justice. The completeness of the separation of powers for the U.S. Constitution can be accomplished by simply creating and adding a 28'th amendment. The incompleteness of the separation of powers in the U.S. Constitution is glaringly obvious, when its is simply pointed out, and historical knowledge teaches us that natural equilibrium law works best under the widest separation of powers possible. We need a higher equilibriating U.S. Constitution, beyond Godel's constitutional incompleteness.
Remember, liberty is equilibrium, and absolute liberty is absolute equilibrium! The ideal is the absolute equilibrium of your law structures, and the problem only exists because there is no rudimentary natural law thinking. The natural laws grant the only way out of the semi-entropic systems. The higher ideas and natural laws of philanthropy and equilibrium are the only ideas and laws to best the lower ideas and natural laws of supply and demand, comparative advantage, and free trade. The fundamental house of naturally equilibriated laws, will be, and is, our only true savior. The rights of liberty, justice, and equality is a natural law of absolute equilibrium - The scales of true justice - The balance of all! The highest spirit of the law is the highest natural equilibrium - possible!
Is capitalism balanced? No! Let's write the sliding time scale law structure to balance it into an ideal and scientific universal justice! The #1 fundamental natural law of universal justice - Divide supply and demand into a multi-directional supply and demand, or, put money in competition with money, globally, and scientific universal justice can be achieved! It all comes down to, "If we set up government, all government, in business in competition with existing private commercial business, we can unilaterally make unlimited reasonable use of the printing press."
A Completeness Theorem - A tautology of universal completeness - Due to scientifically accepted facts of the incompletenesses of all present knowledge and logic systems, and the fact that we have never learned to talk the absolute truth, this self-logical proof is deemed necessary - The scientific universal truth, knowledge and wisdom of man, excluding the completenesses of cosmic balances, laws and truths, does not and can not exist in the incompletenesses of the past's and present's injustices. The scientific universal truth, knowledge and wisdom of man, excluding the completenesses of cosmic balances, laws and truths, can exist only in the future's ideal state of scientific universal justice, grounded in natural law. Tis a logical imperative, due to the past's and present's incompletenesses, that absolute true truth, knowledge and wisdom must be drawn from a perfected state future universal wisdom, truth and scientific logic, of the ideal universal completenesses! The incompleteness within the completeness, turned to the ideal state of scientific completeness, is the only absolute truth, and is based on the completeness of the fundamental natural laws in a true relationship to man's state laws, and fundamental scientific self-certainty, also based on the fundamental natural law of balance! The universal laws are completenesses within themselves. Properly used, they are the scientific proofs of themselves, and all universal reality! These natural fundamental laws are a self-logical proof, in and of themselves, of a natural spirit origin, due to the circular fact of logic itself, grounded in the very essence of our own spirit nature! Thus, the #1 law of absolute truths is - Absolute truths can only be drawn from the fundamental natural laws - the only truly grounded reality!
The law of scientific cognitive self-logic - The essence of righteous self-judgment over judgment is the king of the self! The soul is the only source of such righteous self-judgment, thus the intuitive soul exists! The lightening fast laws of mind are governed by the positive energy soul, the only possible answer, as all other energies are yin yang combos, and man can't think that fast! Thus, man is created with a mind and soul smarter than he is! This is the competition between intuitive trickster energy and soul energy. There are also three free wills - subtle soul will, subtle trickster will and our spirit's stronger will. This is the law of scientific self-logic, beyond man's ability to know its total self-functioning! The reverse engineering of logic and judgment shown in the natural laws is proof of a logical spirit producing the essences of logic and judgment in the first place! A discovery of the miraculous! The natural law of righteous self-judgment of judgment is the supreme conceptual law of man's nature! It's signature is our natural soul!
L.A.Gillespie - Link
{My goal - Write an international constitution to create a law and money standard based on the fundamental laws of nature.}
"You must think big ideas to advance." L.G.
"The fundamental law of the law is the constitution, and the fundamental laws of the constitution are the fundamental laws of nature, science and logic - or mind and person." L.G.
I have had a breakthrough, and discovered a new path, to scientific natural law logic. I have discovered scientific logic systems that can and will change the world. I have discovered scientific logic systems large enough to destroy or save the world. I have discovered how to create scientific moral logic systems of newly discovered natural law. I have discovered a scientific logic system superior to the "existing." Using the cognitive intellectual logical faculty, and adhering to absolute equilibriated objectivism... Scientific logic systems can be built from the fundamental natural laws to solve the world's problems. I can show you how to use scientific natural law's moral equilibrium logic to best Boolean, machine logic and the "existing" natural law logic. I tore the whole system apart, and put it back together with the scientific natural laws. I can prove beyond any reasonable doubt, that the separation of commercial powers and state powers is required, to safely advance all nations, by new scientific natural law logic systems. A superior scientific natural law argument can be based on philanthropy, entropy and equilibrium. The scientific natural laws can be used as a logic system proof, of John Nash's equilibriums, superiority over Adam Smith's supply and demand, and David Ricardo's comparative advantage natural laws. In other words, a democratic scientific logic system can be built to best the "existing" natural law, and state law logic systems... In order to advance civilization, scientific logic requires, the separation of state financial powers, and commercial financial powers.
"To develop the skill of correct thinking is in the first place to learn what you have to disregard. In order to go on, you have to know what to leave out; this is the essence of effective thinking." Kurt Godel
A U.S. Constitution Completeness - The U.S. Constitution requires a XXVIII'th amendment, to solve America's and the rest of the world's problems. This amendment is necessary because of the incompleteness of the existing U.S. Constitution. The present state of capitalism and U.S. Constitutional law can be proven mathematically incomplete, by natural equilibrium law, first discovered by John Nash, around 1950. A completed constitution is one where the greatest good is best served by the highest equilibrium possibe, of new constitutional laws. This certainly is not now the case. The natural law of equilibrium is the highest of all the natural laws, thus should be respected so... Only your deepest soul sees the world truly, and the above can be clearly seen by any honest person. The incompleteness of human understanding can only be enhanced toward completeness by truly realizing America needs a 28'th amendment based on the natural law of absolute equilibrium.
The natural law of philanthropic equilibrium can produce superior systems of universal economic justice. The power of the above's natural law ideas, creates law with teeth, as ideas connected to the natural laws have real teeth and true power. You see, the rudimentary problem is the U.S. Constitution's incompleteness, from our founding fathers on. Both Jefferson and Franklin offered completeness solutions, in their day, but these ideas did not make it into the original document - They should have. Franklin's works offer an international bank to manage the offshore tax havens, and Jefferson's works offered the 11'th amendment against monopolies. Many throughout history have offered these same solutions, from Plato to Keynes and our own Paul Davidson, but they have not been instituted, as they should have been. Isn't it about time?
The natural law of equilibrium demands an evolution of the U.S. Constitution. Natural equilibrium law demands a separation of powers to balance the U.S. Constitution in a perfect universal competition of markets, to create a true universal justice. The completeness of the separation of powers for the U.S. Constitution can be accomplished by simply creating and adding a 28'th amendment. The incompleteness of the separation of powers in the U.S. Constitution is glaringly obvious, when its is simply pointed out, and historical knowledge teaches us that natural equilibrium law works best under the widest separation of powers possible. We need a higher equilibriating U.S. Constitution, beyond Godel's constitutional incompleteness.
Remember, liberty is equilibrium, and absolute liberty is absolute equilibrium! The ideal is the absolute equilibrium of your law structures, and the problem only exists because there is no rudimentary natural law thinking. The natural laws grant the only way out of the semi-entropic systems. The higher ideas and natural laws of philanthropy and equilibrium are the only ideas and laws to best the lower ideas and natural laws of supply and demand, comparative advantage, and free trade. The fundamental house of naturally equilibriated laws, will be, and is, our only true savior. The rights of liberty, justice, and equality is a natural law of absolute equilibrium - The scales of true justice - The balance of all! The highest spirit of the law is the highest natural equilibrium - possible!
Is capitalism balanced? No! Let's write the sliding time scale law structure to balance it into an ideal and scientific universal justice! The #1 fundamental natural law of universal justice - Divide supply and demand into a multi-directional supply and demand, or, put money in competition with money, globally, and scientific universal justice can be achieved! It all comes down to, "If we set up government, all government, in business in competition with existing private commercial business, we can unilaterally make unlimited reasonable use of the printing press."
A Completeness Theorem - A tautology of universal completeness - Due to scientifically accepted facts of the incompletenesses of all present knowledge and logic systems, and the fact that we have never learned to talk the absolute truth, this self-logical proof is deemed necessary - The scientific universal truth, knowledge and wisdom of man, excluding the completenesses of cosmic balances, laws and truths, does not and can not exist in the incompletenesses of the past's and present's injustices. The scientific universal truth, knowledge and wisdom of man, excluding the completenesses of cosmic balances, laws and truths, can exist only in the future's ideal state of scientific universal justice, grounded in natural law. Tis a logical imperative, due to the past's and present's incompletenesses, that absolute true truth, knowledge and wisdom must be drawn from a perfected state future universal wisdom, truth and scientific logic, of the ideal universal completenesses! The incompleteness within the completeness, turned to the ideal state of scientific completeness, is the only absolute truth, and is based on the completeness of the fundamental natural laws in a true relationship to man's state laws, and fundamental scientific self-certainty, also based on the fundamental natural law of balance! The universal laws are completenesses within themselves. Properly used, they are the scientific proofs of themselves, and all universal reality! These natural fundamental laws are a self-logical proof, in and of themselves, of a natural spirit origin, due to the circular fact of logic itself, grounded in the very essence of our own spirit nature! Thus, the #1 law of absolute truths is - Absolute truths can only be drawn from the fundamental natural laws - the only truly grounded reality!
The law of scientific cognitive self-logic - The essence of righteous self-judgment over judgment is the king of the self! The soul is the only source of such righteous self-judgment, thus the intuitive soul exists! The lightening fast laws of mind are governed by the positive energy soul, the only possible answer, as all other energies are yin yang combos, and man can't think that fast! Thus, man is created with a mind and soul smarter than he is! This is the competition between intuitive trickster energy and soul energy. There are also three free wills - subtle soul will, subtle trickster will and our spirit's stronger will. This is the law of scientific self-logic, beyond man's ability to know its total self-functioning! The reverse engineering of logic and judgment shown in the natural laws is proof of a logical spirit producing the essences of logic and judgment in the first place! A discovery of the miraculous! The natural law of righteous self-judgment of judgment is the supreme conceptual law of man's nature! It's signature is our natural soul!
