Wednesday, May 24, 2006
Saturday, April 29, 2006
Finally: Rebalancing Legitimized!
Rebalancing Legitimized!
Time For A New Global Architecture
by Stephen Roach (Hong Kong)
At long last, global rebalancing is center stage in the world policy theater. That’s an important conclusion to take out of the results of April’s power councils — the G-7 meeting as well as the annual gathering of the full complement of some 184 members of the IMF. This is good news for an unbalanced world. It is not, however, the silver bullet for dealing with a very tough problem. The road to global rebalancing is likely to be long and arduous, and the new approach still has some problems. But as someone who has led the charge in worrying about the pitfalls of an unbalanced world, I am delighted that the Wise Men have finally seen the light.
Policy makers have always communicated in strange and almost ritualistic ways. That’s true at the national as well as at the global level. Statements typically are steeped in jargon and opaque phraseology. Nuanced language allows for multiple interpretations — providing the cover, or hedge, if things go awry. All those caveats aside, there can be no mistaking a very important message sent on 21 April by the G-7 finance ministers and central bank governors after their recent meeting in Washington: Global imbalances have now been officially anointed as a major concern by the stewards of globalization. Not only were they given prominent mention in the official G-7 communiqué, but they were also the focus of a rare “annex” to the statement. In G-7 circles, that’s about as loud as an alarm ever gets.
The annex lays out three basic principles that shape the G-7’s approach to global rebalancing: One, it is a shared responsibility — an obvious but very important statement that readers of my work will also recognize. It is policy jargon for saying “no” to scapegoatting — pinning the blame unfairly on a nation like China. Two, rebalancing requires, first and foremost, a realignment of global saving and investment flows; this identifies disparities between current account surpluses and deficits as the major source of global instability — again, quite consistent with my own thinking and clearly putting the US, with its world record current account deficit, at the top of the problem list. Three, the G-7 annex stresses that rebalancing strategies must be designed with an aim toward maximizing sustained economic growth; in my view, that’s the weakest element of the G-7’s proposed strategy. While rapid growth is an understandable goal, its emphasis may obscure the heavy lifting that will ultimately be required of an effective global rebalancing strategy.
This latter point deserves elaboration. Economic growth has become the elixir of political angst — the perceived remedy for all that ails a nation’s economy. Pro-growth politicians win elections — and re-elections — while the anti-growth set is doomed to a quick oblivion. Growth has become such an important part of the policy rubric that it has spawned its own theoretical framework — supply-side economics. A broad array of pro-growth policies — especially tax cutting — has come into fashion as the rising tide that lifts all boats. Supply-siders believe that self-financing budget deficits, narrowing income inequalities, and surging productivity are all part of the growth miracle. Never mind America’s gaping budget deficit and the recent widening of disparities in the US income distribution — the pro-growth principles of supply-side economics have taken on almost a religious fervor in Washington and on Wall Street.
America’s current account deficit — the world’s most serious imbalance — is, first and foremost, an excess consumption problem. I make that statement on the basis of three facts: One, tradable goods imports by the US are currently 89% larger than its exports of tradables. That means exports now have to grow twice as rapidly as imports just to hold the US trade deficit constant. Two, import penetration has reached very high levels in America; tradable goods imports now account for a record 37% of US expenditures on goods. That means that the faster US domestic demand grows, the faster imports will grow — implying that faster growth begets an ever-widening US trade deficit and ever-mounting global imbalances. Three, US consumption is currently holding at a record 71% of US GDP — a huge breakout from the 25-year average of 67% that prevailed over the 1975 to 2000 period. These three points imply that it will be extremely difficult for the US to accept its role in the shared responsibility of global rebalancing without coming to grips with its excess consumption problem. And that, I’m afraid, could well spell slower economic growth in America. Such a conclusion not only flies in the face of the pro-growth principles of the G-7’s newly-articulated rebalancing strategy, but it is also very much at odds with the supply-side policy biases that currently dominate the Washington consensus.
I don’t want to come across as too negative in assessing the implications of the G-7’s epiphany. As an unabashed champion of the imperatives of global rebalancing for longer than I care to remember, I believe the 21 April communiqué was something close to an historical breakthrough. Moreover, it was followed by an equally impressive effort from the IMF at its companion annual meeting — an endorsement of the principles of “multi-lateral surveillance and consultation.” This is policy jargon for a big change in the modus operandi of the Fund, which has long conducted its work mainly on the basis of single-country missions and consultations. By taking its functionality to the multi-lateral level, the IMF is accepting the very important task of coming to grips with the “spillovers” across nations that arise from imbalances of trade and capital flows. The surveillance aspect of this task essentially empowers the IMF to sound warnings when multi-lateral imbalances reach dangerous levels — a welcome development for a world that is inclined to ignore such problems until it is too late. The multi-lateral consultation function will undoubtedly be a good deal thornier to execute, since it could conceptually involve arbitrating the costs and benefits of a shift in US fiscal policy versus structural reforms in Europe, weighing in reserve management practices of the oil producers and Asian exporters, and so on. Globalization is not just about integration — it is also about navigating the ever-contentious waters of cross-border structural and policy tradeoffs.
For the IMF, this new role could well be a key to its survival as a relevant global institution. In my view, it is unconscionable that the stewards of globalization could have allowed the world’s imbalances to reach such dangerous proportions. The Fund will now be able to demonstrate if it is up to the challenge of its mandate. The IMF, in effect, has been charged with the execution of the G-7’s newly stated principles of global rebalancing. By accepting this important responsibility, the IMF has the opportunity to provide an unbalanced world with legitimate hope on the road to rebalancing. Success could lay the groundwork for a major breakthrough in the reform of the world’s policy architecture. Failure could spell curtains for the IMF as we know it — portending a painful slip into the obscurity that Governor Mervyn King of the Bank of England has raised as a worrisome possibility (see my 24 April dispatch, “Time for a New Global Architecture”).
There’s one element of this new rebalancing agenda that continues to gnaw at me — the insistence on Chinese currency flexibility as an important element of the global adjustment process. I definitely believe that China has an important role to play in global rebalancing. I also think that China accepts its responsibility to do just that. As I have noted, the newly enacted 11th Five-Year Plan has rebalancing written all over it, as China attempts the Herculean task of shifting the mix of its economic growth from exports and investment to private consumption (see my 24 April 2006 Special Economic Study, “China’s Rebalancing Challenge”). Instead of fixating on the currency as the main lever of rebalancing — and implying that a sharp revaluation of the RMB is needed — the G-7 and the broader global policy councils need to give China credit where credit is due: China is attempting to do something that Japan, Korea, and the rest of the so-called Asian dynamos have utterly failed to do — embracing and delivering on a pro-consumption growth strategy. Success of this plan will turn China into a very positive force in the rebalancing sweepstakes. Conversely, large currency movements — especially for a poor country with a still shaky financial system — borrow a page right out of the script of the “yen blunder” that Japan acceded to in the 1980s (see my 21 April dispatch, “Bad Advice”). Global rebalancing needs enlightened policies from China — not a replay of the painful mistakes that led Japan astray 20 years ago.
Globalization is a complex and challenging transformation of the world order. The stewards of globalization have been asleep at the switch — allowing unprecedented imbalances of trade and capital flows to mount. The G-7 and the IMF have finally come together to recognize the dangers of these problems. In doing so, they have rejected (thankfully) the “new paradigm” views of those who argue that imbalances are a perfectly sustainable attribute of a new world order. The long march down the road of global rebalancing may have just begun. Notwithstanding some of my quibbles noted above, this is excellent news for an unbalanced world. If the G-7 strategy works, it is also good news for financial markets. In particular, a successful rebalancing should lower the risks of a global hard landing — tempering the fears of a crash in the US dollar and/or a related sharp increase in real long-term US interest rates. So far, the hope is all on paper — buried in the rhetoric of a communiqué. Now it’s time for the heavy lifting.
Time For A New Global Architecture
by Stephen Roach (Hong Kong)
At long last, global rebalancing is center stage in the world policy theater. That’s an important conclusion to take out of the results of April’s power councils — the G-7 meeting as well as the annual gathering of the full complement of some 184 members of the IMF. This is good news for an unbalanced world. It is not, however, the silver bullet for dealing with a very tough problem. The road to global rebalancing is likely to be long and arduous, and the new approach still has some problems. But as someone who has led the charge in worrying about the pitfalls of an unbalanced world, I am delighted that the Wise Men have finally seen the light.
Policy makers have always communicated in strange and almost ritualistic ways. That’s true at the national as well as at the global level. Statements typically are steeped in jargon and opaque phraseology. Nuanced language allows for multiple interpretations — providing the cover, or hedge, if things go awry. All those caveats aside, there can be no mistaking a very important message sent on 21 April by the G-7 finance ministers and central bank governors after their recent meeting in Washington: Global imbalances have now been officially anointed as a major concern by the stewards of globalization. Not only were they given prominent mention in the official G-7 communiqué, but they were also the focus of a rare “annex” to the statement. In G-7 circles, that’s about as loud as an alarm ever gets.
The annex lays out three basic principles that shape the G-7’s approach to global rebalancing: One, it is a shared responsibility — an obvious but very important statement that readers of my work will also recognize. It is policy jargon for saying “no” to scapegoatting — pinning the blame unfairly on a nation like China. Two, rebalancing requires, first and foremost, a realignment of global saving and investment flows; this identifies disparities between current account surpluses and deficits as the major source of global instability — again, quite consistent with my own thinking and clearly putting the US, with its world record current account deficit, at the top of the problem list. Three, the G-7 annex stresses that rebalancing strategies must be designed with an aim toward maximizing sustained economic growth; in my view, that’s the weakest element of the G-7’s proposed strategy. While rapid growth is an understandable goal, its emphasis may obscure the heavy lifting that will ultimately be required of an effective global rebalancing strategy.
This latter point deserves elaboration. Economic growth has become the elixir of political angst — the perceived remedy for all that ails a nation’s economy. Pro-growth politicians win elections — and re-elections — while the anti-growth set is doomed to a quick oblivion. Growth has become such an important part of the policy rubric that it has spawned its own theoretical framework — supply-side economics. A broad array of pro-growth policies — especially tax cutting — has come into fashion as the rising tide that lifts all boats. Supply-siders believe that self-financing budget deficits, narrowing income inequalities, and surging productivity are all part of the growth miracle. Never mind America’s gaping budget deficit and the recent widening of disparities in the US income distribution — the pro-growth principles of supply-side economics have taken on almost a religious fervor in Washington and on Wall Street.
America’s current account deficit — the world’s most serious imbalance — is, first and foremost, an excess consumption problem. I make that statement on the basis of three facts: One, tradable goods imports by the US are currently 89% larger than its exports of tradables. That means exports now have to grow twice as rapidly as imports just to hold the US trade deficit constant. Two, import penetration has reached very high levels in America; tradable goods imports now account for a record 37% of US expenditures on goods. That means that the faster US domestic demand grows, the faster imports will grow — implying that faster growth begets an ever-widening US trade deficit and ever-mounting global imbalances. Three, US consumption is currently holding at a record 71% of US GDP — a huge breakout from the 25-year average of 67% that prevailed over the 1975 to 2000 period. These three points imply that it will be extremely difficult for the US to accept its role in the shared responsibility of global rebalancing without coming to grips with its excess consumption problem. And that, I’m afraid, could well spell slower economic growth in America. Such a conclusion not only flies in the face of the pro-growth principles of the G-7’s newly-articulated rebalancing strategy, but it is also very much at odds with the supply-side policy biases that currently dominate the Washington consensus.
I don’t want to come across as too negative in assessing the implications of the G-7’s epiphany. As an unabashed champion of the imperatives of global rebalancing for longer than I care to remember, I believe the 21 April communiqué was something close to an historical breakthrough. Moreover, it was followed by an equally impressive effort from the IMF at its companion annual meeting — an endorsement of the principles of “multi-lateral surveillance and consultation.” This is policy jargon for a big change in the modus operandi of the Fund, which has long conducted its work mainly on the basis of single-country missions and consultations. By taking its functionality to the multi-lateral level, the IMF is accepting the very important task of coming to grips with the “spillovers” across nations that arise from imbalances of trade and capital flows. The surveillance aspect of this task essentially empowers the IMF to sound warnings when multi-lateral imbalances reach dangerous levels — a welcome development for a world that is inclined to ignore such problems until it is too late. The multi-lateral consultation function will undoubtedly be a good deal thornier to execute, since it could conceptually involve arbitrating the costs and benefits of a shift in US fiscal policy versus structural reforms in Europe, weighing in reserve management practices of the oil producers and Asian exporters, and so on. Globalization is not just about integration — it is also about navigating the ever-contentious waters of cross-border structural and policy tradeoffs.
For the IMF, this new role could well be a key to its survival as a relevant global institution. In my view, it is unconscionable that the stewards of globalization could have allowed the world’s imbalances to reach such dangerous proportions. The Fund will now be able to demonstrate if it is up to the challenge of its mandate. The IMF, in effect, has been charged with the execution of the G-7’s newly stated principles of global rebalancing. By accepting this important responsibility, the IMF has the opportunity to provide an unbalanced world with legitimate hope on the road to rebalancing. Success could lay the groundwork for a major breakthrough in the reform of the world’s policy architecture. Failure could spell curtains for the IMF as we know it — portending a painful slip into the obscurity that Governor Mervyn King of the Bank of England has raised as a worrisome possibility (see my 24 April dispatch, “Time for a New Global Architecture”).
There’s one element of this new rebalancing agenda that continues to gnaw at me — the insistence on Chinese currency flexibility as an important element of the global adjustment process. I definitely believe that China has an important role to play in global rebalancing. I also think that China accepts its responsibility to do just that. As I have noted, the newly enacted 11th Five-Year Plan has rebalancing written all over it, as China attempts the Herculean task of shifting the mix of its economic growth from exports and investment to private consumption (see my 24 April 2006 Special Economic Study, “China’s Rebalancing Challenge”). Instead of fixating on the currency as the main lever of rebalancing — and implying that a sharp revaluation of the RMB is needed — the G-7 and the broader global policy councils need to give China credit where credit is due: China is attempting to do something that Japan, Korea, and the rest of the so-called Asian dynamos have utterly failed to do — embracing and delivering on a pro-consumption growth strategy. Success of this plan will turn China into a very positive force in the rebalancing sweepstakes. Conversely, large currency movements — especially for a poor country with a still shaky financial system — borrow a page right out of the script of the “yen blunder” that Japan acceded to in the 1980s (see my 21 April dispatch, “Bad Advice”). Global rebalancing needs enlightened policies from China — not a replay of the painful mistakes that led Japan astray 20 years ago.