L.A.Gillespie - Link
Tuesday, September 27, 2005
A U.S. Constitution Completeness
L.A.Gillespie
"To develop the skill of correct thinking is in the first place to learn what you have to disregard. In order to go on, you have to know what to leave out; this is the essence of effective thinking." Kurt Godel
The U.S. Constitution requires a XXVIII'th amendment, to solve America's and the rest of the world's problems. This amendment is necessary because of the incompleteness of the existing U.S. Constitution. The present state of capitalism and U.S. Constitutional law can be proven mathematically incomplete, by natural equilibrium law, first discovered by John Nash, around 1950... A completed constitution is one where the greatest good is best served by the highest equilibrium possible, of new constitutional laws. This certainly is not now the case. The natural law of equilibrium is the highest of all the natural laws, thus should be respected so. Only your deepest soul sees the world truly, and the above can be clearly seen by any honest person. The incompleteness of human understanding can only be enhanced toward completeness by truly realizing America needs a 28'th amendment based on the natural law of absolute equilibrium.
The natural law of philanthropic equilibrium can produce superior systems of universal economic justice. The power of the above's natural law ideas, creates law with teeth, as ideas connected to the natural laws have real teeth and true power. You see, the rudimentary problem is The U.S. Constitution's incompleteness, from our founding fathers on. Both Jefferson and Franklin offered completeness solutions, in their day, but these ideas did not make it into the original document - They should have. Franklin's works offer an international bank to manage the offshore tax havens, and Jefferson's works offered the 11'th amendment against monopolies. Many throughout history have offered these same solutions, from Plato to Keynes and our own Paul Davidson, but they have not been instituted, as they should have been. Isn't it about time?
The natural law of equilibrium demands an evolution of the U.S. Constitution. Natural equilibrium law demands a separation of powers to balance the U.S. Constitution in a perfect universal competition of markets, to create a true universal justice. The completeness of the separation of powers for the U.S. Constitution can be accomplished by simply creating and adding a 28'th amendment. The incompleteness of the separation of powers in the U.S. Constitution is glaringly obvious, when it is simply pointed out, and historical knowledge teaches us that natural equilibrium law works best under the widest separation of powers possible. We need a higher equilibriating U.S. Constitution, beyond Godel's constitutional incompleteness.
Remember, liberty is equilibrium, and absolute liberty is absolute equilibrium! The ideal is the absolute equilibrium of your law structures, and the problem only exists because there is no rudimentary natural law thinking. The natural laws grant the only way out of the semi-entropic systems. The higher ideas and natural laws of philanthropy and equilibrium are the only ideas and laws to best the lower ideas and natural laws of supply and demand, comparative advantage, and free trade. The fundamental house of naturally equilibriated laws, will be, and is, our only true savior. The rights of liberty, justice, and equality is a natural law of the absolute equilibrium - The scales of true justice - The balance of All! The highest spirit of the law is the highest natural equilibrium - possible!
L.A.Gillespie
"To develop the skill of correct thinking is in the first place to learn what you have to disregard. In order to go on, you have to know what to leave out; this is the essence of effective thinking." Kurt Godel
The U.S. Constitution requires a XXVIII'th amendment, to solve America's and the rest of the world's problems. This amendment is necessary because of the incompleteness of the existing U.S. Constitution. The present state of capitalism and U.S. Constitutional law can be proven mathematically incomplete, by natural equilibrium law, first discovered by John Nash, around 1950... A completed constitution is one where the greatest good is best served by the highest equilibrium possible, of new constitutional laws. This certainly is not now the case. The natural law of equilibrium is the highest of all the natural laws, thus should be respected so. Only your deepest soul sees the world truly, and the above can be clearly seen by any honest person. The incompleteness of human understanding can only be enhanced toward completeness by truly realizing America needs a 28'th amendment based on the natural law of absolute equilibrium.
The natural law of philanthropic equilibrium can produce superior systems of universal economic justice. The power of the above's natural law ideas, creates law with teeth, as ideas connected to the natural laws have real teeth and true power. You see, the rudimentary problem is The U.S. Constitution's incompleteness, from our founding fathers on. Both Jefferson and Franklin offered completeness solutions, in their day, but these ideas did not make it into the original document - They should have. Franklin's works offer an international bank to manage the offshore tax havens, and Jefferson's works offered the 11'th amendment against monopolies. Many throughout history have offered these same solutions, from Plato to Keynes and our own Paul Davidson, but they have not been instituted, as they should have been. Isn't it about time?
The natural law of equilibrium demands an evolution of the U.S. Constitution. Natural equilibrium law demands a separation of powers to balance the U.S. Constitution in a perfect universal competition of markets, to create a true universal justice. The completeness of the separation of powers for the U.S. Constitution can be accomplished by simply creating and adding a 28'th amendment. The incompleteness of the separation of powers in the U.S. Constitution is glaringly obvious, when it is simply pointed out, and historical knowledge teaches us that natural equilibrium law works best under the widest separation of powers possible. We need a higher equilibriating U.S. Constitution, beyond Godel's constitutional incompleteness.
Remember, liberty is equilibrium, and absolute liberty is absolute equilibrium! The ideal is the absolute equilibrium of your law structures, and the problem only exists because there is no rudimentary natural law thinking. The natural laws grant the only way out of the semi-entropic systems. The higher ideas and natural laws of philanthropy and equilibrium are the only ideas and laws to best the lower ideas and natural laws of supply and demand, comparative advantage, and free trade. The fundamental house of naturally equilibriated laws, will be, and is, our only true savior. The rights of liberty, justice, and equality is a natural law of the absolute equilibrium - The scales of true justice - The balance of All! The highest spirit of the law is the highest natural equilibrium - possible!
L.A.Gillespie
Friday, September 09, 2005
A Completeness Theorem
MacroMouse
"To develop the skill of correct thinking is in the first place to learn what you have to disregard. In order to go on, you have to know what to leave out; this is the essence of effective thinking." Kurt Godel
A Completeness Theorem - A tautology of universal completeness - Due to scientifically accepted facts of the incompletenesses of all present knowledge and logic systems, and the fact that we have never learned to talk the absolute truth, this tautology is deemed necessary - The absolute universal truth, knowledge and wisdom of man, excluding the completenesses of cosmic balances, laws and truths, does not and can not exist in the incompletenesses of the past's and present's injustices. The absolute universal truth, knowledge and wisdom of man, excluding the completenesses of cosmic balances, laws and truths, can exist only in the future's ideal state of absolute universal justice, grounded in natural law. Tis a logical imperative, due to the past's and present's incompletenesses, that absolute true truth, knowledge and wisdom must be drawn from a perfected state future universal wisdom, truth and absolute logic, of the ideal universal completenesses! The incompleteness within the completeness, turned to the ideal state of absolute completeness, is the only absolute truth, and is based on the completeness of the fundamental natural laws in a true relationship to man's state laws, and fundamental absolute self-certainty, also based on the fundamental natural law of balance! The universal laws are completenesses within themselves. Properly used, they are the absolute proofs of themselves, and all universal reality! These natural fundamental laws are a tautological proof, in and of themselves, of a natural spirit origin, due to the circular fact of logic itself, grounded in the very essence of our own spirit nature! Thus, the #1 law of absoulte truths is - Absolute truths can only be drawn from the fundamental natural laws - the only truly grounded reality!"
L.A.Gillespie - Link
"To develop the skill of correct thinking is in the first place to learn what you have to disregard. In order to go on, you have to know what to leave out; this is the essence of effective thinking." Kurt Godel
A Completeness Theorem - A tautology of universal completeness - Due to scientifically accepted facts of the incompletenesses of all present knowledge and logic systems, and the fact that we have never learned to talk the absolute truth, this tautology is deemed necessary - The absolute universal truth, knowledge and wisdom of man, excluding the completenesses of cosmic balances, laws and truths, does not and can not exist in the incompletenesses of the past's and present's injustices. The absolute universal truth, knowledge and wisdom of man, excluding the completenesses of cosmic balances, laws and truths, can exist only in the future's ideal state of absolute universal justice, grounded in natural law. Tis a logical imperative, due to the past's and present's incompletenesses, that absolute true truth, knowledge and wisdom must be drawn from a perfected state future universal wisdom, truth and absolute logic, of the ideal universal completenesses! The incompleteness within the completeness, turned to the ideal state of absolute completeness, is the only absolute truth, and is based on the completeness of the fundamental natural laws in a true relationship to man's state laws, and fundamental absolute self-certainty, also based on the fundamental natural law of balance! The universal laws are completenesses within themselves. Properly used, they are the absolute proofs of themselves, and all universal reality! These natural fundamental laws are a tautological proof, in and of themselves, of a natural spirit origin, due to the circular fact of logic itself, grounded in the very essence of our own spirit nature! Thus, the #1 law of absoulte truths is - Absolute truths can only be drawn from the fundamental natural laws - the only truly grounded reality!"
L.A.Gillespie - Link
Monday, August 22, 2005
Thursday, August 11, 2005
Inflation - Deflation?
Inflationists missing the big picture
Chuck DiFalco is a software engineer in League City, Texas.
The inflation versus deflation debate is the most interesting, as well as the most hotly debated, macroeconomic issue concerning the current secular bear market in global equities. The current cyclical bull market (’02-’05) notwithstanding, the “Great Recession” is still with us. The five years that have passed since the stock market peak in 2000 most likely contain the easy part of the 10 to 20 year economic bust. A critical aspect for a person’s desire for capital preservation is to know whether the rest of the bust will be characterized by inflation or not. Ignoring the other side of the (for now) academic debate, as part of an “I’m right” zeal, can doom an investor to years of losses or sub par returns. Indeed, the world economy might deal a pernicious dose of both inflation and deflation to everyone’s dismay. While I cannot expose all my ideas on this issue in one short article, I first focus on one critical aspect, that bigger power brokers can trump big ones.
“Give someone a hammer, and everything looks like a nail.” Those inflationists with economics or mathematics backgrounds, with their data plots representing equations laden with logarithms, derivatives and exponentials (I took one, maybe two dozen college math courses), often fall into this logical trap. There is no room in their plots for outside-the-chart thinking that could result in discontinuities in the otherwise smooth lines or clean waves. Current trends NEVER continue! Many inflationists dismiss phenomena such as politics, mass psychology, and event risk. These messy and unquantifiable “what ifs”, however, still exist, and serious investors must literally take them into account. The focus on the realm of numbers, intensified by looking backwards in time, sits at the heart of why many inflationists miss the big picture.
Inflation versus deflation articles repeatedly delve into definitions. While I have my own extensive views about the meaning of up and down, I will (perhaps mercifully) postpone such irreverent discussion. At the risk of oversimplification, I will restrict inflation, with a few strokes of the keyboard, to the increase in price level of a basket of goods and services in the USA. Note that the popularized measures of this narrowly defined inflation, such as CPI, core rates, deflators, etc., don’t even do a good job of this task. Their resultant effect on asset prices is what concerns investors struggling to profit in an overpriced world.
Now, back to the future. There are basically two camps on how the sharp end of the Great Recession will play out over the next ten or so years. The inflationists argue for a surge in inflation. Like that 1970’s show, irresponsible government and quasi-government institutions will print vast quantities of valueless fiat currency in the vain attempt to anesthetize the voting populace from any and all economic pain. On the other hand, the deflationists contend that the next decade will feel more like the desperate 1930’s. A few well-placed mortals cannot overcome the Kondratieff cycle of market economies, they say. The inevitable aftermath of the feel-good 1982-2000 “autumn” can only be a dark, deflationary winter.
Gross domestic product, trade deficits, trillions in debt, central banks, international asset, labor, and goods markets--what can be bigger than the global economy? Here the inflationists miss the boat on one important point. The crux of their argument stems in their contention that central banks, most notably the US Federal Reserve Bank, one of the most powerful quasi-government institutions in the world, will never let deflation occur. Everybody knows that deflation renders central banks powerless. Their most potent weapon, the level of short-term interest rates, then become ineffective because zero is as low as they can go. When prices are falling, and people cannot earn money in a bank account, they will just withdraw it and stuff it in their safe deposit boxes. Thus, the “fed” will just create money out of thin air in their own bank account. Computers are much faster than printing presses to this end.
The implied omnipotence of central banks is an incorrect characterization. Central banks, including the USA’s and China’s, do not hold the commanding heights over their own economies, let alone over the global economy. There are other, bigger players, ready to overrule the central bank. Most correctly take it for granted that the Communist Party has this power in China. To forget or dismiss that the same power exists in the USA is a serious mistake. Right now, the USA is the world’s only superpower, and its money is the world’s reserve currency. A volatile dollar, suffering from chronic trade deficits, and stoking fears of (but not quite the quantity of) 1970’s style inflation, would jeopardize the dollar’s reserve status, and thus undermine political and military global primacy. You cannot be a world power if your highly visible currency loses value and drags down your economy with it. Germany, with its hyperinflation in the early 1920’s, is an extreme example. Also, recall the American “malaise” versus Soviet-style totalitarianism in the stagflationary 1970’s. If there were a currency crisis in the next decade, which could involve the mere threat of sudden devaluation, let alone an actual one like Argentina had just a few years ago, do you think the US government would stand idly by and let the dollar crash in the currency markets? Elected government officials like and will continue to jealously guard their positions of power in Washington, DC. As they feel that power dropping with the dollar’s value, are they going to delegate economy fixing authority to a recession–phobic federal reserve? Not a chance. The US federal reserve does not operate in a political vacuum.
How would the US government fight a dollar crisis? Like backward looking generals, it would fight the last war. There was a dollar crisis in the 1970s, with the US going off the gold standard, oil embargos, soaring inflation, mobbed gasoline stations, recessions, stagflation, exponential precious metals prices, and WIN (Whip Inflation Now) buttons. Eventually the elected politicians in the US were forced to act strongly. Along came Paul Volcker, appointed to chairmanship of the federal reserve, armed with a single mindedness to destroy inflation, and determined to increase interest rates regardless of the economic cost. He provided a spectacular economic discontinuity in 1979-80. The resulting high real interest rates created benign disinflation from the mid 1980s to the late 1990s. A 2010 (to guess on a year) administration would see that paradigm, and think that we could do it again. The heat would be turned on the federal reserve to increase short term interest rates to save the dollar. While an outright seizure of the federal reserve might not be politically feasible, more subtle pressures might be applied. Executive and legislative big shots could “make happen” forced resignations and appointments of more aggressive federal reserve board members. What could do the trick is a simple “nudge nudge, wink wink, if you don’t go along with us or resign, we’ve heard of many hellacious IRS audits recently.” Regardless of the actual power mechanism, the US federal reserve board members ultimately serve elected politicians.
The result might not be the same next time, since all other things will not be equal to the 1970s USA. A scenario of downsized wages and benefits, unsustainably high consumer, corporate, and government debt loads, and the subsequent cascade of bankruptcies and credit destruction could mean that inflation drops below zero for an extended period of time—even ten months, let alone 10 years, would feel like a long time—but that’s another article. Even now, the more I hear protests that the US is not like the deflationary Japan of the 1990s, the more we’re turning Japanese. I have read that elected politicians would have no stomach to risk serious recession(s) by creating an environment in which real interest rates surge. I’m not confident that the logic would match political reality. Interest rate hawks might have a strong political ally. I see the huge baby boomer segment of the population increasingly demand investment income, as opposed to capital appreciation. To those millions of registered voters with nonzero portfolios, increasing real interest rates would be a GOOD thing. The inflation busters could also be cheered by an impatient citizenry wanting the government to do something NOW about an inflation scare (but not reality) highlighted by volatile gasoline prices. The inflationists counter that the US government would not want to raise taxes, and instead inflate away, its debt. Oh, really? Rather than risk superpower status, why not raise taxes in a politically palatable way? You think politicians are not clever enough to pull it off? “It’s all China’s fault that we’re in such a mess! And India! And everyone else! Let’s do right for homegrown American products. An across the board tariff on all imported goods and services! Let’s help American workers! Let’s get America back on its feet again.” This is one scenario out of many that I can envision in which an inflation and deflation combine to devastate the standard of living in the US, thus confounding both the inflationists and deflationists. Markets enjoy maximizing investor frustration.
Can the inflationists be correct? There is a possibility that shocking price increases, even hyperinflation, will negate the current deflationary pressures of globalization and irredeemable debt accumulation. If people like “Helicopter” Bernanke get their way without veto from the three branches of the federal government, an extra zero or two might magically be appended to everyone’s bank balance. Seriously, the way to push on a string might be to dangle an enticing carrot in front of the hungry person holding the other end, and to hold on for dear life. The carrot could take the form of millions of fat US Treasury checks in the mail, wrapped in some catchy advertising like “Citizenship Dividend”. The money behind the check would quietly be created from nothing, or noisily obscured in an Enron-style “off budget” accounting scam. The US government would in either case have no intention of financial discipline or honesty. Consumers would rush to spend their money before the government could debase it further. Dollar devaluation would shift into high gear. Perhaps there is a cycle bigger than the “K-wave” that totally trumps deflation.
While this “ugly” scenario might not be quite what most inflationists have in mind, the general idea of creating monopoly money from nothing is common. They remain convinced that the federal reserve bank’s supposedly unlimited power to create money will inevitably overpower deflation. Inflationists focus on chartable measures of money supplies, at the risk of ignoring innumerable factors that are integral parts of the economic big picture. Both they and their deflationist colleagues risk much more than they realize with their one-way bets. Krassimir Petrov proposes that China, with its huge surpluses, will do anything to prevent Stephen Roach’s “global imbalances” from crashing down before the 2008 Beijing Olympics. Thus, we just might have some time to theorize, strategize, invest, and hedge before the Great Recession decides the inflation question for us.
Chuck DiFalco is a software engineer in League City, Texas.
The inflation versus deflation debate is the most interesting, as well as the most hotly debated, macroeconomic issue concerning the current secular bear market in global equities. The current cyclical bull market (’02-’05) notwithstanding, the “Great Recession” is still with us. The five years that have passed since the stock market peak in 2000 most likely contain the easy part of the 10 to 20 year economic bust. A critical aspect for a person’s desire for capital preservation is to know whether the rest of the bust will be characterized by inflation or not. Ignoring the other side of the (for now) academic debate, as part of an “I’m right” zeal, can doom an investor to years of losses or sub par returns. Indeed, the world economy might deal a pernicious dose of both inflation and deflation to everyone’s dismay. While I cannot expose all my ideas on this issue in one short article, I first focus on one critical aspect, that bigger power brokers can trump big ones.
“Give someone a hammer, and everything looks like a nail.” Those inflationists with economics or mathematics backgrounds, with their data plots representing equations laden with logarithms, derivatives and exponentials (I took one, maybe two dozen college math courses), often fall into this logical trap. There is no room in their plots for outside-the-chart thinking that could result in discontinuities in the otherwise smooth lines or clean waves. Current trends NEVER continue! Many inflationists dismiss phenomena such as politics, mass psychology, and event risk. These messy and unquantifiable “what ifs”, however, still exist, and serious investors must literally take them into account. The focus on the realm of numbers, intensified by looking backwards in time, sits at the heart of why many inflationists miss the big picture.
Inflation versus deflation articles repeatedly delve into definitions. While I have my own extensive views about the meaning of up and down, I will (perhaps mercifully) postpone such irreverent discussion. At the risk of oversimplification, I will restrict inflation, with a few strokes of the keyboard, to the increase in price level of a basket of goods and services in the USA. Note that the popularized measures of this narrowly defined inflation, such as CPI, core rates, deflators, etc., don’t even do a good job of this task. Their resultant effect on asset prices is what concerns investors struggling to profit in an overpriced world.
Now, back to the future. There are basically two camps on how the sharp end of the Great Recession will play out over the next ten or so years. The inflationists argue for a surge in inflation. Like that 1970’s show, irresponsible government and quasi-government institutions will print vast quantities of valueless fiat currency in the vain attempt to anesthetize the voting populace from any and all economic pain. On the other hand, the deflationists contend that the next decade will feel more like the desperate 1930’s. A few well-placed mortals cannot overcome the Kondratieff cycle of market economies, they say. The inevitable aftermath of the feel-good 1982-2000 “autumn” can only be a dark, deflationary winter.