Globalization is a complex and challenging transformation of the world order. The stewards of globalization have been asleep at the switch — allowing unprecedented imbalances of trade and capital flows to mount. The G-7 and the IMF have finally come together to recognize the dangers of these problems. In doing so, they have rejected (thankfully) the “new paradigm” views of those who argue that imbalances are a perfectly sustainable attribute of a new world order. The long march down the road of global rebalancing may have just begun. Notwithstanding some of my quibbles noted above, this is excellent news for an unbalanced world. If the G-7 strategy works, it is also good news for financial markets. In particular, a successful rebalancing should lower the risks of a global hard landing — tempering the fears of a crash in the US dollar and/or a related sharp increase in real long-term US interest rates. So far, the hope is all on paper — buried in the rhetoric of a communiqué. Now it’s time for the heavy lifting.
Thursday, April 20, 2006
The Politics of Money
Hazel Henderson:
"THE POLITICS OF MONEY"
by
Hazel Henderson
The word is out that economics, never a science, has always been politics in disguise. I have explored how the economics profession grew to dominate public policy and trump so many other academic disciplines and values in our daily lives. Economics and economists view reality through the lens of money. Everything has its price, they believe, from rain forests to human labor to the air we breathe. Economic textbooks, Gross National Product (GNP) and the statistics on employment, productivity, investment, and globalization – all follow the money. Happily, all this focus on money is leading to the widespread awareness of ways money is designed, created and manipulated. This politics of money is at last unraveling centuries of mystification.
Civic action with local currencies, barter, community credit and the more dubious rash of digital cybermoney all reveal the politics of money. Economics is now widely seen as the faulty sourcecode deep in societies’ hard drives….replicating unsustainability: booms, busts, bubbles, recessions, poverty, trade wars, pollution, disruption of communities, loss of cultural and biodiversity. Citizens all over the world are rejecting this malfunctioning economic sourcecode and its operating systems: the World Bank, the IMF, the WTO and imperious central banks. Its hard-wired program: the now derided “Washington Consensus” recipe for hyping GNP-growth is challenged by the Human Development Index (HDI), Ecological Footprint Analysis, the Living Planet Index, the Calvert-Henderson Quality of Life Indicators, the Genuine Progress Index and Bhutan’s Gross National Happiness… not to mention scores of local city indices such as Jacksonville, Florida’s Quality Indicators for Progress, pioneered by the late Marian Chambers in 1983.
As with politics, all real money is local, created by people to facilitate exchange, transactions and is based on trust. The story of how this useful invention, money, grew into abstract national fiat currencies backed only by the promises of rulers and central bankers is being told anew. We witness how information technology and deregulation of banking and finance in the 1980s helped create today’s monstrous global casino where $1.15 trillion worth of fiat currencies slosh around the planet daily via mouse clicks on electronic exchanges, 90% in purely speculative trading.
US President Bush embraced former chief economic advisor and new Fed Chairman, Ben Bernanke’s opinion that the mystery of low bond yields and interest rates was due to a “global savings glut.” Former Fed Chairman Greenspan, whose zero real interest rates flooded the US economy with excess liquidity and helped create the dot-com, housing and global asset bubbles, declared himself “perplexed.” The anomaly involves the global economic imbalances between the USA, the world’s largest debtor – borrowing the lion’s share of global capital – and the developing countries of Asia and those exporting oil as the world’s new lenders. I doubt there is a “global savings glut” or a “Shift of Thrift” from indebted U.S. household’s zero saving rates to thrifty Asian savers as claimed in The Economist editorial of Sept. 24, 2005. My view is that there’s a global flood of fiat paper money – mostly trillions of US dollars – amplified by the pyramiding of financial “innovations” (derivatives, hedge funds, offshore “special purpose entities,” currency speculation and tax havens) vis-à-vis real production of goods and services in the real world.
Today, we see worldwide experimentation with local exchange, barter and swap clubs, such as Deli-Dollars, LETS, Ithaca Hours and other scrip currencies in the USA and Canada. Billions of people still live in traditional non-money societies and the world’s mostly female voluntary sectors. I have described these huge unchartered sectors as the “Love Economy” estimated by the Human Development Report (United Nations Development Program 1995) as $16 trillion simply missing from economists’ global GDP that year of $24 trillion. Others have described these non-money sectors, notably Karl Polanyi; in Primitive, Archaic and Modern Economies (1968); Lewis Hyde in The Gift (1979); Genevieve Vaughan in For-Giving (1997); Dallas Morning News financial editor, Scott Burns in Home, Inc (1975); Edgar Cahn’s No More Throw Away People (2004) and his time-banking programs now emulated worldwide (The Time Dollar How To Manual, www.timedollar.org).
All this hands-on experimenting resulted in an explosion of grassroots awareness about the nature of money itself. As local groups and communities created their own local scrip currencies and exchange systems, they learned about economists’ deepest secret: money and information are equivalent – and neither is scarce! As money morphed from stone tablets, metal coins, gold and paper to electronic blips of pure information – the economic theories of scarcity and competition began to be bypassed by electronic sharing and community cooperation. Barter, dismissed in economic textbooks as a primitive relic – went hi-tech. eBay, the world’s largest garage sale, is an example of how to bypass existing markets.
People began to see how central banks and national money-systems control populations by macro-economic managing of scarcity, employment levels, availability of mortgages and car loans, via the money-supply, credit, interest rates and all the secretive levers and spigots used by central bankers. Even Nobel prizes were politicized as mathematicians in 2004 challenged the so-called “Nobel Memorial Prize in Economics” demanding its de-linking from the Nobel prizes and to confess its real name, “The Bank of Sweden Prize in Economics.” The mathematicians, Peter Nobel, grandson of Nobel and many other scientists object that economists misuse mathematics to hide their faulty assumptions – and that economics is not a science but a profession. The row over the 2004 Bank of Sweden Prize was because its recipients had authored a 1977 paper with a mathematical model purporting to “prove” why central banks should be independent of political control – even in democracies. Central banking too, is politics in even deeper disguise, as I describe in “21st Century Strategies for Sustainability”
Today, rapid social learning about the politics of money and how it functions is revealing this key mythology underlying our current societies and its transmission belt: that faulty economic sourcecode still replicating today’s unsustainable poverty gaps, energy crises and resource depletion. Climate change creeping upon us for 25 years is the latest media wake up call, and predictably economists quickly “captured this issue for our profession,” as a UK economics group put it (Henderson, 1996), to promote their pollution and C02 trading “markets.” In spite of such efforts, the defrocking of economics, the deconstructing of money systems and the growth of all the healthy local, real world alternatives is propagating widely. The World Social Forum launched in sunny Porto Alegre in 2000 by Brasilian reformers is one of many such worldwide movements. Argentina’s default in 2001 taught its citizens that they could trust their own local scrip, flea markets and electronic swap systems more than the country’s official currency: the peso. Argentina, Brasil and Venezuela have announced they will repay their IMF loans in full – to free their economies from “Washington Consensus” prescriptions.
I have documented over the years many of the pioneers of money reform, from the Time Store in Cincinnati in the 1890s, Ralph Barsodi’s “constants” in New Exeter, and during the 1930s “bank holiday,” Vermont’s own Malted Cereals Company scrip, issued in Burlington and the Wolfboro Chamber of Commerce’s scrip in New Hampshire.
Margaret Thoren has kept alive The Truth in Money Book by Theodore R. Thoren and Richard F. Warner (from P.O. Box 30, Chagrin Fall, OH, 44022). Other perennials: E.F. Schumacher’s Small is Beautiful (1973); James Robertson’s Future Wealth (1989); Margrit Kennedy’s tireless teachings; Robert Swann’s Community Economics are all in the Schumacher Society’s Library. The Society runs the SHARE credit system while documenting other community credit pioneering, such as Michael Linton’s LETS experiments, Paul Glover’s Ithaca Hours and many other projects since the early 1980s. Bernard Lietaer’s The Future of Money (2001); Lynn Twist’s The Soul of Money (2004); William Krehm’s COMER Newsletter (www.comer.org) and James Robertson and Josef Huber’s Creating New Money (2004) continue to keep these lessons alive and updated. My bookshelf on alternative economics, barter, credit and currency system continues to grow, and includes Ralph A. Mitchell and Neil Shafer’s indispensable eye-opening self-published Standard Catalog of Depression Scrip of the United States in the 1930s (Kranse Publications, Iola, WI) (1984). It contains thousands of pictures of alternative scrip currencies issued in almost every US state and city and many in Canada and Mexico after the Great Crash of 1929 and the bank failures that followed. During the 1980’s in all my talks across North America advocating local self-reliance and alternatives to fiat money, I carried this heavy volume along to show how local inventiveness helped overcome the failures of national banking and finance. People would raise their hands in recognition as I would show on overheads the scrip used in their state. “I remember these in my Dad’s bureau!” “My Mom used that to buy our groceries!”
So, today, as the global casino again reaches crises of abstraction, derivatives, currency futures and financial bubbles – we have been here before. Today’s global imbalances, deficits, bouncing currencies, poverty and debt crises require a systemic redesign of that faulty economic sourcecode. Worried finance ministers and central bankers call vainly for a “new international financial architecture.” They do little but fret about this behind closed doors, at meetings of the G-8, WTO, and in Jackson Hole and Davos. Some clever libertarians try to beat the bankers at their own game with global digital currencies backed by gold, including e-gold Ltd, Gold Money and Web Money. Based in offshore havens, Nevis, Jersey, Moscow and Panama, they have become platforms for cyber-crooks (Business Week, January 9, 2006). The rest of us are redesigning healthy homegrown sustainable local economies – all over the world.
Before we fall into “either/or” errors, we should avoid doctrinaire “smallness,” ideological localism and knee-jerk libertarianism. None can protect local communities from the ravages of market fundamentalist-driven globalization. Like it or not, we are all “glocal” now. Communities, like cells in the body-politic and the body, need boundaries or membranes to keep out elements destructive to the cell’s integrity. But all cell membranes are semi-permeable to allow needed elements, information and energy exchanges from the environment to pass through. In today’s information saturated world, communities need to understand anew which elements to reject and which to embrace. Wholesale rejection can lead to rigidity, xenophobia and misreading of history. Wholesale acceptance of current unsustainable economic global trends will surely lead to loss of local culture, biodiversity and resource-depletion. We humans have been adept at creating new scenarios and technologies that mirror our lack of systemic knowledge and foresight. From such social changes and unanticipated consequences, we must then learn and evolve – or suffer ecological collapse.
"THE POLITICS OF MONEY"
by
Hazel Henderson
The word is out that economics, never a science, has always been politics in disguise. I have explored how the economics profession grew to dominate public policy and trump so many other academic disciplines and values in our daily lives. Economics and economists view reality through the lens of money. Everything has its price, they believe, from rain forests to human labor to the air we breathe. Economic textbooks, Gross National Product (GNP) and the statistics on employment, productivity, investment, and globalization – all follow the money. Happily, all this focus on money is leading to the widespread awareness of ways money is designed, created and manipulated. This politics of money is at last unraveling centuries of mystification.
Civic action with local currencies, barter, community credit and the more dubious rash of digital cybermoney all reveal the politics of money. Economics is now widely seen as the faulty sourcecode deep in societies’ hard drives….replicating unsustainability: booms, busts, bubbles, recessions, poverty, trade wars, pollution, disruption of communities, loss of cultural and biodiversity. Citizens all over the world are rejecting this malfunctioning economic sourcecode and its operating systems: the World Bank, the IMF, the WTO and imperious central banks. Its hard-wired program: the now derided “Washington Consensus” recipe for hyping GNP-growth is challenged by the Human Development Index (HDI), Ecological Footprint Analysis, the Living Planet Index, the Calvert-Henderson Quality of Life Indicators, the Genuine Progress Index and Bhutan’s Gross National Happiness… not to mention scores of local city indices such as Jacksonville, Florida’s Quality Indicators for Progress, pioneered by the late Marian Chambers in 1983.
As with politics, all real money is local, created by people to facilitate exchange, transactions and is based on trust. The story of how this useful invention, money, grew into abstract national fiat currencies backed only by the promises of rulers and central bankers is being told anew. We witness how information technology and deregulation of banking and finance in the 1980s helped create today’s monstrous global casino where $1.15 trillion worth of fiat currencies slosh around the planet daily via mouse clicks on electronic exchanges, 90% in purely speculative trading.
US President Bush embraced former chief economic advisor and new Fed Chairman, Ben Bernanke’s opinion that the mystery of low bond yields and interest rates was due to a “global savings glut.” Former Fed Chairman Greenspan, whose zero real interest rates flooded the US economy with excess liquidity and helped create the dot-com, housing and global asset bubbles, declared himself “perplexed.” The anomaly involves the global economic imbalances between the USA, the world’s largest debtor – borrowing the lion’s share of global capital – and the developing countries of Asia and those exporting oil as the world’s new lenders. I doubt there is a “global savings glut” or a “Shift of Thrift” from indebted U.S. household’s zero saving rates to thrifty Asian savers as claimed in The Economist editorial of Sept. 24, 2005. My view is that there’s a global flood of fiat paper money – mostly trillions of US dollars – amplified by the pyramiding of financial “innovations” (derivatives, hedge funds, offshore “special purpose entities,” currency speculation and tax havens) vis-à-vis real production of goods and services in the real world.
Today, we see worldwide experimentation with local exchange, barter and swap clubs, such as Deli-Dollars, LETS, Ithaca Hours and other scrip currencies in the USA and Canada. Billions of people still live in traditional non-money societies and the world’s mostly female voluntary sectors. I have described these huge unchartered sectors as the “Love Economy” estimated by the Human Development Report (United Nations Development Program 1995) as $16 trillion simply missing from economists’ global GDP that year of $24 trillion. Others have described these non-money sectors, notably Karl Polanyi; in Primitive, Archaic and Modern Economies (1968); Lewis Hyde in The Gift (1979); Genevieve Vaughan in For-Giving (1997); Dallas Morning News financial editor, Scott Burns in Home, Inc (1975); Edgar Cahn’s No More Throw Away People (2004) and his time-banking programs now emulated worldwide (The Time Dollar How To Manual, www.timedollar.org).