Gross domestic product, trade deficits, trillions in debt, central banks, international asset, labor, and goods markets--what can be bigger than the global economy? Here the inflationists miss the boat on one important point. The crux of their argument stems in their contention that central banks, most notably the US Federal Reserve Bank, one of the most powerful quasi-government institutions in the world, will never let deflation occur. Everybody knows that deflation renders central banks powerless. Their most potent weapon, the level of short-term interest rates, then become ineffective because zero is as low as they can go. When prices are falling, and people cannot earn money in a bank account, they will just withdraw it and stuff it in their safe deposit boxes. Thus, the “fed” will just create money out of thin air in their own bank account. Computers are much faster than printing presses to this end.
The implied omnipotence of central banks is an incorrect characterization. Central banks, including the USA’s and China’s, do not hold the commanding heights over their own economies, let alone over the global economy. There are other, bigger players, ready to overrule the central bank. Most correctly take it for granted that the Communist Party has this power in China. To forget or dismiss that the same power exists in the USA is a serious mistake. Right now, the USA is the world’s only superpower, and its money is the world’s reserve currency. A volatile dollar, suffering from chronic trade deficits, and stoking fears of (but not quite the quantity of) 1970’s style inflation, would jeopardize the dollar’s reserve status, and thus undermine political and military global primacy. You cannot be a world power if your highly visible currency loses value and drags down your economy with it. Germany, with its hyperinflation in the early 1920’s, is an extreme example. Also, recall the American “malaise” versus Soviet-style totalitarianism in the stagflationary 1970’s. If there were a currency crisis in the next decade, which could involve the mere threat of sudden devaluation, let alone an actual one like Argentina had just a few years ago, do you think the US government would stand idly by and let the dollar crash in the currency markets? Elected government officials like and will continue to jealously guard their positions of power in Washington, DC. As they feel that power dropping with the dollar’s value, are they going to delegate economy fixing authority to a recession–phobic federal reserve? Not a chance. The US federal reserve does not operate in a political vacuum.
How would the US government fight a dollar crisis? Like backward looking generals, it would fight the last war. There was a dollar crisis in the 1970s, with the US going off the gold standard, oil embargos, soaring inflation, mobbed gasoline stations, recessions, stagflation, exponential precious metals prices, and WIN (Whip Inflation Now) buttons. Eventually the elected politicians in the US were forced to act strongly. Along came Paul Volcker, appointed to chairmanship of the federal reserve, armed with a single mindedness to destroy inflation, and determined to increase interest rates regardless of the economic cost. He provided a spectacular economic discontinuity in 1979-80. The resulting high real interest rates created benign disinflation from the mid 1980s to the late 1990s. A 2010 (to guess on a year) administration would see that paradigm, and think that we could do it again. The heat would be turned on the federal reserve to increase short term interest rates to save the dollar. While an outright seizure of the federal reserve might not be politically feasible, more subtle pressures might be applied. Executive and legislative big shots could “make happen” forced resignations and appointments of more aggressive federal reserve board members. What could do the trick is a simple “nudge nudge, wink wink, if you don’t go along with us or resign, we’ve heard of many hellacious IRS audits recently.” Regardless of the actual power mechanism, the US federal reserve board members ultimately serve elected politicians.
The result might not be the same next time, since all other things will not be equal to the 1970s USA. A scenario of downsized wages and benefits, unsustainably high consumer, corporate, and government debt loads, and the subsequent cascade of bankruptcies and credit destruction could mean that inflation drops below zero for an extended period of time—even ten months, let alone 10 years, would feel like a long time—but that’s another article. Even now, the more I hear protests that the US is not like the deflationary Japan of the 1990s, the more we’re turning Japanese. I have read that elected politicians would have no stomach to risk serious recession(s) by creating an environment in which real interest rates surge. I’m not confident that the logic would match political reality. Interest rate hawks might have a strong political ally. I see the huge baby boomer segment of the population increasingly demand investment income, as opposed to capital appreciation. To those millions of registered voters with nonzero portfolios, increasing real interest rates would be a GOOD thing. The inflation busters could also be cheered by an impatient citizenry wanting the government to do something NOW about an inflation scare (but not reality) highlighted by volatile gasoline prices. The inflationists counter that the US government would not want to raise taxes, and instead inflate away, its debt. Oh, really? Rather than risk superpower status, why not raise taxes in a politically palatable way? You think politicians are not clever enough to pull it off? “It’s all China’s fault that we’re in such a mess! And India! And everyone else! Let’s do right for homegrown American products. An across the board tariff on all imported goods and services! Let’s help American workers! Let’s get America back on its feet again.” This is one scenario out of many that I can envision in which an inflation and deflation combine to devastate the standard of living in the US, thus confounding both the inflationists and deflationists. Markets enjoy maximizing investor frustration.
Can the inflationists be correct? There is a possibility that shocking price increases, even hyperinflation, will negate the current deflationary pressures of globalization and irredeemable debt accumulation. If people like “Helicopter” Bernanke get their way without veto from the three branches of the federal government, an extra zero or two might magically be appended to everyone’s bank balance. Seriously, the way to push on a string might be to dangle an enticing carrot in front of the hungry person holding the other end, and to hold on for dear life. The carrot could take the form of millions of fat US Treasury checks in the mail, wrapped in some catchy advertising like “Citizenship Dividend”. The money behind the check would quietly be created from nothing, or noisily obscured in an Enron-style “off budget” accounting scam. The US government would in either case have no intention of financial discipline or honesty. Consumers would rush to spend their money before the government could debase it further. Dollar devaluation would shift into high gear. Perhaps there is a cycle bigger than the “K-wave” that totally trumps deflation.
While this “ugly” scenario might not be quite what most inflationists have in mind, the general idea of creating monopoly money from nothing is common. They remain convinced that the federal reserve bank’s supposedly unlimited power to create money will inevitably overpower deflation. Inflationists focus on chartable measures of money supplies, at the risk of ignoring innumerable factors that are integral parts of the economic big picture. Both they and their deflationist colleagues risk much more than they realize with their one-way bets. Krassimir Petrov proposes that China, with its huge surpluses, will do anything to prevent Stephen Roach’s “global imbalances” from crashing down before the 2008 Beijing Olympics. Thus, we just might have some time to theorize, strategize, invest, and hedge before the Great Recession decides the inflation question for us.
Tuesday, August 09, 2005
Saturday, July 30, 2005
Saturday, July 23, 2005
Inflation - Deflation?
Stephen Roach
The more I ponder the inflation story, the more I become convinced that we need to come up with a new approach. In two earlier essays, I addressed the shifting composition of inflation (see “Inflation Phobia” July 15, 2005) and the cross-border convergence of pricing (see “Inflation Convergence, July 18, 2005). In what follows, I explore some important shifts in the macro relationships that have long been at the heart of the inflation process. What emerges from this trilogy is a strong conviction that increasingly powerful forces of globalization have fundamentally altered the inflation outlook. Barring a setback to globalization or a major policy blunder, low inflation could well be here to stay for the foreseeable future.
Globalization is all about the cross-border integration of economies, markets, trade and financial capital flows, and information. Ultimately, it also entails increased mobility of the factors of production -- capital, labor, and technology -- thereby forcing us to think about the production process and the dissemination of services in an increasingly global context. That means the pricing of goods and services must also be examined in the same broader framework -- in essence, determined by the market-clearing balance between globalized supply and demand curves. The rapid expansion of global trade in recent years underscores the need to accept this analytical leap of faith in assessing inflation risk. By our calculations, global exports will exceed 28% of world GDP in 2005 -- easily a record and more than ten percentage points above the 17% share that prevailed as recently as 1986. As global trade continues to power ahead, the forces of globalization -- and their impacts on real economic and financial market activity -- can only intensify as a result.
It’s easy to be awestruck by the anecdotes of globalization; look no further than Tom Friedman’s latest best-seller, The World Is Flat (Farrar, Strauss and Giroux, 2005). As macro practitioners, however, we need to dig deeper. In particular, it is critical to assess whether cross-border integration has had a major impact on time-honored macro relationships that drive economic growth, employment, income generation, and inflation. I am very sympathetic to that possibility. I first explored such an outcome in the context of shifting global trends in employment and labor income generation (see my 5 October 2003 essay, The Global Labor Arbitrage). More recently, I have generalized this framework to include the cross-border arbitrage of saving and pricing (see my 6 June 2005 essay, The New Macro of Globalization). Some fascinating new research just published by the Bank for International Settlements adds further evidence to this debate. In particular, it sheds considerable light on how globalization is challenging the macro relationships that have long been at the heart of our understanding of the inflation process (see especially Chapter II of the 75th Annual Report of the BIS, June 2005). The BIS research provides a goldmine of evidence in the laboratory of globalization.
Three findings by the BIS strike me as especially noteworthy in revealing the impacts of globalization on inflation (see accompanying table): First is the link between exchange rates and import prices. Currency depreciation has long been perceived as an inflationary development. Unless foreign exporters are willing to compromise their profit margins, it makes sense for them to maintain price targets in home-currency terms -- thereby allowing external pricing to fluctuate with shifts in foreign exchange rates. While that’s still the case to some extent, BIS researchers have found that this relationship has become far less robust as globalization has taken hold. They compare this relationship over two periods -- the modern-day globalization era of 1990 to 2004 and the “pre-globalization” era of 1971-89. An examination of trends in six major developed countries -- the US, Japan, Germany, France, the UK, and Italy -- finds that the sensitivity (elasticity) of import prices to a one percentage point change in the nominal effective exchange rate has diminished sharply between the two periods. In the US, for example, the exchange-rate-import-price elasticity over the most recent 15 years was more than 60% below the elasticity of the preceding 20 years. Declines of varying magnitudes were also evident in the other five countries -- led by France and followed in descending order by Japan, the UK, Italy, and Germany.
Second, the BIS also finds that that the pass-through of import prices into the domestic price structure has been seriously curtailed as globalization has taken root. With the exception of Italy, all of the six countries examined have experienced a dramatic decline in the sensitivity between fluctuations in import prices and domestic prices in the past 15 years. I suspect this underscores the increased power of the global price-setting mechanism: Even if import prices rise due to currency fluctuations or market conditions in foreign economies, the lack of pricing leverage in a world with a hugely-expanded global supply curve now constrains domestic producers from passing through these higher external costs. In all six countries, this constraint has been evident in the form of reduced elasticities as globalization has taken off over the 1990 to 2004 period.
Third, there is also solid evidence of sharply diminished linkages between inflation and the broadest gauges of market pressures. This shows up in the form of reduced sensitivities between fluctuations in core inflation and changes in the so-called output gap -- the difference between actual and “potential,” or full-employment GDP. The UK experience is an exception to this trend, but sharp reductions in this elasticity were evident between the globalization and pre-globalization periods for Japan, France, Italy, the US, and Germany. Not surprisingly, this result fits well with equally-impressive declines in the linkages between unit labor costs and core inflation that I noted in the second installment of this trilogy (see my 19 July dispatch, “Inflation Convergence). If the broadly-based output gap has lost its potency in driving fluctuations in inflation, it stands to reason that a similar result can be expected from the linkage between inflation and the cost pressures that arise from cyclical fluctuations in the labor-market piece of the output gap.
Don’t get me wrong -- this is not ironclad evidence that globalization has repealed the macro rules of inflation. However, there can be no mistaking the evidence of a sharp reduction of the linkages between price setting and several of its key determinants -- namely, currencies, import prices, output gaps, and labor costs. It’s the timing of these diminished linkages that brings globalization into the story. For six major developed economies, the elasticities and correlations have declined during the same period when globalization has burst forth with extraordinary scope and speed. Maybe that’s just a coincidence. After all, there could certainly be other powerful forces at work. Central bankers would like you to believe that they deserve credit for their success as inflation fighters. In addition, the explosion of the Internet points to a new technology of price setting. These developments can hardly be dismissed as inconsequential events on the inflation front. But, in my view, they are dwarfed by the far more powerful market-driven forces of globalization. I do not think it is a coincidence that global inflation convergence has occurred at the same time when the roles of currencies, import prices, and labor costs have all diminished in importance in shaping inflation. Nor do I think it is a coincidence that these developments have all occurred during a period when global trade has soared repeatedly to new records as a share of world GDP.
At work, in my view, is the globalization of disinflation. Our old closed-economy models have been rendered increasingly obsolete by the emergence of far more powerful cross-border influences on pricing. As a result, in making inflation calls, we now need to pay less attention to country-specific shifts in unemployment and capacity utilization rates. Instead, we need to focus more on the global balance between supply and demand that shape the far more open models of globalization. In that broader context, the outlook for inflation remains very constructive, in my view. After all, it’s hard to have bottlenecks without a bottle.
The more I ponder the inflation story, the more I become convinced that we need to come up with a new approach. In two earlier essays, I addressed the shifting composition of inflation (see “Inflation Phobia” July 15, 2005) and the cross-border convergence of pricing (see “Inflation Convergence, July 18, 2005). In what follows, I explore some important shifts in the macro relationships that have long been at the heart of the inflation process. What emerges from this trilogy is a strong conviction that increasingly powerful forces of globalization have fundamentally altered the inflation outlook. Barring a setback to globalization or a major policy blunder, low inflation could well be here to stay for the foreseeable future.
Globalization is all about the cross-border integration of economies, markets, trade and financial capital flows, and information. Ultimately, it also entails increased mobility of the factors of production -- capital, labor, and technology -- thereby forcing us to think about the production process and the dissemination of services in an increasingly global context. That means the pricing of goods and services must also be examined in the same broader framework -- in essence, determined by the market-clearing balance between globalized supply and demand curves. The rapid expansion of global trade in recent years underscores the need to accept this analytical leap of faith in assessing inflation risk. By our calculations, global exports will exceed 28% of world GDP in 2005 -- easily a record and more than ten percentage points above the 17% share that prevailed as recently as 1986. As global trade continues to power ahead, the forces of globalization -- and their impacts on real economic and financial market activity -- can only intensify as a result.
It’s easy to be awestruck by the anecdotes of globalization; look no further than Tom Friedman’s latest best-seller, The World Is Flat (Farrar, Strauss and Giroux, 2005). As macro practitioners, however, we need to dig deeper. In particular, it is critical to assess whether cross-border integration has had a major impact on time-honored macro relationships that drive economic growth, employment, income generation, and inflation. I am very sympathetic to that possibility. I first explored such an outcome in the context of shifting global trends in employment and labor income generation (see my 5 October 2003 essay, The Global Labor Arbitrage). More recently, I have generalized this framework to include the cross-border arbitrage of saving and pricing (see my 6 June 2005 essay, The New Macro of Globalization). Some fascinating new research just published by the Bank for International Settlements adds further evidence to this debate. In particular, it sheds considerable light on how globalization is challenging the macro relationships that have long been at the heart of our understanding of the inflation process (see especially Chapter II of the 75th Annual Report of the BIS, June 2005). The BIS research provides a goldmine of evidence in the laboratory of globalization.
Three findings by the BIS strike me as especially noteworthy in revealing the impacts of globalization on inflation (see accompanying table): First is the link between exchange rates and import prices. Currency depreciation has long been perceived as an inflationary development. Unless foreign exporters are willing to compromise their profit margins, it makes sense for them to maintain price targets in home-currency terms -- thereby allowing external pricing to fluctuate with shifts in foreign exchange rates. While that’s still the case to some extent, BIS researchers have found that this relationship has become far less robust as globalization has taken hold. They compare this relationship over two periods -- the modern-day globalization era of 1990 to 2004 and the “pre-globalization” era of 1971-89. An examination of trends in six major developed countries -- the US, Japan, Germany, France, the UK, and Italy -- finds that the sensitivity (elasticity) of import prices to a one percentage point change in the nominal effective exchange rate has diminished sharply between the two periods. In the US, for example, the exchange-rate-import-price elasticity over the most recent 15 years was more than 60% below the elasticity of the preceding 20 years. Declines of varying magnitudes were also evident in the other five countries -- led by France and followed in descending order by Japan, the UK, Italy, and Germany.
Second, the BIS also finds that that the pass-through of import prices into the domestic price structure has been seriously curtailed as globalization has taken root. With the exception of Italy, all of the six countries examined have experienced a dramatic decline in the sensitivity between fluctuations in import prices and domestic prices in the past 15 years. I suspect this underscores the increased power of the global price-setting mechanism: Even if import prices rise due to currency fluctuations or market conditions in foreign economies, the lack of pricing leverage in a world with a hugely-expanded global supply curve now constrains domestic producers from passing through these higher external costs. In all six countries, this constraint has been evident in the form of reduced elasticities as globalization has taken off over the 1990 to 2004 period.
Third, there is also solid evidence of sharply diminished linkages between inflation and the broadest gauges of market pressures. This shows up in the form of reduced sensitivities between fluctuations in core inflation and changes in the so-called output gap -- the difference between actual and “potential,” or full-employment GDP. The UK experience is an exception to this trend, but sharp reductions in this elasticity were evident between the globalization and pre-globalization periods for Japan, France, Italy, the US, and Germany. Not surprisingly, this result fits well with equally-impressive declines in the linkages between unit labor costs and core inflation that I noted in the second installment of this trilogy (see my 19 July dispatch, “Inflation Convergence). If the broadly-based output gap has lost its potency in driving fluctuations in inflation, it stands to reason that a similar result can be expected from the linkage between inflation and the cost pressures that arise from cyclical fluctuations in the labor-market piece of the output gap.
Don’t get me wrong -- this is not ironclad evidence that globalization has repealed the macro rules of inflation. However, there can be no mistaking the evidence of a sharp reduction of the linkages between price setting and several of its key determinants -- namely, currencies, import prices, output gaps, and labor costs. It’s the timing of these diminished linkages that brings globalization into the story. For six major developed economies, the elasticities and correlations have declined during the same period when globalization has burst forth with extraordinary scope and speed. Maybe that’s just a coincidence. After all, there could certainly be other powerful forces at work. Central bankers would like you to believe that they deserve credit for their success as inflation fighters. In addition, the explosion of the Internet points to a new technology of price setting. These developments can hardly be dismissed as inconsequential events on the inflation front. But, in my view, they are dwarfed by the far more powerful market-driven forces of globalization. I do not think it is a coincidence that global inflation convergence has occurred at the same time when the roles of currencies, import prices, and labor costs have all diminished in importance in shaping inflation. Nor do I think it is a coincidence that these developments have all occurred during a period when global trade has soared repeatedly to new records as a share of world GDP.
At work, in my view, is the globalization of disinflation. Our old closed-economy models have been rendered increasingly obsolete by the emergence of far more powerful cross-border influences on pricing. As a result, in making inflation calls, we now need to pay less attention to country-specific shifts in unemployment and capacity utilization rates. Instead, we need to focus more on the global balance between supply and demand that shape the far more open models of globalization. In that broader context, the outlook for inflation remains very constructive, in my view. After all, it’s hard to have bottlenecks without a bottle.
Saturday, July 16, 2005
The Demise of The Euro
Kirchner
Back in 1999, I gave the euro five years at most. My prediction might have worked out if the goal posts, in particular, the Stability and Growth Pact, had not been shifted. Milton Friedman gave himself more wriggle room by forecasting the euro’s demise within ten years. The euro project is now being seriously questioned, and its possible demise actively canvassed, as Joachim Fels notes:
A full-blown political union in Europe is not only unlikely, it is also undesirable. Europe’s cultural, political and institutional diversity should be seen as a strength rather than a weakness because it encourages institutional competition for ideas and for mobile capital…
The euro’s founding fathers assumed that monetary union would over time quasi-automatically lead to political union and thus didn’t spend much time worrying about the long-run viability of the euro. But their assumption is clearly no longer valid…
As long as all euro members agree that higher inflation and fiscal deficits are desirable or at least unavoidable, this does not yet put the euro at risk. Each euro would merely buy less domestic and foreign goods and services. However, some member states’ tolerance for inflation and fiscal deficits is likely to be lower than that of others, especially if the euro would turn into a mini-lira. In this case, the more stability minded members might decide to introduce a harder currency. Needless to say, a break-up of EMU would be economically very costly for all parties involved. But that doesn’t mean it cannot happen.