All this hands-on experimenting resulted in an explosion of grassroots awareness about the nature of money itself. As local groups and communities created their own local scrip currencies and exchange systems, they learned about economists’ deepest secret: money and information are equivalent – and neither is scarce! As money morphed from stone tablets, metal coins, gold and paper to electronic blips of pure information – the economic theories of scarcity and competition began to be bypassed by electronic sharing and community cooperation. Barter, dismissed in economic textbooks as a primitive relic – went hi-tech. eBay, the world’s largest garage sale, is an example of how to bypass existing markets.
People began to see how central banks and national money-systems control populations by macro-economic managing of scarcity, employment levels, availability of mortgages and car loans, via the money-supply, credit, interest rates and all the secretive levers and spigots used by central bankers. Even Nobel prizes were politicized as mathematicians in 2004 challenged the so-called “Nobel Memorial Prize in Economics” demanding its de-linking from the Nobel prizes and to confess its real name, “The Bank of Sweden Prize in Economics.” The mathematicians, Peter Nobel, grandson of Nobel and many other scientists object that economists misuse mathematics to hide their faulty assumptions – and that economics is not a science but a profession. The row over the 2004 Bank of Sweden Prize was because its recipients had authored a 1977 paper with a mathematical model purporting to “prove” why central banks should be independent of political control – even in democracies. Central banking too, is politics in even deeper disguise, as I describe in “21st Century Strategies for Sustainability”
Today, rapid social learning about the politics of money and how it functions is revealing this key mythology underlying our current societies and its transmission belt: that faulty economic sourcecode still replicating today’s unsustainable poverty gaps, energy crises and resource depletion. Climate change creeping upon us for 25 years is the latest media wake up call, and predictably economists quickly “captured this issue for our profession,” as a UK economics group put it (Henderson, 1996), to promote their pollution and C02 trading “markets.” In spite of such efforts, the defrocking of economics, the deconstructing of money systems and the growth of all the healthy local, real world alternatives is propagating widely. The World Social Forum launched in sunny Porto Alegre in 2000 by Brasilian reformers is one of many such worldwide movements. Argentina’s default in 2001 taught its citizens that they could trust their own local scrip, flea markets and electronic swap systems more than the country’s official currency: the peso. Argentina, Brasil and Venezuela have announced they will repay their IMF loans in full – to free their economies from “Washington Consensus” prescriptions.
I have documented over the years many of the pioneers of money reform, from the Time Store in Cincinnati in the 1890s, Ralph Barsodi’s “constants” in New Exeter, and during the 1930s “bank holiday,” Vermont’s own Malted Cereals Company scrip, issued in Burlington and the Wolfboro Chamber of Commerce’s scrip in New Hampshire.
Margaret Thoren has kept alive The Truth in Money Book by Theodore R. Thoren and Richard F. Warner (from P.O. Box 30, Chagrin Fall, OH, 44022). Other perennials: E.F. Schumacher’s Small is Beautiful (1973); James Robertson’s Future Wealth (1989); Margrit Kennedy’s tireless teachings; Robert Swann’s Community Economics are all in the Schumacher Society’s Library. The Society runs the SHARE credit system while documenting other community credit pioneering, such as Michael Linton’s LETS experiments, Paul Glover’s Ithaca Hours and many other projects since the early 1980s. Bernard Lietaer’s The Future of Money (2001); Lynn Twist’s The Soul of Money (2004); William Krehm’s COMER Newsletter (www.comer.org) and James Robertson and Josef Huber’s Creating New Money (2004) continue to keep these lessons alive and updated. My bookshelf on alternative economics, barter, credit and currency system continues to grow, and includes Ralph A. Mitchell and Neil Shafer’s indispensable eye-opening self-published Standard Catalog of Depression Scrip of the United States in the 1930s (Kranse Publications, Iola, WI) (1984). It contains thousands of pictures of alternative scrip currencies issued in almost every US state and city and many in Canada and Mexico after the Great Crash of 1929 and the bank failures that followed. During the 1980’s in all my talks across North America advocating local self-reliance and alternatives to fiat money, I carried this heavy volume along to show how local inventiveness helped overcome the failures of national banking and finance. People would raise their hands in recognition as I would show on overheads the scrip used in their state. “I remember these in my Dad’s bureau!” “My Mom used that to buy our groceries!”
So, today, as the global casino again reaches crises of abstraction, derivatives, currency futures and financial bubbles – we have been here before. Today’s global imbalances, deficits, bouncing currencies, poverty and debt crises require a systemic redesign of that faulty economic sourcecode. Worried finance ministers and central bankers call vainly for a “new international financial architecture.” They do little but fret about this behind closed doors, at meetings of the G-8, WTO, and in Jackson Hole and Davos. Some clever libertarians try to beat the bankers at their own game with global digital currencies backed by gold, including e-gold Ltd, Gold Money and Web Money. Based in offshore havens, Nevis, Jersey, Moscow and Panama, they have become platforms for cyber-crooks (Business Week, January 9, 2006). The rest of us are redesigning healthy homegrown sustainable local economies – all over the world.
Before we fall into “either/or” errors, we should avoid doctrinaire “smallness,” ideological localism and knee-jerk libertarianism. None can protect local communities from the ravages of market fundamentalist-driven globalization. Like it or not, we are all “glocal” now. Communities, like cells in the body-politic and the body, need boundaries or membranes to keep out elements destructive to the cell’s integrity. But all cell membranes are semi-permeable to allow needed elements, information and energy exchanges from the environment to pass through. In today’s information saturated world, communities need to understand anew which elements to reject and which to embrace. Wholesale rejection can lead to rigidity, xenophobia and misreading of history. Wholesale acceptance of current unsustainable economic global trends will surely lead to loss of local culture, biodiversity and resource-depletion. We humans have been adept at creating new scenarios and technologies that mirror our lack of systemic knowledge and foresight. From such social changes and unanticipated consequences, we must then learn and evolve – or suffer ecological collapse.
Wednesday, April 12, 2006
Banking And The Business Cycle
Banking And The Business Cycle
A Bloomberg headline caught my attention earlier in the week: “Fisher Says Globalization Reduces Inflation Threat.” In his Tuesday speech -- “A New Perspective for Policy” -- Federal Reserve Bank of Dallas’ President, Richard W. Fisher, noted a finding from recent globalization research conducted by the Bank of International Settlements. “…[F]or some countries, including—and to my mind especially—the United States, the proxies for global slack have become more important predictors of changes in inflation than measures of domestic slack.” Mr. Fisher also noted “the realization of the importance of global economic conditions for making monetary policy decisions is becoming more widespread.” Reminiscent of the late-nineties view that extraordinary productivity gains had empowered the Greenspan Fed to let the economy (and financial markets!) run hotter, today it is “globalization” that supposedly keeps “inflation” in check, thereby bestowing the Federal Reserve and global central bankers greater latitude for accommodation.
There is great irony in the fact that U.S. led Global Credit Inflation and attendant Asset Bubbles of unprecedented dimensions are fostering (over)investment in global goods-producing capacity, a backdrop that is perceived by the New Paradigmers as ensuring ongoing “slack” and quiescent “inflation.” This is dangerously flawed analysis, and I find it at this point rather ridiculous that policymakers cling to such a narrow (“core-CPI”) view of “inflation.” I suggest Mr. Fisher, Dr. Bernanke, Dr. Poole and others read (or, perhaps, re-read) the classic, Banking and the Business Cycle – A Study of the Great Depression in the United States, by C.A. Phillips, T.F. McManus, and R.W. Nelson, 1937.
The authors brought a (refreshing) degree of invaluable clarity to complex – and pertinent - economic issues that are today simply omitted from the discourse. In particular, I much appreciate the use of the terminology “Investment Credit Inflation.” It is, after all, the creation of new financial claims (Credit) that augments purchasing power, and analysts must be vigilant observers of the sources and uses of this additional spending. The key is to recognize the nature of the Processes of Credit Creation and Dissemination, especially when marketable securities, leveraged speculation, and Asset Inflation are key facets of the boom. And just as the popular proxy index for the general price level utterly failed during the ‘twenties to indicate the prevailing massive Credit Inflation, the Fed’s favored (narrow) price level indicators today only work to palliate and mislead.
But it is better to just let the timeless insights from “Banking and the Business Cycle” “speak” for themselves.
“It is sought to show that the main cause of the dislocation in trade and industry was, in [T.E.] Gregory’s language, the ‘disregard of the rules of common sense in the treatment of the money supply’ of the United States; the depression is proximately an effect of inflation. The post [First World] War inflation in the United States was an investment credit inflation, however, as distinguished from the commodity credit inflation of War-time.” (page 4)
“The special character of the depression is traced to the hyper-elasticity of the Federal Reserve System, and to the operation of that system as exemplified in the ‘managed currency’ experiment of the Federal Reserve Board… The depression, in other words, was the price paid for the experimentation with currency management by the Federal Reserve Board…” (pages 5/6)
“Through the purchase of investments, commercial banks impart a positive upward impulsion to the business cycle. Coming in as a marginal determining factor in the price of bonds, purchases of investments by banks force down the long-term market rate of interest so that it becomes profitable, in view of the existing realized rate of return to capital at important new investment margins, to float new bond issues and to embark upon new capital development; this results in an investment boom which affects a change in the structure of production… the purchase of investments by banks creates new deposits in the banking system in much the same fashion as does the granting of loans.” (page 6)
“The term ‘inflation’ has long been the subject of interminable and diverse definition. In the view of the writers, inflation applies to a state of money, credit, and prices arising not only from excessive issues of paper money, but also from any increase in the effective supply of circulating media that outruns the rate of increase of the physical volume of production and trade, thus forcing a rise of prices… In the modern world of finance…the most important single cause of inflation is the multiplication of bank credit by the banking machinery, resulting in an increase in the volume of purchasing power…” (page 13)
“‘Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency [quote from Keynes].’ How close the capitalist system in America has come to destruction in consequence of the inflationary debauch of the currency indulged in during and since the [First World] War by the manufacture of deposit currency is as yet uncertain.” (page 34)
“One of the duties devolving upon economists is that of pointing out the errors in fallacious economic contentions…” (page 38)
“Overinvestment, which must be assigned the role of a positive disturbing factor, has its ultimate source in an excess of credit… the policy of overinvestment, with its attendant misapplication of capital, could never have been carried to the lengths that it was during the decade of the ‘twenties' if the banks and the Government had not supplied abundant credits at artificially cheap rates.” (page 68)
“…the position of Professor [Lionel] Robbins: ‘It may prove to be no accident that the depression in which most measures have been taken to ‘maintain consumers’ purchasing power’ is also the depression of the widest extent and most alarming proportions.’” (page 72)
“The fall in prices would in itself serve to constitute an effective check upon inordinate capital development because it would bring about a decline in the rate of return going to capital; as the rate of return to capital declined consequently upon the fall in prices the rate of accumulation of capital goods would tend to diminish. Under such conditions the system is automatically self-corrective. It is just this self-corrective process which is essential to the smooth functioning of the economic machinery. And it is in this way that the system would work were it not for the disturbing factor of credit. The injections of new credit not only permit an increase in the rate of capital accumulation, but also tend to disrupt progressively the normal equilibrium relationships between costs and prices over many sectors of the pricing front. The fundamental disequilibria are not discernable until the new credits are withdrawn or cease to increase, when it then becomes apparent that the anticipated earnings of capital based on the prevailing (artificially pegged) price level will not be realized…” (page 77)
“And for an understanding of the more immediate causes of the depression it is essential that the developments taking place in the American banking system be clearly in mind, as the changes occurring in the banking system were intimately connected with the structural changes in the economic system which led to the depression.” (page 78)
“The immediate effects of this investment credit inflation were marked by important and interrelated changes in the character of bank loans and investment assets. There developed an indirectness in the processes of bank credit financing, bank credit entering into the channels of production and trade through operations in the securities and capital markets… As a result of the plethora of bank credit and the utilization by banks of their excess reserves to swell their investment accounts, the long-term rate declined and it became increasingly profitable and popular to float new stock and bond issues. This favorable situation in the capital funds market was translated into a constructional boom of previously unheard-of dimensions; a real estate boom developed, first in Florida, but soon was transferred to the urban real estate market on a nation-wide scale; and, finally, the stock market became the recipient of the excessive credit expansion. These three booms – the constructional boom proper, the real estate booms, and the stock market hysteria – combined to produce structural changes in the economic system which were directly involved with the immediate origins of the depression. This trinity of booms contributed to sustain a seeming prosperity, the tragic speciousness of which was not widely apparent until after the bubble had burst. Hence the remote effect of the investment credit inflation was depression...” (page 81)
“The growth of deposits for all the banks in the country from June, 1921, to December 1929, was over 19 billion dollars. This is to be compared with 18.6 billion in total deposits for all banks, in June, 1914… The banking years from 1922 to 1929, then, were characterized by a great credit inflation – an absolute quantitative inflation viewed from any angle, and a relative inflation viewed with respect to the needs of trade and in consideration of the price level.” (pages 82/84)
“In the course of the time…increased flotation of corporate securities in an especially favorable capital market virtually surfeited some of the issuing corporations with liquid funds for which they found a profitable use in the stock exchange call-loan market, adding new fuel to the already raging flames of stock market speculation... Real estate bond issues were brought out on a scale unmatched in previous history… Our export trade was stimulated by extensive over-seas lending… All these factors…helped to carry business activity to the false bottom of credit inflation long enough for the term ‘New Era’ to become a byword…” (pages 112/13)
“It was through these various booms of a capital nature that the ‘cheap credit’ policy of this period found its chief outlets. The net effect of these influences was to produce an alteration in the structure of production.” (page 113)
“If the recent cycle has proved so puzzling to so many students of its devious course and manifold phases, it is because the full effects of the creation and operation of this central banking system upon the commercial banks have not been widely nor adequately understood; nor, furthermore, have the influences of the changing structure of the American banking system upon the structure of production been fully realized.” (page 140)
“Most American observers who were concerned with the structural view of business cycles were unable fully to appreciate the monetary aspects of the situation; those who were advocates of the purely monetary theory were so obsessed with the stable-price level complex that they were unable properly to assess the importance of the underlying structural phenomena which were developing… The movement of wholesale prices occupies a central role in the usual monetary theory, and this concentration of attention upon the superficial phenomena of changes in the value of money has militated against an understanding of the channels through which newly created credit entered the economic system and of the effect of this new credit upon the structure of production. Further, there are certain aspects of the recent situation which render the usual monetary theory practically useless… commodity prices as measured by the wholesale prices index in this country were remarkably stable from 1922 to 1929…so that one point definitely established by the monetary experimentation involved is that stability of the price level is a doubtful safeguard against depression.” (pages 147/148)
“In the first place, the depression was as exaggerated and as protracted as it was because the stock market crash itself was the most devastating… In the second place, the alteration of the structure of production…was greater than in any previous depression… And, in the third place, during no previous collapse was there such a complex entanglement of the banking system with the course of the depression… But underlying and supplementing all these factors was a stubbornly persisting lack of equilibrium in the entire economic and price structure.” (pages 150/151)
“It has frequently been argued that the stock market boom was justified on the basis of rapidly rising corporate earnings. Some have contended that profits not only were large in absolute amount but that they were increasing at an accelerating rate… On sober afterthought, however, it appears that the stock market boom was largely a product of bank credit expansion, a mad speculative frenzy which had no rationale whatever.” (page 155)
“Although wholesale commodity prices were relatively steady, prices in a more inclusive sense did rise. That is to say, the emissions of bank credit found expression in a rise of prices other than wholesale commodity prices, the index to which most persons are accustomed to refer when considering prices in relation to increased purchasing media. For ‘credit takes various directions, and the effects of inflation can only be measured best at those points in the business structure where the use of credit has been most active.’ The ‘points’ where credit played its most active part in affecting prices in the period from 1922 onward are those already referred to – real estate, stocks, and long-term investments.”