These costs need to be balanced against the reduction in macroeconomic policy risk that would occur with the demise of the euro, in particular, the risk of serious monetary policy mistake by the ECB being propagated across the euro zone.
Back in 1999, I gave the euro five years at most. My prediction might have worked out if the goal posts, in particular, the Stability and Growth Pact, had not been shifted. Milton Friedman gave himself more wriggle room by forecasting the euro’s demise within ten years. The euro project is now being seriously questioned, and its possible demise actively canvassed, as Joachim Fels notes:
A full-blown political union in Europe is not only unlikely, it is also undesirable. Europe’s cultural, political and institutional diversity should be seen as a strength rather than a weakness because it encourages institutional competition for ideas and for mobile capital…
The euro’s founding fathers assumed that monetary union would over time quasi-automatically lead to political union and thus didn’t spend much time worrying about the long-run viability of the euro. But their assumption is clearly no longer valid…
As long as all euro members agree that higher inflation and fiscal deficits are desirable or at least unavoidable, this does not yet put the euro at risk. Each euro would merely buy less domestic and foreign goods and services. However, some member states’ tolerance for inflation and fiscal deficits is likely to be lower than that of others, especially if the euro would turn into a mini-lira. In this case, the more stability minded members might decide to introduce a harder currency. Needless to say, a break-up of EMU would be economically very costly for all parties involved. But that doesn’t mean it cannot happen.
These costs need to be balanced against the reduction in macroeconomic policy risk that would occur with the demise of the euro, in particular, the risk of serious monetary policy mistake by the ECB being propagated across the euro zone.
Friday, July 01, 2005
Thinking Minsky - D.Noland
Minsky
“Capitalism is essentially a financial system, and the peculiar behavior attributes of a capitalist economy center around the impact of finance upon system behavior.” Hyman Minsky, “Financial Intermediation in the Money and Capital Markets,” 1967
“The financial structure of the American economy has undergone significant evolution over the history of the republic. In the initial era of commercial capitalism, external finance was used primarily to facilitate commerce by financing goods in process or in transit. The present period, in contrast, is one of money-manager capitalism, where financial markets and arrangements are dominated by institutional investors.” Hyman Minsky, “Economic Insecurity and the Institutional Prerequisites for Successful Capitalism,” Journal of Post Keynesian Economics, Winter 1996/97
“Looking at the economy from a Wall Street board room, we see a paper world – a world of commitments to pay cash today and in the future. These cash flows are a legacy of past contracts in which money today was exchanged for money in the future. In addition, we see deals being made in which commitments to pay cash in the future are exchanged for cash today. The viability of this paper world rests upon the cash flows…that business organizations, households, and governmental bodies, such as states and municipalities, receive as a result of the income-generating process. The focus will be on business debt, because this debt is an essential characteristic of a capitalist economy.” (p. 63)
“Central Banking has always been a major determinant of what is known with certainty, what is probable, and what is purely conjectural in financial markets. The evolution and development of central banking has not been solely a reaction to an independently-evolving financial structure, but has been also a determinant of this evolution.” Hyman Minsky, “The New Uses of Monetary Power,” 1969
“It should be noted that [the] stabilizing effect of big government has destabilizing implications in that once borrowers and lenders recognize that the downside instability of profits has decreased there will be an increase in the willingness and ability of business and bankers to debt-finance. If the cash flows to validate debt are virtually guaranteed by the profit implications of big government then debt-financing of positions in capital assets is encouraged.” Minsky, “Inflation Recession and Economic Policy,” 1982 (p. 43)
“As the period over which the economy does well lengthens, two things become evident in boardrooms. Existing debts are easily validated and units that were heavily in debt prospered; it paid to lever. After the event it becomes apparent that the margins of safety built into debt structures were too great. As a result, over a period in which the economy does well, views about acceptable debt structure change. In the deal-making that goes on between banks, investment bankers, and businessmen, the acceptable amount of debt to use in financing various types of activities and positions increase. This increase in the weight of debt financing raises the market price of capital assets and increases investment. As this continues the economy is transferred into a boom economy… Innovations in financial practices are a feature of our economy, especially when things go well… In our economy, it is useful to distinguish between hedge and speculative finance.” “Inflation Recession and Economic Policy,” (p. 66)
“Three financial postures for firms, households, and government units can be differentiated by the relation between the contractual payment commitments due to their liabilities and their primary cash flows. These financial postures are hedge, speculative, and ‘Ponzi.’ The stability of an economy’s financial structure depends upon the mix of financial postures. For any given regime of financial institutions and government interventions, the greater the weight of hedge financing in the economy, the greater the stability of the economy whereas an increasing weight of speculative and Ponzi financing indicates an increasing susceptibility of the economy to financial instability.” Hyman Minsky, Finance and Profits: The Changing Nature of American Business Cycles, 1980
(Simplifying the analysis, a hedge unit enjoys cash inflows above contractual payment commitments in all periods. A speculative financing unit’s cash flows are positive in most periods, although the unit must speculate that additional finance will be available for those occasional deficit periods. A Ponzi unit lacks sufficient cashflows to service its debt. Its debt level must increase to successfully meet its commitments, irrespective of income generating capacity.)
“Viability of a representative Ponzi unit often depends upon the expectation that some assets will be sold at a high enough price some time in the future.”
“The debt structure is a legacy of past financing conditions and decisions. The question this analysis raises is whether the future profitability of the business sector can support the financial decisions that were made as the current capital-asset structure of the economy was put into place.” “Inflation Recession and Economic Policy,” (p. 25)
“For speculative and especially for Ponzi finance units a rise in interest rates can transform a positive net worth into a negative net worth. If solvency matters for the continued normal functioning of an economy, then large increases and wild swings in interest rates will affect the behavior of an economy with large proportions of speculative and Ponzi finance.” “Inflation Recession and Economic Policy,” (p. 29)
“The big conclusion of these papers (combined in “Inflation, Recession and Economic Policy”) is that the processes which make for financial instability are an inescapable part of any decentralized capitalist economy – i.e., capitalism is inherently flawed – but financial instability need not lead to a great depression; ‘It’ need not happen…”
The brilliant Hyman Minsky viewed Capitalism as “a dynamic, evolving system… Nowhere is this dynamism more evident than in its financial structure.” He saw long periods of stability as breeding grounds for increasingly destabilizing behavior. Economic agents progressively reach for profits, risk and leverage, in the process constructing more fragile debt structures. When he died in 1996 he had spent much of his life hypothesizing as to whether the financial backdrop could reach a sufficiently fragile state where “It” (a depression) could happen again. If only he had lived another decade.
I have proposed a “Minskian” evolution from Money Manager Capitalism to “Financial Arbitrage Capitalism.” Command over the Credit system – hence the “capitalist economy” – has shifted away from “corporate boardrooms” and “institutional investors” to investment bankers, derivative players, and the “leveraged speculating community.” Moreover – and in a momentous departure from Minsky’s era – the consumer loan has become the locus for system Credit creation, supplanting business borrowing to finance capital investment. Thinking Minsky, one can confidently suggest that such historic financial system change provides monumental implications for the nature of both economic development and system stability.
The current environment is remarkable in so many ways. For one, many knowledgeable and seasoned analysts speak today of a “secular decline in volatility.” After the global tumult experienced during the second half of the nineties and the first few years of the new millennium, there is now expectation that we have commenced a period of financial and economic stability (confirmed by economic resiliency and minimal marketplace risk premiums and “implied volatilities”). Yet, Thinking Minsky, the extraordinary advance in risk-taking and debt that transpired over the past decade is much more consistent with mounting financial fragility and system instability. Indeed, one can make a strong “Minskian” case for the progression over the past decade to a perilous state of Systemic Ponzi Finance. What gives?
Evolution to Financial Arbitrage Capitalism gained significant momentum during the early nineties. A flurry of major financial innovation was well underway, with securitization, derivatives and securities-lending operations beginning to gain clout on Wall Street. This process then accelerated rapidly when the banking system’s hangover (from late-eighties excesses) provoked a remarkable response from the Greenspan Fed (Fed funds declined from 9.75% in June of ‘89 to 3% by Sept. ’92). Powered by cheap and abundant liquidity, Wall Street was willing and able to step into the Credit system void created by bank and S&L impairment. Moreover, easy money provided a bonanza for the fledgling hedge fund community, borrowing artificially cheap short-term "money" and lending long. Treasury bonds and mortgage-backed securities quickly became coveted commodities for the leveraged players. Leveraged speculator and derivative player tumult in 1994 only conditioned the Fed to approach future rate increases in a more cautious and transparent manner. An audacious symbiotic relationship was born.
And if Fed policies played the leading role in nurturing the evolution to Financial Arbitrage Capitalism, the government-sponsored enterprises were right on their coattails. Wall Street and the fledgling arbitrage establishment were in need of a securities boom that only “big government” could bestow – while savvy politicians were keen for a booming economy. The GSEs provided government backing for the blossoming MBS marketplace, at the same time offering huge quantities of perceived government guaranteed debt (with a stable spread to Treasuries!) as they ballooned their balance sheets. GSE liabilities actually increased $1.269 Trillion during the nineties, expanding 280% to $1.723 Trillion. GSE debt expanded 24% ($151bn) during the hedge fund rout of 1994, with a 28% gain ($305bn) during infamous 1998 and 23% in less infamous 1999 ($317bn). Not only had the burgeoning leveraged speculating community received the bounty of unlimited low-cost and predictable short-term finance, the GSEs offered central bank-style “buyers of first and last resort” operations for the entire MBS marketplace.
The character of the marketplace – the nature of financial arrangements as well as market perceptions of risk and uncertainty - was altered radically. A revolutionary new type of Credit system emerged. “Big government” pegged the cost of cheap liquidity, while at the same time cultivating “The Moneyness of Credit.” Innovations in securities finance provided unlimited capacity to leverage financial instruments, while no quantity of MBS or GSE debt issuance would put at risk their coveted AAA rating (and stable spread/risk premium!). There were no restraints on liquidity creation. Better yet, Wall Street had developed its own system to create its own liquidity. All it lacked was an unlimited supply of new loans (enter asset-based lending and The Mortgage Finance Bubble!).