“…the Board’s policies also had international effects that were of far-reaching import. During the period of the ‘twenties when the United States was not only the most powerful commercial and industrial nation in the world, but also was in possession of the major portion of the stock of monetary gold of the world, our domestic developments and conditions were bound to influence the course of economic events in other countries. The [Fed] in its efforts to inflate purchasing power and to support the price level in this country helped indirectly…to arrest the decline of prices in other important commercial nations…” (page 197)
“As early as June 1927, the effects of the Federal Reserve Board’s domestic credit policies upon the international situation were diagnosed by Professor Bertil Ohlin of Stockholm University as follows: ‘The influx and efflux of gold in the United States has thus lost all influence upon the monetary purchasing power and the prices level in that country. The question of granting credit is instead determined by what the Federal Reserve Board considers suitable from an economic point of view. This implies nothing less than a revolution in the monetary system not only of the United States but of all countries with a gold standard…” (page 198)
“Stability of the price level is no adequate safeguard against depression, it is contended, because any policy aimed at stabilizing a single index is bound to set up countervailing influences elsewhere in the economic system. Although the policy of stabilization may appear to be successful for a time, eventually it will break down, because there is no way of insuring that the agencies of control will be able to make their influence felt at precisely those ‘points’ of strategic importance.” (page 200)
“A sharply contrasting objective of banking policy…and the one here advocated, would be the control of the total amount of credit, such that the violent inflations and contractions of credit would be eliminated, or at least greatly mitigated, and without special regard for any one index of economic activity.” (page 202)
The authors’ delved into considerable detail and analysis elucidating the various factors and mechanisms that supported “a much larger superstructure of credit than was previously possible.” Certainly at the top of the list was the expansion of the Federal Reserve System, along with various factors and avenues that significantly reduced bank reserve-to-deposit requirements and financial innovation generally. To be sure, however, the “hyper-elasticity of the Federal Reserve System” and the fractional-reserve banking apparatus from the ‘twenties is Inflationary Child’s Play in comparison to the virtually unchecked securities-based Credit systems of our day.
The contemporary U.S. Credit system (evolving to the status of the backbone of the global Credit mechanism) comprised of banks, the GSEs, global central bank dollar holdings, brokerage firms, the MBS and ABS marketplaces, hedge funds, finance companies, insurance companies, etc., operate today generally unrestrained from either reserve or capital requirements (not to mention a gold standard). And, in the final analysis, ‘this implies nothing less than a revolution in the monetary system not only of the United States but of all countries…’ Moreover, ‘changes occurring in the [global financial] system [are] intimately connected with the structural changes in the [global] economic system…’
“The stock market crash provided the shock to confidence which definitely and dramatically started the depression on its downward course, revealing to most persons for the first time the inherent instability of the conditions which had prevailed for several years.” (page 161)
And while “Banking and the Business Cycle” does not pursue this line of reasoning, it is my view that the 1929 crash was inevitable due to the extreme nature of speculative leveraging and deep structural maladjustment, and it was as well the impetus for an unavoidable collapse of system liquidity. One never knows from where the shock to confidence will emanate, while today’s intertwined global Credit apparatus has an unknown multitude of highly leveraged marketplaces that would qualify as potential financial dislocation catalysts. Yet one can look to today’s Highly Extraordinary Global Credit and Speculative Boom Environment and state unequivocally that the system is acutely vulnerable to any break in confidence, panicked speculator deleveraging, or even any meaningful downturn in Credit growth. Admittedly, the Global Credit Bubble has quite a head of steam. But, then again, so might global interest rates.
A Bloomberg headline caught my attention earlier in the week: “Fisher Says Globalization Reduces Inflation Threat.” In his Tuesday speech -- “A New Perspective for Policy” -- Federal Reserve Bank of Dallas’ President, Richard W. Fisher, noted a finding from recent globalization research conducted by the Bank of International Settlements. “…[F]or some countries, including—and to my mind especially—the United States, the proxies for global slack have become more important predictors of changes in inflation than measures of domestic slack.” Mr. Fisher also noted “the realization of the importance of global economic conditions for making monetary policy decisions is becoming more widespread.” Reminiscent of the late-nineties view that extraordinary productivity gains had empowered the Greenspan Fed to let the economy (and financial markets!) run hotter, today it is “globalization” that supposedly keeps “inflation” in check, thereby bestowing the Federal Reserve and global central bankers greater latitude for accommodation.
There is great irony in the fact that U.S. led Global Credit Inflation and attendant Asset Bubbles of unprecedented dimensions are fostering (over)investment in global goods-producing capacity, a backdrop that is perceived by the New Paradigmers as ensuring ongoing “slack” and quiescent “inflation.” This is dangerously flawed analysis, and I find it at this point rather ridiculous that policymakers cling to such a narrow (“core-CPI”) view of “inflation.” I suggest Mr. Fisher, Dr. Bernanke, Dr. Poole and others read (or, perhaps, re-read) the classic, Banking and the Business Cycle – A Study of the Great Depression in the United States, by C.A. Phillips, T.F. McManus, and R.W. Nelson, 1937.
The authors brought a (refreshing) degree of invaluable clarity to complex – and pertinent - economic issues that are today simply omitted from the discourse. In particular, I much appreciate the use of the terminology “Investment Credit Inflation.” It is, after all, the creation of new financial claims (Credit) that augments purchasing power, and analysts must be vigilant observers of the sources and uses of this additional spending. The key is to recognize the nature of the Processes of Credit Creation and Dissemination, especially when marketable securities, leveraged speculation, and Asset Inflation are key facets of the boom. And just as the popular proxy index for the general price level utterly failed during the ‘twenties to indicate the prevailing massive Credit Inflation, the Fed’s favored (narrow) price level indicators today only work to palliate and mislead.
But it is better to just let the timeless insights from “Banking and the Business Cycle” “speak” for themselves.
“It is sought to show that the main cause of the dislocation in trade and industry was, in [T.E.] Gregory’s language, the ‘disregard of the rules of common sense in the treatment of the money supply’ of the United States; the depression is proximately an effect of inflation. The post [First World] War inflation in the United States was an investment credit inflation, however, as distinguished from the commodity credit inflation of War-time.” (page 4)
“The special character of the depression is traced to the hyper-elasticity of the Federal Reserve System, and to the operation of that system as exemplified in the ‘managed currency’ experiment of the Federal Reserve Board… The depression, in other words, was the price paid for the experimentation with currency management by the Federal Reserve Board…” (pages 5/6)
“Through the purchase of investments, commercial banks impart a positive upward impulsion to the business cycle. Coming in as a marginal determining factor in the price of bonds, purchases of investments by banks force down the long-term market rate of interest so that it becomes profitable, in view of the existing realized rate of return to capital at important new investment margins, to float new bond issues and to embark upon new capital development; this results in an investment boom which affects a change in the structure of production… the purchase of investments by banks creates new deposits in the banking system in much the same fashion as does the granting of loans.” (page 6)
“The term ‘inflation’ has long been the subject of interminable and diverse definition. In the view of the writers, inflation applies to a state of money, credit, and prices arising not only from excessive issues of paper money, but also from any increase in the effective supply of circulating media that outruns the rate of increase of the physical volume of production and trade, thus forcing a rise of prices… In the modern world of finance…the most important single cause of inflation is the multiplication of bank credit by the banking machinery, resulting in an increase in the volume of purchasing power…” (page 13)
“‘Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency [quote from Keynes].’ How close the capitalist system in America has come to destruction in consequence of the inflationary debauch of the currency indulged in during and since the [First World] War by the manufacture of deposit currency is as yet uncertain.” (page 34)
“One of the duties devolving upon economists is that of pointing out the errors in fallacious economic contentions…” (page 38)
“Overinvestment, which must be assigned the role of a positive disturbing factor, has its ultimate source in an excess of credit… the policy of overinvestment, with its attendant misapplication of capital, could never have been carried to the lengths that it was during the decade of the ‘twenties' if the banks and the Government had not supplied abundant credits at artificially cheap rates.” (page 68)
“…the position of Professor [Lionel] Robbins: ‘It may prove to be no accident that the depression in which most measures have been taken to ‘maintain consumers’ purchasing power’ is also the depression of the widest extent and most alarming proportions.’” (page 72)
“The fall in prices would in itself serve to constitute an effective check upon inordinate capital development because it would bring about a decline in the rate of return going to capital; as the rate of return to capital declined consequently upon the fall in prices the rate of accumulation of capital goods would tend to diminish. Under such conditions the system is automatically self-corrective. It is just this self-corrective process which is essential to the smooth functioning of the economic machinery. And it is in this way that the system would work were it not for the disturbing factor of credit. The injections of new credit not only permit an increase in the rate of capital accumulation, but also tend to disrupt progressively the normal equilibrium relationships between costs and prices over many sectors of the pricing front. The fundamental disequilibria are not discernable until the new credits are withdrawn or cease to increase, when it then becomes apparent that the anticipated earnings of capital based on the prevailing (artificially pegged) price level will not be realized…” (page 77)
“And for an understanding of the more immediate causes of the depression it is essential that the developments taking place in the American banking system be clearly in mind, as the changes occurring in the banking system were intimately connected with the structural changes in the economic system which led to the depression.” (page 78)
“The immediate effects of this investment credit inflation were marked by important and interrelated changes in the character of bank loans and investment assets. There developed an indirectness in the processes of bank credit financing, bank credit entering into the channels of production and trade through operations in the securities and capital markets… As a result of the plethora of bank credit and the utilization by banks of their excess reserves to swell their investment accounts, the long-term rate declined and it became increasingly profitable and popular to float new stock and bond issues. This favorable situation in the capital funds market was translated into a constructional boom of previously unheard-of dimensions; a real estate boom developed, first in Florida, but soon was transferred to the urban real estate market on a nation-wide scale; and, finally, the stock market became the recipient of the excessive credit expansion. These three booms – the constructional boom proper, the real estate booms, and the stock market hysteria – combined to produce structural changes in the economic system which were directly involved with the immediate origins of the depression. This trinity of booms contributed to sustain a seeming prosperity, the tragic speciousness of which was not widely apparent until after the bubble had burst. Hence the remote effect of the investment credit inflation was depression...” (page 81)
“The growth of deposits for all the banks in the country from June, 1921, to December 1929, was over 19 billion dollars. This is to be compared with 18.6 billion in total deposits for all banks, in June, 1914… The banking years from 1922 to 1929, then, were characterized by a great credit inflation – an absolute quantitative inflation viewed from any angle, and a relative inflation viewed with respect to the needs of trade and in consideration of the price level.” (pages 82/84)
“In the course of the time…increased flotation of corporate securities in an especially favorable capital market virtually surfeited some of the issuing corporations with liquid funds for which they found a profitable use in the stock exchange call-loan market, adding new fuel to the already raging flames of stock market speculation... Real estate bond issues were brought out on a scale unmatched in previous history… Our export trade was stimulated by extensive over-seas lending… All these factors…helped to carry business activity to the false bottom of credit inflation long enough for the term ‘New Era’ to become a byword…” (pages 112/13)
“It was through these various booms of a capital nature that the ‘cheap credit’ policy of this period found its chief outlets. The net effect of these influences was to produce an alteration in the structure of production.” (page 113)
“If the recent cycle has proved so puzzling to so many students of its devious course and manifold phases, it is because the full effects of the creation and operation of this central banking system upon the commercial banks have not been widely nor adequately understood; nor, furthermore, have the influences of the changing structure of the American banking system upon the structure of production been fully realized.” (page 140)
“Most American observers who were concerned with the structural view of business cycles were unable fully to appreciate the monetary aspects of the situation; those who were advocates of the purely monetary theory were so obsessed with the stable-price level complex that they were unable properly to assess the importance of the underlying structural phenomena which were developing… The movement of wholesale prices occupies a central role in the usual monetary theory, and this concentration of attention upon the superficial phenomena of changes in the value of money has militated against an understanding of the channels through which newly created credit entered the economic system and of the effect of this new credit upon the structure of production. Further, there are certain aspects of the recent situation which render the usual monetary theory practically useless… commodity prices as measured by the wholesale prices index in this country were remarkably stable from 1922 to 1929…so that one point definitely established by the monetary experimentation involved is that stability of the price level is a doubtful safeguard against depression.” (pages 147/148)
“In the first place, the depression was as exaggerated and as protracted as it was because the stock market crash itself was the most devastating… In the second place, the alteration of the structure of production…was greater than in any previous depression… And, in the third place, during no previous collapse was there such a complex entanglement of the banking system with the course of the depression… But underlying and supplementing all these factors was a stubbornly persisting lack of equilibrium in the entire economic and price structure.” (pages 150/151)
“It has frequently been argued that the stock market boom was justified on the basis of rapidly rising corporate earnings. Some have contended that profits not only were large in absolute amount but that they were increasing at an accelerating rate… On sober afterthought, however, it appears that the stock market boom was largely a product of bank credit expansion, a mad speculative frenzy which had no rationale whatever.” (page 155)
“Although wholesale commodity prices were relatively steady, prices in a more inclusive sense did rise. That is to say, the emissions of bank credit found expression in a rise of prices other than wholesale commodity prices, the index to which most persons are accustomed to refer when considering prices in relation to increased purchasing media. For ‘credit takes various directions, and the effects of inflation can only be measured best at those points in the business structure where the use of credit has been most active.’ The ‘points’ where credit played its most active part in affecting prices in the period from 1922 onward are those already referred to – real estate, stocks, and long-term investments.”
“…the Board’s policies also had international effects that were of far-reaching import. During the period of the ‘twenties when the United States was not only the most powerful commercial and industrial nation in the world, but also was in possession of the major portion of the stock of monetary gold of the world, our domestic developments and conditions were bound to influence the course of economic events in other countries. The [Fed] in its efforts to inflate purchasing power and to support the price level in this country helped indirectly…to arrest the decline of prices in other important commercial nations…” (page 197)
“As early as June 1927, the effects of the Federal Reserve Board’s domestic credit policies upon the international situation were diagnosed by Professor Bertil Ohlin of Stockholm University as follows: ‘The influx and efflux of gold in the United States has thus lost all influence upon the monetary purchasing power and the prices level in that country. The question of granting credit is instead determined by what the Federal Reserve Board considers suitable from an economic point of view. This implies nothing less than a revolution in the monetary system not only of the United States but of all countries with a gold standard…” (page 198)
“Stability of the price level is no adequate safeguard against depression, it is contended, because any policy aimed at stabilizing a single index is bound to set up countervailing influences elsewhere in the economic system. Although the policy of stabilization may appear to be successful for a time, eventually it will break down, because there is no way of insuring that the agencies of control will be able to make their influence felt at precisely those ‘points’ of strategic importance.” (page 200)
“A sharply contrasting objective of banking policy…and the one here advocated, would be the control of the total amount of credit, such that the violent inflations and contractions of credit would be eliminated, or at least greatly mitigated, and without special regard for any one index of economic activity.” (page 202)
The authors’ delved into considerable detail and analysis elucidating the various factors and mechanisms that supported “a much larger superstructure of credit than was previously possible.” Certainly at the top of the list was the expansion of the Federal Reserve System, along with various factors and avenues that significantly reduced bank reserve-to-deposit requirements and financial innovation generally. To be sure, however, the “hyper-elasticity of the Federal Reserve System” and the fractional-reserve banking apparatus from the ‘twenties is Inflationary Child’s Play in comparison to the virtually unchecked securities-based Credit systems of our day.
The contemporary U.S. Credit system (evolving to the status of the backbone of the global Credit mechanism) comprised of banks, the GSEs, global central bank dollar holdings, brokerage firms, the MBS and ABS marketplaces, hedge funds, finance companies, insurance companies, etc., operate today generally unrestrained from either reserve or capital requirements (not to mention a gold standard). And, in the final analysis, ‘this implies nothing less than a revolution in the monetary system not only of the United States but of all countries…’ Moreover, ‘changes occurring in the [global financial] system [are] intimately connected with the structural changes in the [global] economic system…’
“The stock market crash provided the shock to confidence which definitely and dramatically started the depression on its downward course, revealing to most persons for the first time the inherent instability of the conditions which had prevailed for several years.” (page 161)
And while “Banking and the Business Cycle” does not pursue this line of reasoning, it is my view that the 1929 crash was inevitable due to the extreme nature of speculative leveraging and deep structural maladjustment, and it was as well the impetus for an unavoidable collapse of system liquidity. One never knows from where the shock to confidence will emanate, while today’s intertwined global Credit apparatus has an unknown multitude of highly leveraged marketplaces that would qualify as potential financial dislocation catalysts. Yet one can look to today’s Highly Extraordinary Global Credit and Speculative Boom Environment and state unequivocally that the system is acutely vulnerable to any break in confidence, panicked speculator deleveraging, or even any meaningful downturn in Credit growth. Admittedly, the Global Credit Bubble has quite a head of steam. But, then again, so might global interest rates.
Wednesday, April 05, 2006
Tuesday, April 04, 2006
Wednesday, March 22, 2006
Social Evolution and the Future of World Society
Christopher Chase-Dunn
Cycles and Trends In The Historical Evolution of World Orders
This article is about the idea of world society and the possible futures of the world-system in long-term evolutionary perspective. Th ough I share a social constructionist and institutional approach similar to that of the Zurich and the world polity schools, my structural approach to world capitalism and the notion of world society emphasizes the importance of markets, money and geopolitics in the modern system, while seeking to take account of the ideological projects of both the contenders for predominance and those who have resisted domination and exploitation...¹
Cycles and Trends In The Historical Evolution of World Orders
This article is about the idea of world society and the possible futures of the world-system in long-term evolutionary perspective. Th ough I share a social constructionist and institutional approach similar to that of the Zurich and the world polity schools, my structural approach to world capitalism and the notion of world society emphasizes the importance of markets, money and geopolitics in the modern system, while seeking to take account of the ideological projects of both the contenders for predominance and those who have resisted domination and exploitation...¹
Thursday, March 16, 2006
Credit Warnings...!
Signs of The Times
Credit Derivatives...
Of course, the Austrian School of Economics has had the best grasp of credit markets and the following is an essay entitled "Dearth of Credit" by Ludwig von Mises:
Credit Derivatives...
Of course, the Austrian School of Economics has had the best grasp of credit markets and the following is an essay entitled "Dearth of Credit" by Ludwig von Mises:
"An increase in the quantity of money or fiduciary media is an indispensable condition of the emergence of a boom. The recurrence of boom periods, followed by periods of depression, is the unavoidable outcome of repeated attempts to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.
The breakdown appears as soon as the banks become frightened by the accelerated pace of the boom and begin to abstain from further credit expansion. The change in the banks' conduct does not create the crisis. It merely makes visible the havoc spread by the faults which business has committed in the boom period.
The dearth of credit which marks the crisis is caused not by contraction but by the abstention from further credit expansion. It hurts all enterprises – not only those which are doomed at any rate, but no less those whose business is sound and could flourish if appropriate credit were available. As the outstanding debts are not paid back, the banks lack the means to grant credits even to the most solid firms. The crisis becomes general and forces all branches of business and all firms to restrict their activities. But there is no means of avoiding these consequences of the preceding boom.
Prices of the factors of production – both material and human – have reached an excessive height in the boom period. They must come down before business can become profitable again. The recovery and return to "normalcy" can only begin when prices and wage rates are so low that a sufficient number of people assume that they will not drop still more."
Sunday, February 12, 2006
The US Economy and Markets May Be Heading For A Bernanke 'Trap'
Rob Lee
..."8. The trap is further deepened by the unfortunate reputation that Mr Bernanke has generated for himself. The following is an well known extract from a speech Mr Bernanke gave in November 2002:
"Like gold, U.S dollars have value only to the extent that they are strictly limited in supply. But the US government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S dollars at it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate... inflation."
It should be emphasised that this was no off the cuff remark, but contained in a set speech while he was already a Fed governor. He has repeatedly expressed these and similar views since. Of course his analysis may very well be correct, but it was not wise of a potential future Fed Chairman to say so. Central bankers around the world were privately aghast. Let's face it, the sobriquet "Helicopter Ben" is not helpful to the man now in charge of the world's reserve currency. Mr Bernanke must be well aware that he has this reputation for being weak on inflation. Is it likely that his first move as Chairman will be to ease policy? No. Does he have less room for manoeuvre than Mr Greenspan, both within the Fed and with markets? Yes.
In summary, I think the US economy is already slowing significantly. Monetary policy is tighter than it appears. Mr Bernanke's Fed will (partly inadvertently) tighten policy even further and initially be slow to react"
..."8. The trap is further deepened by the unfortunate reputation that Mr Bernanke has generated for himself. The following is an well known extract from a speech Mr Bernanke gave in November 2002:
"Like gold, U.S dollars have value only to the extent that they are strictly limited in supply. But the US government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S dollars at it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate... inflation."
It should be emphasised that this was no off the cuff remark, but contained in a set speech while he was already a Fed governor. He has repeatedly expressed these and similar views since. Of course his analysis may very well be correct, but it was not wise of a potential future Fed Chairman to say so. Central bankers around the world were privately aghast. Let's face it, the sobriquet "Helicopter Ben" is not helpful to the man now in charge of the world's reserve currency. Mr Bernanke must be well aware that he has this reputation for being weak on inflation. Is it likely that his first move as Chairman will be to ease policy? No. Does he have less room for manoeuvre than Mr Greenspan, both within the Fed and with markets? Yes.
In summary, I think the US economy is already slowing significantly. Monetary policy is tighter than it appears. Mr Bernanke's Fed will (partly inadvertently) tighten policy even further and initially be slow to react"
Thursday, January 26, 2006
Equilibriation
Theory of Everything - Why Do Intellectuals Oppose Capitalism?
"Let me state it simply. The mind, the more educated, develops the habit of natural equilibriating logic. This logic is against capitalism because it is not equilibriated, it is a dis-equilibriating class system, even though I support it more than the other wrecks. What may be required is a mixed equilibriated economic system of truly balanced supply and demand, then maybe the intellectuals could support it. But don't tell the intellectuals, they fear what they don't think of!"
Just a hint,
Lloyd"
"Let me state it simply. The mind, the more educated, develops the habit of natural equilibriating logic. This logic is against capitalism because it is not equilibriated, it is a dis-equilibriating class system, even though I support it more than the other wrecks. What may be required is a mixed equilibriated economic system of truly balanced supply and demand, then maybe the intellectuals could support it. But don't tell the intellectuals, they fear what they don't think of!"
Just a hint,
Lloyd"
Tuesday, January 24, 2006
Beyond Keynes to Inflation
Richard Benson
Without constant monetary stimulus, the credit-based U.S. economy would die. Our current economic model is similar to the one used by banana republic countries that are running hyperinflation* and end up in hock to the IMF:
"Hyperinflations are caused by extremely rapid growth in the supply of “paper” money. They occur when the monetary and fiscal authorities of a nation regularly issue large quantities of money to pay for a large stream of government expenditures. In effect, inflation is a form of taxation where the government gains at the expense of those who hold money whose value is declining. Hyperinflations are, therefore, very large taxation schemes."
America is now extraordinarily vulnerable to the whims of foreign governments. What if our creditors demanded a higher rate of interest? Perhaps they already have, and the Federal Reserve will have to raise interest rates higher than the capital markets currently expect.
What about the housing bubble? Mr. Bernanke may be left with only one course of action: Given housing price inflation of 50 to 100 percent in some areas over the past few years, the Fed’s goal for the next several years will be how to get inflation up without crushing housing prices because of rising interest rates. A housing price crash could severely affect the financial markets in our country and take the economic system down with it. Mr. Bernanke has spent his entire adult life studying to prevent this from happening and I suspect he will do everything in his power to keep inflation going. When everything else is inflated, housing prices (at their current levels) won’t appear to be so over-valued. Getting money into the hands of consumers who can’t tap their savings (because most Americans don’t have any), or use their credit cards (because they’re over-extended - welcome to the new bankruptcy law), or draw cash from the home equity loan ATM installed on the side of their house (housing prices are stagnant or falling), will be a real challenge. To get money into the consumer’s hands, the Fed will have to print more money and encourage the creation of more debt. Mr. Bernanke’s illusion about dropping “money from helicopters” may actually come to pass as a direct way to distribute money to the consumer to service old debts and keep spending alive. The new economic model should be “inflate, or face deflationary collapse”.
Without constant monetary stimulus, the credit-based U.S. economy would die. Our current economic model is similar to the one used by banana republic countries that are running hyperinflation* and end up in hock to the IMF:
"Hyperinflations are caused by extremely rapid growth in the supply of “paper” money. They occur when the monetary and fiscal authorities of a nation regularly issue large quantities of money to pay for a large stream of government expenditures. In effect, inflation is a form of taxation where the government gains at the expense of those who hold money whose value is declining. Hyperinflations are, therefore, very large taxation schemes."
America is now extraordinarily vulnerable to the whims of foreign governments. What if our creditors demanded a higher rate of interest? Perhaps they already have, and the Federal Reserve will have to raise interest rates higher than the capital markets currently expect.
What about the housing bubble? Mr. Bernanke may be left with only one course of action: Given housing price inflation of 50 to 100 percent in some areas over the past few years, the Fed’s goal for the next several years will be how to get inflation up without crushing housing prices because of rising interest rates. A housing price crash could severely affect the financial markets in our country and take the economic system down with it. Mr. Bernanke has spent his entire adult life studying to prevent this from happening and I suspect he will do everything in his power to keep inflation going. When everything else is inflated, housing prices (at their current levels) won’t appear to be so over-valued. Getting money into the hands of consumers who can’t tap their savings (because most Americans don’t have any), or use their credit cards (because they’re over-extended - welcome to the new bankruptcy law), or draw cash from the home equity loan ATM installed on the side of their house (housing prices are stagnant or falling), will be a real challenge. To get money into the consumer’s hands, the Fed will have to print more money and encourage the creation of more debt. Mr. Bernanke’s illusion about dropping “money from helicopters” may actually come to pass as a direct way to distribute money to the consumer to service old debts and keep spending alive. The new economic model should be “inflate, or face deflationary collapse”.