Financial history had witnessed nothing remotely similar. Not only had Financial Arbitrage Capitalism ushered in a New Era of Credit Availability, the capacity for unrestrained marketable securities-based Credit expansion divorced the demand for borrowings from its cost. Instead, the price of finance was set through interplay between the Federal Reserve and the expansion of leveraged speculating community holdings. And the greater the system succumbed to speculative and leveraging excess, the more the Fed pandered to The New Capitalists. The more powerful the “arbitrageurs” the more expedient it became for the Greenspan Fed to use them as the key mechanism for stimulating/inflating the markets and economy. (I am, strangely enough, reminded of the Aaron Neville lyrics “Oh just keep on using me until you use me up.”)
Especially after the telecom and corporate debt debacles of 2001/2002, the financial arbitrageurs needed no further convincing that mortgage and government debt were superior to corporates for leveraging and trading. And with the Fed again collapsing interest rates, The Crusade for Yield harbored unprecedented demand for subprime, ARM, and increasingly exotic mortgage loans. Then later, when the Fed forewarned of a gradual increase in rates, the entire Credit system had adequate time to gravitate to adjustable-rate loans (no '94 crisis here!). The speculative mania for mortgage paper in the financial sector was, predictably, matched by an unfolding National Housing Mania altering the underlying structure of the real economy. By the time the GSEs stumbled, ongoing rampant mortgage Credit and housing inflation assured that “private label” MBS and ABS garnered “moneyness” attributes (and predictable spreads!).
The new financial apparatus has made certain that mortgages and consumer spending have ridden roughshod over the traditional mainstay - business loans and investment. This has been a profound development with respect to both the nature of economic development and system stability, although the ramifications are today barely noticeable. After all, an unprecedented explosion in mortgage debt, huge government borrowings, ballooning central bank balance sheets, and untold speculator leveraging together provide a seductive wall of liquidity/cash flow to corporate America. This has given the New Paradigmers a new (short) lease on respectability, this time mistakenly believing that “productivity,” “efficiency,” superior investment and “intellectual capital” are responsible for the American profit windfall. Market analysts are wont to extrapolate today’s abundant liquidity, low rates and reduced “volatility,” while leading policymakers trumpet a “global savings glut.” Caution and previous thin margins of safety are deemed dangerous to one’s financial health.
Thinking Minsky, today’s Mortgage Finance Bubble is history’s most spectacular bout of Ponzi Finance. Household Net Worth has never been higher, as huge increases in borrowings are rewarded with multiples of nominal dollar asset inflation. Still, massive and unrelenting debt growth are necessary to sustain the housing mania, while the U.S. Bubble economy is vulnerable to any reduction in mortgage Credit growth or reversal in housing price inflation. The Credit losses associated with atrocious lending standards and inflated prices are held at bay only by expanding quantities of Ponzi Mortgage Credit. Narrow risk premiums – and the viability of mortgage securities “arbitrage” – are dependent upon unending mortgage lending excess.
Meanwhile, maladjusted U.S. and global financial markets are susceptible to any compression in marketplace liquidity. And, “If solvency matters for the continued normal functioning of an economy, then large increases and wild swings in interest rates will affect the behavior of an economy with large proportions of speculative and Ponzi finance.” Sure enough, system fragility has the Fed Locked in Feeble Baby-Step Tightening-Lite and the speculators fat, happy and complacent. And, curiously, the inflationists – so Enthusiastically Cheerleading the Evolution to Precarious Mortgage Ponzi Finance Excess – today argue that the economy is too vulnerable and the system too leveraged to raise short-term rates above 3.5%. Apparently, these Proponents of Perpetual Ponzi believe it is preferable public policy for this scheme to grow to eternity.
Minsky wrote that “Ponzi financing units cannot carry on too long.” In his analytical world, the inflationary boom would abruptly run up against overheated demand for borrowings and resultant upward pressure on interest rates - the kiss of death to Ponzi Finance units. Ironically, “Minskian” innovation in central banking and financial arrangements abrogated a central facet of his analysis. And Minsky’s analytical framework also did not incorporate $700 billion U.S. Current Account Deficits or $3.8 Trillion global central bank holdings of foreign reserve assets.
Minsky was, however, keenly focused on how central bank validation of speculative practices guaranteed a more precarious inflationary boom. Never has such excess been “validated” and on such a global scale. Financial Arbitrage Capitalism, with its fixation on asset-based lending, leveraged speculation, U.S. consumption and massive Credit inflation, has taken the world by storm. Finance has evolved from vulnerable and less than “robust” to exceedingly “fragile” on a global scale, although this fragility is masked by robust housing inflation, ballooning central bank balance sheets, and overly-abundant global liquidity.
Until rising rates, a dollar crisis, or some other major development exposes the acute frailty inherent in Historic Systemic Ponzi Finance, we should be on guard for fascinating developments. Sixty dollar crude is indicative of the swapping of inflating global monetary units for less abundant real things with inherent value and inflating market prices. This could prove contagious. And while the Japanese were content to trade our IOUs for Pebble Beach, Los Angelles office buildings, movie studios, and other overvalued properties, the Chinese are keen on energy, commodities, capital equipment and other resources.
Thinking Minsky, he was keen to have policymakers recognize the “flaw” in Capitalism. I am more inclined to underscore Capitalism’s “vulnerabilities.” However, the critical flaw in Financial Arbitrage Capitalism is that speculation and leveraging excess begets greater excess, with the marketplace woefully incapable of self-adjustment and central banks unwilling to risk reining in The Powerful Speculator Class. And while the leveraged speculating community may be indefinitely satisfied to expand leveraged holdings of increasingly suspect and fragile U.S. (“Ponzi”) mortgage securities and instruments, the rest of the world surely is not. Moreover, the risks associated with a higher cost of finance may have been taken out of the equation, but this only elevates the key issue of how overly abundant cheap finance is utilized in regards to economic development. A prolonged period of Systemic Ponzi Finance – with all the associated weakened debt structures and global financial and economic fragilities - ensures that “It” can happen again.
“Capitalism is essentially a financial system, and the peculiar behavior attributes of a capitalist economy center around the impact of finance upon system behavior.” Hyman Minsky, “Financial Intermediation in the Money and Capital Markets,” 1967
“The financial structure of the American economy has undergone significant evolution over the history of the republic. In the initial era of commercial capitalism, external finance was used primarily to facilitate commerce by financing goods in process or in transit. The present period, in contrast, is one of money-manager capitalism, where financial markets and arrangements are dominated by institutional investors.” Hyman Minsky, “Economic Insecurity and the Institutional Prerequisites for Successful Capitalism,” Journal of Post Keynesian Economics, Winter 1996/97
“Looking at the economy from a Wall Street board room, we see a paper world – a world of commitments to pay cash today and in the future. These cash flows are a legacy of past contracts in which money today was exchanged for money in the future. In addition, we see deals being made in which commitments to pay cash in the future are exchanged for cash today. The viability of this paper world rests upon the cash flows…that business organizations, households, and governmental bodies, such as states and municipalities, receive as a result of the income-generating process. The focus will be on business debt, because this debt is an essential characteristic of a capitalist economy.” (p. 63)
“Central Banking has always been a major determinant of what is known with certainty, what is probable, and what is purely conjectural in financial markets. The evolution and development of central banking has not been solely a reaction to an independently-evolving financial structure, but has been also a determinant of this evolution.” Hyman Minsky, “The New Uses of Monetary Power,” 1969
“It should be noted that [the] stabilizing effect of big government has destabilizing implications in that once borrowers and lenders recognize that the downside instability of profits has decreased there will be an increase in the willingness and ability of business and bankers to debt-finance. If the cash flows to validate debt are virtually guaranteed by the profit implications of big government then debt-financing of positions in capital assets is encouraged.” Minsky, “Inflation Recession and Economic Policy,” 1982 (p. 43)
“As the period over which the economy does well lengthens, two things become evident in boardrooms. Existing debts are easily validated and units that were heavily in debt prospered; it paid to lever. After the event it becomes apparent that the margins of safety built into debt structures were too great. As a result, over a period in which the economy does well, views about acceptable debt structure change. In the deal-making that goes on between banks, investment bankers, and businessmen, the acceptable amount of debt to use in financing various types of activities and positions increase. This increase in the weight of debt financing raises the market price of capital assets and increases investment. As this continues the economy is transferred into a boom economy… Innovations in financial practices are a feature of our economy, especially when things go well… In our economy, it is useful to distinguish between hedge and speculative finance.” “Inflation Recession and Economic Policy,” (p. 66)
“Three financial postures for firms, households, and government units can be differentiated by the relation between the contractual payment commitments due to their liabilities and their primary cash flows. These financial postures are hedge, speculative, and ‘Ponzi.’ The stability of an economy’s financial structure depends upon the mix of financial postures. For any given regime of financial institutions and government interventions, the greater the weight of hedge financing in the economy, the greater the stability of the economy whereas an increasing weight of speculative and Ponzi financing indicates an increasing susceptibility of the economy to financial instability.” Hyman Minsky, Finance and Profits: The Changing Nature of American Business Cycles, 1980
(Simplifying the analysis, a hedge unit enjoys cash inflows above contractual payment commitments in all periods. A speculative financing unit’s cash flows are positive in most periods, although the unit must speculate that additional finance will be available for those occasional deficit periods. A Ponzi unit lacks sufficient cashflows to service its debt. Its debt level must increase to successfully meet its commitments, irrespective of income generating capacity.)
“Viability of a representative Ponzi unit often depends upon the expectation that some assets will be sold at a high enough price some time in the future.”
“The debt structure is a legacy of past financing conditions and decisions. The question this analysis raises is whether the future profitability of the business sector can support the financial decisions that were made as the current capital-asset structure of the economy was put into place.” “Inflation Recession and Economic Policy,” (p. 25)
“For speculative and especially for Ponzi finance units a rise in interest rates can transform a positive net worth into a negative net worth. If solvency matters for the continued normal functioning of an economy, then large increases and wild swings in interest rates will affect the behavior of an economy with large proportions of speculative and Ponzi finance.” “Inflation Recession and Economic Policy,” (p. 29)
“The big conclusion of these papers (combined in “Inflation, Recession and Economic Policy”) is that the processes which make for financial instability are an inescapable part of any decentralized capitalist economy – i.e., capitalism is inherently flawed – but financial instability need not lead to a great depression; ‘It’ need not happen…”
The brilliant Hyman Minsky viewed Capitalism as “a dynamic, evolving system… Nowhere is this dynamism more evident than in its financial structure.” He saw long periods of stability as breeding grounds for increasingly destabilizing behavior. Economic agents progressively reach for profits, risk and leverage, in the process constructing more fragile debt structures. When he died in 1996 he had spent much of his life hypothesizing as to whether the financial backdrop could reach a sufficiently fragile state where “It” (a depression) could happen again. If only he had lived another decade.