Tuesday, January 17, 2006
The Dynamic Unity of Reality
On Truth and Reality: Philosophy Physics Metaphysics - Wave Structure of Matter: Famous Physics Philosophy Quotes
This site deserves to be read by all. Just finished it myself. After, I checked the web for all official physicists connected, and or related to Geoff's ideas, I found them in agreement, and his ideas flawless. Anyone wanting to thoroughly understand the world of physics and philosophy, and one's own self, need go no further. I think this should become the highest rated site on the web, as it has the real potential to greatly advance all scientific, and `social' redemptive truth.
There doesn't seem to be anyone around, so I'll take a stab at answering your querry. In my logical way of achieving certainty of quantum mechanics, and wsm over cosmological space-time special relativity, I compared the absolute mathematical certainty of greatest magnitude infinity itself, to spact-time relativity's lack of mathematical infinity at all, in the large. Of course infinity, in the small, exists in all systems, but a greatest magnitude infinity only exists in non-space time absolute infinite space, i.e., the new quantum mechanics of wolff, mead, hawkings, lafreniere, haselhurst, myself and others, plus the wsm. It only takes doing the spact-time math of either 15 or 30 billion years of light speed travel to realize einstein's figures fall far short of greatest magnitude infinity. So if we eliminate the possibility of einstein having any cosmological space-time validity, we have more certainty, to start with - no cosmological space-time special relativity confusion. This in no way eliminates lorentz's quantum relativity - the only true relativity to begin with.
By my mind's logic, absolute greatest magnitude infinity makes far more sense than einstein's restricted cosmological curved space-time special relativity balloon, of false lesser than infinity mathematics. If we are going to accept logic as mathematical certainty, greatest magnitude infinity must be accepted as a corresponding mathematical certainty, only possible in wsm's new quantum infinite space reality. You can't have conflict in mathematics and achieve any certainty at all in formal logical systems. Most all formal higher order logic and mathematics systems either agree or correspond, not contradict. Einstein's cosmological space-time special relativity mathematics contradicts the highest order formal logic of greatest magnitude mathematics. Thus, einstein is wrong and wsm is right, as the only other serious mathematical reality left - a new logic of mathematical certainty - least and greatest magnitudes of infinity.
As to the laws of nature, physics and sciences, they really don't control anything, anyway. They are the evolving of space motion onward. They exist as descriptors of wave actions of motions. Even if I were to grant the validity of einstein's cosmological space-time special relativity, none of the natural laws would change at any velocity approaching the speed of light, even if such a foolish idea as speeding the earth were done, due to conspansion, all measuring tools, parallel lines, maths, etc., on and on would all shrink with inperceptable change to any theoretical observer. The reality of the observer, even in the shrinking rod scenario or clock scenario, is absolutely impossible due to conspansion - the fact that no observer at the cosmological level, under einstein quantifactions, can ever tell if that type of universe is going forward or back, or stable, shrinking, or expanding, or matter shrinking, nor can an observer ever exist at that level, even theoretically, without always viewing the same unchanging frame of reference. Not to be offensive, but quite a foolish false reality, if you ask me. So I suggest we accept the only sensible possible reality - wsm and true infinite and absolute space.
We have only one real choice, the false mathematics of special relativity einstein or the true greatest magnitude mathematics of infinity.
by L.A.Gillespie
This site deserves to be read by all. Just finished it myself. After, I checked the web for all official physicists connected, and or related to Geoff's ideas, I found them in agreement, and his ideas flawless. Anyone wanting to thoroughly understand the world of physics and philosophy, and one's own self, need go no further. I think this should become the highest rated site on the web, as it has the real potential to greatly advance all scientific, and `social' redemptive truth.
There doesn't seem to be anyone around, so I'll take a stab at answering your querry. In my logical way of achieving certainty of quantum mechanics, and wsm over cosmological space-time special relativity, I compared the absolute mathematical certainty of greatest magnitude infinity itself, to spact-time relativity's lack of mathematical infinity at all, in the large. Of course infinity, in the small, exists in all systems, but a greatest magnitude infinity only exists in non-space time absolute infinite space, i.e., the new quantum mechanics of wolff, mead, hawkings, lafreniere, haselhurst, myself and others, plus the wsm. It only takes doing the spact-time math of either 15 or 30 billion years of light speed travel to realize einstein's figures fall far short of greatest magnitude infinity. So if we eliminate the possibility of einstein having any cosmological space-time validity, we have more certainty, to start with - no cosmological space-time special relativity confusion. This in no way eliminates lorentz's quantum relativity - the only true relativity to begin with.
By my mind's logic, absolute greatest magnitude infinity makes far more sense than einstein's restricted cosmological curved space-time special relativity balloon, of false lesser than infinity mathematics. If we are going to accept logic as mathematical certainty, greatest magnitude infinity must be accepted as a corresponding mathematical certainty, only possible in wsm's new quantum infinite space reality. You can't have conflict in mathematics and achieve any certainty at all in formal logical systems. Most all formal higher order logic and mathematics systems either agree or correspond, not contradict. Einstein's cosmological space-time special relativity mathematics contradicts the highest order formal logic of greatest magnitude mathematics. Thus, einstein is wrong and wsm is right, as the only other serious mathematical reality left - a new logic of mathematical certainty - least and greatest magnitudes of infinity.
As to the laws of nature, physics and sciences, they really don't control anything, anyway. They are the evolving of space motion onward. They exist as descriptors of wave actions of motions. Even if I were to grant the validity of einstein's cosmological space-time special relativity, none of the natural laws would change at any velocity approaching the speed of light, even if such a foolish idea as speeding the earth were done, due to conspansion, all measuring tools, parallel lines, maths, etc., on and on would all shrink with inperceptable change to any theoretical observer. The reality of the observer, even in the shrinking rod scenario or clock scenario, is absolutely impossible due to conspansion - the fact that no observer at the cosmological level, under einstein quantifactions, can ever tell if that type of universe is going forward or back, or stable, shrinking, or expanding, or matter shrinking, nor can an observer ever exist at that level, even theoretically, without always viewing the same unchanging frame of reference. Not to be offensive, but quite a foolish false reality, if you ask me. So I suggest we accept the only sensible possible reality - wsm and true infinite and absolute space.
We have only one real choice, the false mathematics of special relativity einstein or the true greatest magnitude mathematics of infinity.
by L.A.Gillespie
Sunday, January 15, 2006
Matter Is Made of Waves
Matter is made of waves
I was so impressed with this site I just had to post it. Maybe a little common sense about physics can help us more clearly understand economics. The same solipsistic academic entanglement embroils economics as is clearly made evident in LaFreniere's site. We must start to see through economics pseudo-equilibrium math problems, then maybe we can start to truly solve a few of the real world's problems.
I was so impressed with this site I just had to post it. Maybe a little common sense about physics can help us more clearly understand economics. The same solipsistic academic entanglement embroils economics as is clearly made evident in LaFreniere's site. We must start to see through economics pseudo-equilibrium math problems, then maybe we can start to truly solve a few of the real world's problems.
Friday, December 23, 2005
Friday, December 09, 2005
Cognitive-Theoretic Model of the Universe
Cognitive-Theoretic Model of the Universe
This is a theory everyone should check out. It can be used as an isomorphic or correspondence theory for any and all fields of thought and ideas. I urge you all to thoroughly read the entire 65 page pdf several times, before drawing false conclusions. Being educated to the extreme, myself, I find it to be the most serious advance in tautological thought in history. I am not steering you wrong. Check it out at: C.T.M.U.
All material at this website © 1998-2005 by Christopher Michael Langan
The Cognitive-Theoretic Model of the Universe:
A New Kind of Reality Theory
Christopher Michael Langan
Paper Published September 2002 in Progress in Complexity, Information and Design, the journal of the International Society for Complexity, Information, and Design.
Introduction
Among the most exciting recent developments in science are Complexity Theory, the theory of self-organizing systems, and the modern incarnation of Intelligent Design Theory, which investigates the deep relationship between self-organization and evolutionary biology in a scientific context not preemptively closed to teleological causation. Bucking the traditional physical reductionism of the hard sciences, complexity theory has given rise to a new trend, informational reductionism, which holds that the basis of reality is not matter and energy, but information. Unfortunately, this new form of reductionism is as problematic as the old one. As mathematician David Berlinski writes regarding the material and informational aspects of DNA: “We quite know what DNA is: it is a macromolecule and so a material object. We quite know what it achieves: apparently everything. Are the two sides of this equation in balance?” More generally, Berlinski observes that since the information embodied in a string of DNA or protein cannot affect the material dynamic of reality without being read by a material transducer, information is meaningless without matter.
The relationship between physical and informational reductionism is a telling one, for it directly mirrors Cartesian mind-matter dualism, the source of several centuries of philosophical and scientific controversy regarding the nature of deep reality. As long as matter and information remain separate, with specialists treating one as primary while tacitly relegating the other to secondary status, dualism remains in effect. To this extent, history is merely repeating itself; where mind and matter once vied with each other for primary status, concrete matter now vies with abstract information abstractly representing matter and its extended relationships. But while the formal abstractness and concrete descriptiveness of information seem to make it a worthy compromise between mind and matter, Berlinski’s comment demonstrates its inadequacy as a conceptual substitute. What is now required is thus what has been required all along: a conceptual framework in which the relationship between mind and matter, cognition and information, is made explicit. This framework must not only permit the completion of the gradual ongoing dissolution of the Cartesian mind-matter divider, but the construction of a footworthy logical bridge across the resulting explanatory gap.
Mathematically, the theoretical framework of Intelligent Design consists of certain definitive principles governing the application of complexity and probability to the analysis of two key attributes of evolutionary phenomena, irreducible complexity and specified complexity. On one hand, because the mathematics of probability must be causally interpreted to be scientifically meaningful, and because probabilities are therefore expressly relativized to specific causal scenarios, it is difficult to assign definite probabilities to evolutionary states in any model not supporting the detailed reconstruction and analysis of specific causal pathways. On the other hand, positing the “absolute improbability” of an evolutionary state ultimately entails the specification of an absolute (intrinsic global) model with respect to which absolute probabilistic deviations can be determined. A little reflection suffices to inform us of some of its properties: it must be rationally derivable from a priori principles and essentially tautological in nature, it must on some level identify matter and information, and it must eliminate the explanatory gap between the mental and physical aspects of reality. Furthermore, in keeping with the name of that to be modeled, it must meaningfully incorporate the intelligence and design concepts, describing the universe as an intelligently self-designed, self-organizing system.
How is this to be done? In a word, with language. This does not mean merely that language should be used as a tool to analyze reality, for this has already been done countless times with varying degrees of success. Nor does it mean that reality should be regarded as a machine language running in some kind of vast computer. It means using language as a mathematical paradigm unto itself. Of all mathematical structures, language is the most general, powerful and necessary. Not only is every formal or working theory of science and mathematics by definition a language, but science and mathematics in whole and in sum are languages. Everything that can be described or conceived, including every structure or process or law, is isomorphic to a description or definition and therefore qualifies as a language, and every sentient creature constantly affirms the linguistic structure of nature by exploiting syntactic isomorphism to perceive, conceptualize and refer to it. Even cognition and perception are languages based on what Kant might have called “phenomenal syntax”. With logic and mathematics counted among its most fundamental syntactic ingredients, language defines the very structure of information. This is more than an empirical truth; it is a rational and scientific necessity.
Of particular interest to natural scientists is the fact that the laws of nature are a language. To some extent, nature is regular; the basic patterns or general aspects of structure in terms of which it is apprehended, whether or not they have been categorically identified, are its “laws”. The existence of these laws is given by the stability of perception. Because these repetitive patterns or universal laws simultaneously describe multiple instances or states of nature, they can be regarded as distributed “instructions” from which self-instantiations of nature cannot deviate; thus, they form a “control language” through which nature regulates its self-instantiations. This control language is not of the usual kind, for it is somehow built into the very fabric of reality and seems to override the known limitations of formal systems. Moreover, it is profoundly reflexive and self-contained with respect to configuration, execution and read-write operations. Only the few and the daring have been willing to consider how this might work…to ask where in reality the laws might reside, how they might be expressed and implemented, why and how they came to be, and how their consistency and universality are maintained. Although these questions are clearly of great scientific interest, science alone is logically inadequate to answer them; a new explanatory framework is required. This paper describes what the author considers to be the most promising framework in the simplest and most direct terms possible.
[more...]
This is a theory everyone should check out. It can be used as an isomorphic or correspondence theory for any and all fields of thought and ideas. I urge you all to thoroughly read the entire 65 page pdf several times, before drawing false conclusions. Being educated to the extreme, myself, I find it to be the most serious advance in tautological thought in history. I am not steering you wrong. Check it out at: C.T.M.U.
All material at this website © 1998-2005 by Christopher Michael Langan
The Cognitive-Theoretic Model of the Universe:
A New Kind of Reality Theory
Christopher Michael Langan
Paper Published September 2002 in Progress in Complexity, Information and Design, the journal of the International Society for Complexity, Information, and Design.
Introduction
Among the most exciting recent developments in science are Complexity Theory, the theory of self-organizing systems, and the modern incarnation of Intelligent Design Theory, which investigates the deep relationship between self-organization and evolutionary biology in a scientific context not preemptively closed to teleological causation. Bucking the traditional physical reductionism of the hard sciences, complexity theory has given rise to a new trend, informational reductionism, which holds that the basis of reality is not matter and energy, but information. Unfortunately, this new form of reductionism is as problematic as the old one. As mathematician David Berlinski writes regarding the material and informational aspects of DNA: “We quite know what DNA is: it is a macromolecule and so a material object. We quite know what it achieves: apparently everything. Are the two sides of this equation in balance?” More generally, Berlinski observes that since the information embodied in a string of DNA or protein cannot affect the material dynamic of reality without being read by a material transducer, information is meaningless without matter.
The relationship between physical and informational reductionism is a telling one, for it directly mirrors Cartesian mind-matter dualism, the source of several centuries of philosophical and scientific controversy regarding the nature of deep reality. As long as matter and information remain separate, with specialists treating one as primary while tacitly relegating the other to secondary status, dualism remains in effect. To this extent, history is merely repeating itself; where mind and matter once vied with each other for primary status, concrete matter now vies with abstract information abstractly representing matter and its extended relationships. But while the formal abstractness and concrete descriptiveness of information seem to make it a worthy compromise between mind and matter, Berlinski’s comment demonstrates its inadequacy as a conceptual substitute. What is now required is thus what has been required all along: a conceptual framework in which the relationship between mind and matter, cognition and information, is made explicit. This framework must not only permit the completion of the gradual ongoing dissolution of the Cartesian mind-matter divider, but the construction of a footworthy logical bridge across the resulting explanatory gap.