I have proposed a “Minskian” evolution from Money Manager Capitalism to “Financial Arbitrage Capitalism.” Command over the Credit system – hence the “capitalist economy” – has shifted away from “corporate boardrooms” and “institutional investors” to investment bankers, derivative players, and the “leveraged speculating community.” Moreover – and in a momentous departure from Minsky’s era – the consumer loan has become the locus for system Credit creation, supplanting business borrowing to finance capital investment. Thinking Minsky, one can confidently suggest that such historic financial system change provides monumental implications for the nature of both economic development and system stability.
The current environment is remarkable in so many ways. For one, many knowledgeable and seasoned analysts speak today of a “secular decline in volatility.” After the global tumult experienced during the second half of the nineties and the first few years of the new millennium, there is now expectation that we have commenced a period of financial and economic stability (confirmed by economic resiliency and minimal marketplace risk premiums and “implied volatilities”). Yet, Thinking Minsky, the extraordinary advance in risk-taking and debt that transpired over the past decade is much more consistent with mounting financial fragility and system instability. Indeed, one can make a strong “Minskian” case for the progression over the past decade to a perilous state of Systemic Ponzi Finance. What gives?
Evolution to Financial Arbitrage Capitalism gained significant momentum during the early nineties. A flurry of major financial innovation was well underway, with securitization, derivatives and securities-lending operations beginning to gain clout on Wall Street. This process then accelerated rapidly when the banking system’s hangover (from late-eighties excesses) provoked a remarkable response from the Greenspan Fed (Fed funds declined from 9.75% in June of ‘89 to 3% by Sept. ’92). Powered by cheap and abundant liquidity, Wall Street was willing and able to step into the Credit system void created by bank and S&L impairment. Moreover, easy money provided a bonanza for the fledgling hedge fund community, borrowing artificially cheap short-term "money" and lending long. Treasury bonds and mortgage-backed securities quickly became coveted commodities for the leveraged players. Leveraged speculator and derivative player tumult in 1994 only conditioned the Fed to approach future rate increases in a more cautious and transparent manner. An audacious symbiotic relationship was born.
And if Fed policies played the leading role in nurturing the evolution to Financial Arbitrage Capitalism, the government-sponsored enterprises were right on their coattails. Wall Street and the fledgling arbitrage establishment were in need of a securities boom that only “big government” could bestow – while savvy politicians were keen for a booming economy. The GSEs provided government backing for the blossoming MBS marketplace, at the same time offering huge quantities of perceived government guaranteed debt (with a stable spread to Treasuries!) as they ballooned their balance sheets. GSE liabilities actually increased $1.269 Trillion during the nineties, expanding 280% to $1.723 Trillion. GSE debt expanded 24% ($151bn) during the hedge fund rout of 1994, with a 28% gain ($305bn) during infamous 1998 and 23% in less infamous 1999 ($317bn). Not only had the burgeoning leveraged speculating community received the bounty of unlimited low-cost and predictable short-term finance, the GSEs offered central bank-style “buyers of first and last resort” operations for the entire MBS marketplace.
The character of the marketplace – the nature of financial arrangements as well as market perceptions of risk and uncertainty - was altered radically. A revolutionary new type of Credit system emerged. “Big government” pegged the cost of cheap liquidity, while at the same time cultivating “The Moneyness of Credit.” Innovations in securities finance provided unlimited capacity to leverage financial instruments, while no quantity of MBS or GSE debt issuance would put at risk their coveted AAA rating (and stable spread/risk premium!). There were no restraints on liquidity creation. Better yet, Wall Street had developed its own system to create its own liquidity. All it lacked was an unlimited supply of new loans (enter asset-based lending and The Mortgage Finance Bubble!).
Financial history had witnessed nothing remotely similar. Not only had Financial Arbitrage Capitalism ushered in a New Era of Credit Availability, the capacity for unrestrained marketable securities-based Credit expansion divorced the demand for borrowings from its cost. Instead, the price of finance was set through interplay between the Federal Reserve and the expansion of leveraged speculating community holdings. And the greater the system succumbed to speculative and leveraging excess, the more the Fed pandered to The New Capitalists. The more powerful the “arbitrageurs” the more expedient it became for the Greenspan Fed to use them as the key mechanism for stimulating/inflating the markets and economy. (I am, strangely enough, reminded of the Aaron Neville lyrics “Oh just keep on using me until you use me up.”)
Especially after the telecom and corporate debt debacles of 2001/2002, the financial arbitrageurs needed no further convincing that mortgage and government debt were superior to corporates for leveraging and trading. And with the Fed again collapsing interest rates, The Crusade for Yield harbored unprecedented demand for subprime, ARM, and increasingly exotic mortgage loans. Then later, when the Fed forewarned of a gradual increase in rates, the entire Credit system had adequate time to gravitate to adjustable-rate loans (no '94 crisis here!). The speculative mania for mortgage paper in the financial sector was, predictably, matched by an unfolding National Housing Mania altering the underlying structure of the real economy. By the time the GSEs stumbled, ongoing rampant mortgage Credit and housing inflation assured that “private label” MBS and ABS garnered “moneyness” attributes (and predictable spreads!).
The new financial apparatus has made certain that mortgages and consumer spending have ridden roughshod over the traditional mainstay - business loans and investment. This has been a profound development with respect to both the nature of economic development and system stability, although the ramifications are today barely noticeable. After all, an unprecedented explosion in mortgage debt, huge government borrowings, ballooning central bank balance sheets, and untold speculator leveraging together provide a seductive wall of liquidity/cash flow to corporate America. This has given the New Paradigmers a new (short) lease on respectability, this time mistakenly believing that “productivity,” “efficiency,” superior investment and “intellectual capital” are responsible for the American profit windfall. Market analysts are wont to extrapolate today’s abundant liquidity, low rates and reduced “volatility,” while leading policymakers trumpet a “global savings glut.” Caution and previous thin margins of safety are deemed dangerous to one’s financial health.
Thinking Minsky, today’s Mortgage Finance Bubble is history’s most spectacular bout of Ponzi Finance. Household Net Worth has never been higher, as huge increases in borrowings are rewarded with multiples of nominal dollar asset inflation. Still, massive and unrelenting debt growth are necessary to sustain the housing mania, while the U.S. Bubble economy is vulnerable to any reduction in mortgage Credit growth or reversal in housing price inflation. The Credit losses associated with atrocious lending standards and inflated prices are held at bay only by expanding quantities of Ponzi Mortgage Credit. Narrow risk premiums – and the viability of mortgage securities “arbitrage” – are dependent upon unending mortgage lending excess.
Meanwhile, maladjusted U.S. and global financial markets are susceptible to any compression in marketplace liquidity. And, “If solvency matters for the continued normal functioning of an economy, then large increases and wild swings in interest rates will affect the behavior of an economy with large proportions of speculative and Ponzi finance.” Sure enough, system fragility has the Fed Locked in Feeble Baby-Step Tightening-Lite and the speculators fat, happy and complacent. And, curiously, the inflationists – so Enthusiastically Cheerleading the Evolution to Precarious Mortgage Ponzi Finance Excess – today argue that the economy is too vulnerable and the system too leveraged to raise short-term rates above 3.5%. Apparently, these Proponents of Perpetual Ponzi believe it is preferable public policy for this scheme to grow to eternity.
Minsky wrote that “Ponzi financing units cannot carry on too long.” In his analytical world, the inflationary boom would abruptly run up against overheated demand for borrowings and resultant upward pressure on interest rates - the kiss of death to Ponzi Finance units. Ironically, “Minskian” innovation in central banking and financial arrangements abrogated a central facet of his analysis. And Minsky’s analytical framework also did not incorporate $700 billion U.S. Current Account Deficits or $3.8 Trillion global central bank holdings of foreign reserve assets.
Minsky was, however, keenly focused on how central bank validation of speculative practices guaranteed a more precarious inflationary boom. Never has such excess been “validated” and on such a global scale. Financial Arbitrage Capitalism, with its fixation on asset-based lending, leveraged speculation, U.S. consumption and massive Credit inflation, has taken the world by storm. Finance has evolved from vulnerable and less than “robust” to exceedingly “fragile” on a global scale, although this fragility is masked by robust housing inflation, ballooning central bank balance sheets, and overly-abundant global liquidity.
Until rising rates, a dollar crisis, or some other major development exposes the acute frailty inherent in Historic Systemic Ponzi Finance, we should be on guard for fascinating developments. Sixty dollar crude is indicative of the swapping of inflating global monetary units for less abundant real things with inherent value and inflating market prices. This could prove contagious. And while the Japanese were content to trade our IOUs for Pebble Beach, Los Angelles office buildings, movie studios, and other overvalued properties, the Chinese are keen on energy, commodities, capital equipment and other resources.
Thinking Minsky, he was keen to have policymakers recognize the “flaw” in Capitalism. I am more inclined to underscore Capitalism’s “vulnerabilities.” However, the critical flaw in Financial Arbitrage Capitalism is that speculation and leveraging excess begets greater excess, with the marketplace woefully incapable of self-adjustment and central banks unwilling to risk reining in The Powerful Speculator Class. And while the leveraged speculating community may be indefinitely satisfied to expand leveraged holdings of increasingly suspect and fragile U.S. (“Ponzi”) mortgage securities and instruments, the rest of the world surely is not. Moreover, the risks associated with a higher cost of finance may have been taken out of the equation, but this only elevates the key issue of how overly abundant cheap finance is utilized in regards to economic development. A prolonged period of Systemic Ponzi Finance – with all the associated weakened debt structures and global financial and economic fragilities - ensures that “It” can happen again.
Subscribe to:
Posts (Atom)