Mathematically, the theoretical framework of Intelligent Design consists of certain definitive principles governing the application of complexity and probability to the analysis of two key attributes of evolutionary phenomena, irreducible complexity and specified complexity. On one hand, because the mathematics of probability must be causally interpreted to be scientifically meaningful, and because probabilities are therefore expressly relativized to specific causal scenarios, it is difficult to assign definite probabilities to evolutionary states in any model not supporting the detailed reconstruction and analysis of specific causal pathways. On the other hand, positing the “absolute improbability” of an evolutionary state ultimately entails the specification of an absolute (intrinsic global) model with respect to which absolute probabilistic deviations can be determined. A little reflection suffices to inform us of some of its properties: it must be rationally derivable from a priori principles and essentially tautological in nature, it must on some level identify matter and information, and it must eliminate the explanatory gap between the mental and physical aspects of reality. Furthermore, in keeping with the name of that to be modeled, it must meaningfully incorporate the intelligence and design concepts, describing the universe as an intelligently self-designed, self-organizing system.
How is this to be done? In a word, with language. This does not mean merely that language should be used as a tool to analyze reality, for this has already been done countless times with varying degrees of success. Nor does it mean that reality should be regarded as a machine language running in some kind of vast computer. It means using language as a mathematical paradigm unto itself. Of all mathematical structures, language is the most general, powerful and necessary. Not only is every formal or working theory of science and mathematics by definition a language, but science and mathematics in whole and in sum are languages. Everything that can be described or conceived, including every structure or process or law, is isomorphic to a description or definition and therefore qualifies as a language, and every sentient creature constantly affirms the linguistic structure of nature by exploiting syntactic isomorphism to perceive, conceptualize and refer to it. Even cognition and perception are languages based on what Kant might have called “phenomenal syntax”. With logic and mathematics counted among its most fundamental syntactic ingredients, language defines the very structure of information. This is more than an empirical truth; it is a rational and scientific necessity.
Of particular interest to natural scientists is the fact that the laws of nature are a language. To some extent, nature is regular; the basic patterns or general aspects of structure in terms of which it is apprehended, whether or not they have been categorically identified, are its “laws”. The existence of these laws is given by the stability of perception. Because these repetitive patterns or universal laws simultaneously describe multiple instances or states of nature, they can be regarded as distributed “instructions” from which self-instantiations of nature cannot deviate; thus, they form a “control language” through which nature regulates its self-instantiations. This control language is not of the usual kind, for it is somehow built into the very fabric of reality and seems to override the known limitations of formal systems. Moreover, it is profoundly reflexive and self-contained with respect to configuration, execution and read-write operations. Only the few and the daring have been willing to consider how this might work…to ask where in reality the laws might reside, how they might be expressed and implemented, why and how they came to be, and how their consistency and universality are maintained. Although these questions are clearly of great scientific interest, science alone is logically inadequate to answer them; a new explanatory framework is required. This paper describes what the author considers to be the most promising framework in the simplest and most direct terms possible.
[more...]
Monday, November 28, 2005
A Quickie on “Money”
A Quickie on “Money” by Doug Noland
“Money” connotes quite different things to different people. Some would argue that gold – a store of value over the ages that is nobody’s liability – is money in its purest form. Others have a more traditional (narrow) focus on currency and banking system reserves (“money stock”), and would generally analyze “money” primarily in terms of its role in consummating transactions. Many still view the money supply as something under the Federal Reserve’s control, holding “Fed pumping” responsible when the monetary aggregates expand rapidly. It is common for pundits to focus on what they believe “money” should be rather than the distinguishing characteristics of the creation, intermediation, risk profile, function and various effects of today’s extraordinary inflation of myriad financial claims.
And while most will view it as unconventional, I believe my “money” analytical framework is consistent with the thinking of some of the leading monetary economists of the past. Consistent with Ludwig von Mises’ “fiduciary media” approach, monetary analysis must be quite broad in scope and focused on the “economic functionality” of new financial claims. Allyn Abbott Young was keen to appreciate the “preciousness” attribute of money throughout history. It is the perceived preciousness (“moneyness”) of specific types of contemporary financial claims that leave them highly susceptible to over-issuance. Traditionally, when it came to financial claims expansion it was government issued currency and central bank created reserves that generally enjoyed the type of persistent (“store of value”) demand conducive to protracted Credit inflations. These days, the defining feature of contemporary Wall Street finance is the amalgamation of financial sector intermediation, the proliferation of credit insurance, financial guarantees, derivatives, implied and explicit GSE and government guarantees, and myriad sophisticated risk-sharing structures that have created to this point unlimited capacity to issue perceived “precious” financial claims. It is the Inherent and Dubious Nature of The Moneyness of Credit that Supply Creates its Own Demand.
I will loosely define contemporary “money” as financial claims perceived to be a highly safe and liquid store of nominal value. Simple enough, one would think, although it is a definition quite problematic for most. The catch is “perceived.” You can’t model perceptions, so my definition would be unacceptable to most academics, econometricians and trained economists (including Fed economists that measure and monitor money growth). Nonetheless, it is my view that the type of financial claims that demonstrates the “economic functionality” of “money” can vary greatly depending on evolving marketplace perceptions with respect to safety, liquidity, and the capacity to maintain nominal value.
And, importantly, I strongly argue that over the life of an inflationary boom the marketplace will come to perceive characteristics of “moneyness” in an expanding array of financial claims, and that this expanding universe of readily accepted instruments plays a defining role in perpetuating the boom. This is particularly the case when it comes to asset Bubbles and the underlying claims backed by inflated collateral values (i.e. after a protracted real estate boom, ABS and MBS today enjoy perceived moneyness qualities). Almost by definition, the final precarious boom-time speculative blow-off is financed through the frenetic expansion of dubious, yet momentarily treasured, financial claims.
With the above as background, I will attempt to clarify my view that we are at no analytical loss with the upcoming relegation of M3 to the government data scrapheap. First of all, M3 is today definitely not reflective of marketplace perceptions with respect to “moneyness.” With each boom year, the spectrum of perceived safe and liquid instruments expands. This year will see record ABS and commercial paper issuance, with the combined growth of these two categories of financial claims likely in the range of total M3 growth. M3 captures little of this imposing monetary expansion.
The monetary aggregates (“M’s”) were constructed for a bygone monetary era largely dictated by banking sector liabilities, intermediation and payment clearing. The expansion of deposits and other bank liabilities (“repos,” euro deposits, etc.) would sufficiently capture total system Credit growth, with the M’s generally correlating well with nominal economic output and indicative of general financial conditions. However, several fundamental developments have profoundly altered the monetary landscape and the capacity for the M’s to reflect relevant economic and market developments. The rise to prominence of non-bank lending mechanisms has profoundly changed the nature of financial sector liability creation and intermediation.
Market-based securities issuance is now a major aspect of monetary expansion, and the M’s are undoubtedly ill-equipped for such an environment. The unprecedented expansion of GSE obligations (debt and MBS) created several Trillion dollars of perceived safe financial sector liabilities. The enormous growth of Wall Street intermediation has spurred both a boom in securities issuance and incredible growth in (individual and institutional) account balances held throughout the (international) broker/dealer community. Technological advancement has also played a key role in expanding “moneyness.” For example, the Internet now allows households and institutions to directly purchase Treasury bills and myriad securities online, when much of these funds would have in the past been held in bank or money fund deposits (and included in the M’s). I also believe our massive Current Account Deficits and the corresponding ballooning of foreign central bank dollar holdings have impacted the relevancy of the M’s. Every day now, a couple billion dollars of Credit growth immediately flows to overseas institutions, where much of it is recycled back to financial claims (Treasuries, agencies, MBS, and ABS) not included in the monetary aggregates. If these funds were instead held domestically as savings, it is quite likely that a large percentage would be held in instruments included in the M’s.
It is also worth noting that the M’s can at times prove especially flawed indicators of Credit expansion. In periods marked by a significant augmentation of Marketplace Risk Embracement, disintermediation out of low-yielding bank and money fund deposits into riskier instruments may meaningfully distort the M’s (recall 2003’s 4th quarter). Not only would stagnant monetary aggregate growth fail to reflect system Credit expansion, it would give decidedly erroneous signals with respect to system liquidity. And I know this is unconventional thinking, but I have come to completely disassociate the M’s from system liquidity. I would argue that system liquidity is today determined by the capacity of the broader financial system (including Wall Street, hedge funds, the “repo market”, foreign bank and global central bank dollar holdings) to expand, almost irrespective of the M’s.
In summary, the M’s no longer reflect either system Credit growth or system liquidity, and are prone to give erroneous signals at critical junctures (when Marketplace Risk Embracement is modulating). I have watched repeatedly over the past few years as analysts have pounced on any slowdown in the M’s as an indicator of waning Credit growth and liquidity. This year, it was the stagnation of MZM that captured analysts’ attention, notwithstanding that this development was largely related to continued disintermediation from the money fund complex and the shift to higher-yielding term deposits; Credit growth remained on record pace, and the Bubble economy carried on. Moreover, M3 is clearly not capturing the historic expansion in the securities-financing repurchase agreement (“repo”) marketplace. While primary dealer “repo” positions have expanded $975 billion over the past two years, the M3 component bank net “repo” liability position has increased $27 billion. And while some “repo” positions are being captured in Money Funds holdings, there are enormous perceived “money” assets held in the ballooning securities financing arena outside the purview of the M’s.
If the Fed endeavored to shroud the extent of current monetary inflation, I suggest they stick with publishing M3. And it is inconceivable at this point to expect the Fed – or the economic community – to embrace a broad-based measure of monetary instruments that would include Wall Street marketable securities and “repos.” Anyway, contemporary “money” is a moving target that changes at the whim of marketplace perceptions. And while I question the premise that the Fed has much to gain by eliminating M3, this nonetheless misses the much more salient point: The Fed has lost control of our nation’s “money” and Credit creation processes. The Greenspan/Bernanke Fed can now only administer feeble attempts to remove accommodation, hoping that over time baby-steps makes some headway but without ever attempting to impede, interrupt or discipline Wall Street Monetary Processes.
The market today believes that a slowing real estate market is in the process of restraining system Credit growth. I am skeptical. It is my view that after the past year’s boom in energy and commodities prices, along with booming exports and a strong inflationary bias throughout much of the economy, it will now take considerably more restraint in mortgage Credit to meaningfully moderate total system Credit growth. And the greater U.S. and global stocks and bonds rally, the more likely the Credit Bubble refuses to miss a beat.
The late 1920s saw the Benjamin Strong Fed acquiesce to the demands of the broker call market after it had evolved into a commanding source of monetary inflation and system liquidity. Today’s securities finance Bubble – certainly including the massive “repo” market – is at a scope unlike any in history. And once a substantial component of a nation’s (world’s) “money” supply is wrapped up in financing market Bubbles – well, you have one hell of a predicament. On the one hand, such powerful Bubbles are (as we have witnessed) strongly self-sustaining. On the other, the consequences of popping the Bubble ensure policymaker timidity and ongoing accommodation. Dr. Bernanke certainly has no intention of administering any meaningful restraint. Yet, inevitably, financial Bubbles do burst and the downside of boom-time Perceived Moneyness and Marketplace Risk Embracement manifest in financial dislocation and a crisis of confidence.
“Money” connotes quite different things to different people. Some would argue that gold – a store of value over the ages that is nobody’s liability – is money in its purest form. Others have a more traditional (narrow) focus on currency and banking system reserves (“money stock”), and would generally analyze “money” primarily in terms of its role in consummating transactions. Many still view the money supply as something under the Federal Reserve’s control, holding “Fed pumping” responsible when the monetary aggregates expand rapidly. It is common for pundits to focus on what they believe “money” should be rather than the distinguishing characteristics of the creation, intermediation, risk profile, function and various effects of today’s extraordinary inflation of myriad financial claims.
And while most will view it as unconventional, I believe my “money” analytical framework is consistent with the thinking of some of the leading monetary economists of the past. Consistent with Ludwig von Mises’ “fiduciary media” approach, monetary analysis must be quite broad in scope and focused on the “economic functionality” of new financial claims. Allyn Abbott Young was keen to appreciate the “preciousness” attribute of money throughout history. It is the perceived preciousness (“moneyness”) of specific types of contemporary financial claims that leave them highly susceptible to over-issuance. Traditionally, when it came to financial claims expansion it was government issued currency and central bank created reserves that generally enjoyed the type of persistent (“store of value”) demand conducive to protracted Credit inflations. These days, the defining feature of contemporary Wall Street finance is the amalgamation of financial sector intermediation, the proliferation of credit insurance, financial guarantees, derivatives, implied and explicit GSE and government guarantees, and myriad sophisticated risk-sharing structures that have created to this point unlimited capacity to issue perceived “precious” financial claims. It is the Inherent and Dubious Nature of The Moneyness of Credit that Supply Creates its Own Demand.
I will loosely define contemporary “money” as financial claims perceived to be a highly safe and liquid store of nominal value. Simple enough, one would think, although it is a definition quite problematic for most. The catch is “perceived.” You can’t model perceptions, so my definition would be unacceptable to most academics, econometricians and trained economists (including Fed economists that measure and monitor money growth). Nonetheless, it is my view that the type of financial claims that demonstrates the “economic functionality” of “money” can vary greatly depending on evolving marketplace perceptions with respect to safety, liquidity, and the capacity to maintain nominal value.
And, importantly, I strongly argue that over the life of an inflationary boom the marketplace will come to perceive characteristics of “moneyness” in an expanding array of financial claims, and that this expanding universe of readily accepted instruments plays a defining role in perpetuating the boom. This is particularly the case when it comes to asset Bubbles and the underlying claims backed by inflated collateral values (i.e. after a protracted real estate boom, ABS and MBS today enjoy perceived moneyness qualities). Almost by definition, the final precarious boom-time speculative blow-off is financed through the frenetic expansion of dubious, yet momentarily treasured, financial claims.
With the above as background, I will attempt to clarify my view that we are at no analytical loss with the upcoming relegation of M3 to the government data scrapheap. First of all, M3 is today definitely not reflective of marketplace perceptions with respect to “moneyness.” With each boom year, the spectrum of perceived safe and liquid instruments expands. This year will see record ABS and commercial paper issuance, with the combined growth of these two categories of financial claims likely in the range of total M3 growth. M3 captures little of this imposing monetary expansion.
The monetary aggregates (“M’s”) were constructed for a bygone monetary era largely dictated by banking sector liabilities, intermediation and payment clearing. The expansion of deposits and other bank liabilities (“repos,” euro deposits, etc.) would sufficiently capture total system Credit growth, with the M’s generally correlating well with nominal economic output and indicative of general financial conditions. However, several fundamental developments have profoundly altered the monetary landscape and the capacity for the M’s to reflect relevant economic and market developments. The rise to prominence of non-bank lending mechanisms has profoundly changed the nature of financial sector liability creation and intermediation.
Market-based securities issuance is now a major aspect of monetary expansion, and the M’s are undoubtedly ill-equipped for such an environment. The unprecedented expansion of GSE obligations (debt and MBS) created several Trillion dollars of perceived safe financial sector liabilities. The enormous growth of Wall Street intermediation has spurred both a boom in securities issuance and incredible growth in (individual and institutional) account balances held throughout the (international) broker/dealer community. Technological advancement has also played a key role in expanding “moneyness.” For example, the Internet now allows households and institutions to directly purchase Treasury bills and myriad securities online, when much of these funds would have in the past been held in bank or money fund deposits (and included in the M’s). I also believe our massive Current Account Deficits and the corresponding ballooning of foreign central bank dollar holdings have impacted the relevancy of the M’s. Every day now, a couple billion dollars of Credit growth immediately flows to overseas institutions, where much of it is recycled back to financial claims (Treasuries, agencies, MBS, and ABS) not included in the monetary aggregates. If these funds were instead held domestically as savings, it is quite likely that a large percentage would be held in instruments included in the M’s.
It is also worth noting that the M’s can at times prove especially flawed indicators of Credit expansion. In periods marked by a significant augmentation of Marketplace Risk Embracement, disintermediation out of low-yielding bank and money fund deposits into riskier instruments may meaningfully distort the M’s (recall 2003’s 4th quarter). Not only would stagnant monetary aggregate growth fail to reflect system Credit expansion, it would give decidedly erroneous signals with respect to system liquidity. And I know this is unconventional thinking, but I have come to completely disassociate the M’s from system liquidity. I would argue that system liquidity is today determined by the capacity of the broader financial system (including Wall Street, hedge funds, the “repo market”, foreign bank and global central bank dollar holdings) to expand, almost irrespective of the M’s.
In summary, the M’s no longer reflect either system Credit growth or system liquidity, and are prone to give erroneous signals at critical junctures (when Marketplace Risk Embracement is modulating). I have watched repeatedly over the past few years as analysts have pounced on any slowdown in the M’s as an indicator of waning Credit growth and liquidity. This year, it was the stagnation of MZM that captured analysts’ attention, notwithstanding that this development was largely related to continued disintermediation from the money fund complex and the shift to higher-yielding term deposits; Credit growth remained on record pace, and the Bubble economy carried on. Moreover, M3 is clearly not capturing the historic expansion in the securities-financing repurchase agreement (“repo”) marketplace. While primary dealer “repo” positions have expanded $975 billion over the past two years, the M3 component bank net “repo” liability position has increased $27 billion. And while some “repo” positions are being captured in Money Funds holdings, there are enormous perceived “money” assets held in the ballooning securities financing arena outside the purview of the M’s.
If the Fed endeavored to shroud the extent of current monetary inflation, I suggest they stick with publishing M3. And it is inconceivable at this point to expect the Fed – or the economic community – to embrace a broad-based measure of monetary instruments that would include Wall Street marketable securities and “repos.” Anyway, contemporary “money” is a moving target that changes at the whim of marketplace perceptions. And while I question the premise that the Fed has much to gain by eliminating M3, this nonetheless misses the much more salient point: The Fed has lost control of our nation’s “money” and Credit creation processes. The Greenspan/Bernanke Fed can now only administer feeble attempts to remove accommodation, hoping that over time baby-steps makes some headway but without ever attempting to impede, interrupt or discipline Wall Street Monetary Processes.
The market today believes that a slowing real estate market is in the process of restraining system Credit growth. I am skeptical. It is my view that after the past year’s boom in energy and commodities prices, along with booming exports and a strong inflationary bias throughout much of the economy, it will now take considerably more restraint in mortgage Credit to meaningfully moderate total system Credit growth. And the greater U.S. and global stocks and bonds rally, the more likely the Credit Bubble refuses to miss a beat.
The late 1920s saw the Benjamin Strong Fed acquiesce to the demands of the broker call market after it had evolved into a commanding source of monetary inflation and system liquidity. Today’s securities finance Bubble – certainly including the massive “repo” market – is at a scope unlike any in history. And once a substantial component of a nation’s (world’s) “money” supply is wrapped up in financing market Bubbles – well, you have one hell of a predicament. On the one hand, such powerful Bubbles are (as we have witnessed) strongly self-sustaining. On the other, the consequences of popping the Bubble ensure policymaker timidity and ongoing accommodation. Dr. Bernanke certainly has no intention of administering any meaningful restraint. Yet, inevitably, financial Bubbles do burst and the downside of boom-time Perceived Moneyness and Marketplace Risk Embracement manifest in financial dislocation and a crisis of confidence.
Wednesday, November 23, 2005
The Coming Disaster in the Derivatives Market
"The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear....[They] are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal." - Warren Buffett
The BIS - Derivatives 2005>
...Already there are rumbling in the financial world, akin to the small tremors that shake the ground ahead of a massive earthquake. In the spring of 2005, several large hedge funds reportedly lost billions of dollars on complicated credit bets gone wrong. One firm even admitted that it had made a substantial “miscalculation” -- which they only realized, of course, after the fact. Given the increasingly complex nature of the derivatives market, that refrain is likely to be heard over and over again in future.
Certainly, the U.S. and global economies have been remarkably resilient, especially in recent years, and it may be a mistake to bet on the downside. What’s more, there are those who would argue that the financial markets have attracted the best and the brightest, and a gut-wrenching, blood-letting debacle is in no one’s interest. Unfortunately, the odds seem stacked against a happy ending, and the cyclical nature of financial crises suggests it is definitely the wrong time to be thinking like a Pollyanna.
Unfortunately, the reality is, if it all goes horribly wrong, it will not only be Wall Street that suffers. Main Street will, too. In the worst case, brokerage firms and banks will shut their doors. Markets will plunge and many investors will lose everything, Interest rates will shoot sharply higher, taxes will rise, and parts of the economy will grind to a halt, at least temporarily. Those seeking a mortgage, a college education, a job, or even day-to-day sustenance may find themselves left wanting.
At a time when many have abandoned prudence in search of profits, and where those who are knowledgeable about the disaster-to-come in the derivatives market are seeking to protect themselves, it is the timeless wisdom that remains true: forewarned is forearmed.
The BIS - Derivatives 2005>
...Already there are rumbling in the financial world, akin to the small tremors that shake the ground ahead of a massive earthquake. In the spring of 2005, several large hedge funds reportedly lost billions of dollars on complicated credit bets gone wrong. One firm even admitted that it had made a substantial “miscalculation” -- which they only realized, of course, after the fact. Given the increasingly complex nature of the derivatives market, that refrain is likely to be heard over and over again in future.
Certainly, the U.S. and global economies have been remarkably resilient, especially in recent years, and it may be a mistake to bet on the downside. What’s more, there are those who would argue that the financial markets have attracted the best and the brightest, and a gut-wrenching, blood-letting debacle is in no one’s interest. Unfortunately, the odds seem stacked against a happy ending, and the cyclical nature of financial crises suggests it is definitely the wrong time to be thinking like a Pollyanna.
Unfortunately, the reality is, if it all goes horribly wrong, it will not only be Wall Street that suffers. Main Street will, too. In the worst case, brokerage firms and banks will shut their doors. Markets will plunge and many investors will lose everything, Interest rates will shoot sharply higher, taxes will rise, and parts of the economy will grind to a halt, at least temporarily. Those seeking a mortgage, a college education, a job, or even day-to-day sustenance may find themselves left wanting.
At a time when many have abandoned prudence in search of profits, and where those who are knowledgeable about the disaster-to-come in the derivatives market are seeking to protect themselves, it is the timeless wisdom that remains true: forewarned is forearmed.
Sunday, November 06, 2005
Monday, October 31, 2005
Bernanke - Bubble Perpetuator
A Bubble Perpetuator
By Doug Noland
To frame my analysis of Dr. Bernanke as Fed Chairman, I thought it worthwhile to highlight comments made yesterday by the highly respected Reserve Bank of New Zealand (RBNZ): “The Reserve Bank has increased the Official Cash Rate (OCR) by 25 basis points to 7.00 percent. Reserve Bank Governor Alan Bollard said: ‘As noted in our September Monetary Policy Statement, medium term inflation risks remain strong. Persistently buoyant housing activity and related consumption, higher oil prices and the risk of flow-through into inflation expectations, and a more expansionary fiscal policy are all of concern. While there has been a noticeable slowing in economic activity, and a particular weakening in the export sector, we have seen ongoing momentum in domestic demand and persistently tight capacity constraints. Hence, we remain concerned that inflation pressures are not abating sufficiently to achieve our medium term target, prompting us to raise the OCR today. The most serious risk to medium term inflation is the continuing strength of household spending, supported by a relentless housing market and rapid growth in mortgage lending. Significant dis-saving by the household sector is showing through in a worsening current account deficit, now 8 percent of GDP. Borrowers and lenders alike need to recognise that the current rate of debt accumulation is unsustainable. The correction of these imbalances and associated inflation pressures will require a slowdown in housing, credit growth and domestic spending. We also expect a significantly lower exchange rate. The longer these adjustments in behaviour and asset prices are deferred, the more disruptive they are likely to be. Today’s increase in the OCR, combined with higher world interest rates and pipeline effects from the repricing of fixed rate mortgages, are expected to slow the housing market and household spending over the coming months. However, the prospect of further tightening may only be ruled out once a noticeable moderation in housing and consumer spending is observed. Certainly, we see no prospect of an easing in the foreseeable future if inflation is to be kept within the 1 percent to 3 percent target range on average over the medium term.”
RBNZ Governor Alan Bollard is successfully filling the large shoes left by his predecessor - the legendary Dr. Donald Brash, in the process upholding the high esteem long afforded the Reserve Bank. Please note how their pronouncement leaves little doubt where the Reserve Bank stands or what key fundamental factors drive policy decisions. No obfuscation necessary: “The correction of these imbalances and associated inflation pressures will require a slowdown in housing, credit growth and domestic spending.” Policymaking becomes unduly complex only when central banking drifts from traditional central banking analysis and doctrine, as it has (and is about to take another giant step) in the U.S.
We will certainly not be reading RBNZ-like language from the Bernanke Federal Reserve. Dr. Bernanke comes at central banking from a completely different perspective and analytical framework (note: the issues of transparency and inflation targeting become moot when applied within the context of a flawed framework). And while there is some media banter with respect to the “dove” or “hawk” label, there is no question that Dr. Bernanke is An Impassioned Inflationist. As for fighting inflation: he’ll talk the talk – of course, and there will come a day when talk will not suffice. In the past, I have labeled chairman Greenspan both an Inflationist and monetary policy radical. Incredibly, Professor Bernanke takes these to a whole new, dangerous extreme.
I was very much hoping Donald Kohn would be Alan Greenspan’s replacement, but would have been satisfied with several potential candidates including Roger Ferguson and Larry Lindsey. And I can say with complete seriousness that of all the leading economists in the country, Mr. Bernanke would be my least favored pick. Is it mere coincidence that the candidate at the very bottom of my list is at the top of the Administration’s and Wall Street’s? Of course not.
I have no reason to doubt that Dr. Bernanke is a “kind and decent man,” as such described by our President. He conveys an aura of integrity, and he is clearly extremely intelligent and a very hard worker. He is said to be a nice guy, and I like nice guys. I very much respect all of these attributes. And I do sense that his instincts are to be a straight-shooter. The nature of his new position, however, will demand a change, and it appears this process is well underway. He has no chance of becoming the master obfuscator, like his predecessor, or attaining Greenspan's amazing capacity to dodge every tough question and “never take a punch.” Dr. Bernanke will provide an easy target. I am tempted to fault Dr. Bernanke for “being an academic,” although it is more clearly stated that I view his background as a distinct handicap for presiding over this New Age of Wall Street Market and Speculation-based Finance in what I expect to be an increasingly hostile environment.
Candidly, I am concerned that he is such an accomplished econometrician and theorist. He has decades invested in his models and analytical framework; he’s too intellectually, analytically and emotionally committed to a perspective of how the financial sector and economy work, one I don’t expect will serve him well. Not only will his talents and perspective bias his view of the uncertain world in which we live, it is my fear that an econometrician’s analytical framework leaves one today at a decided disadvantage in discerning and appreciating the nuances of contemporary Wall Street Finance.
From Steven Pearlstein of the Washington Post: “Bernanke is smart and will figure out the markets before long.” Well, I’m not sure it’s that easy. It’s not about “smarts” or even so much with his lack of market experience. I don’t believe career “marketicians” would be well-suited for economic research. Do econometricians have an analytical perspective conducive to “figuring out the markets”? I believe the Bernanke chairmanship is likely to illuminate the major divide that exists today between academic research and real world markets – a chasm not commonly recognized. (note: warning to academia – your research is being set up as The Fall Guy.)
I don’t believe there’s any hope for effectively modeling complex financial systems or markets. Greed, fear and speculative dynamics are not generally the favored elements of the econometrician. Furthermore, it is my view that models don’t offer much value (negative value?) when it comes to the underlying complexities, subtleties, and whims of Credit expansion, financial flows, speculative dynamics and asset inflation/Bubbles. The model-maker must work to radically simplify a perplexing, convoluted and changing world. For example, instead of the nebulous and difficult to quantify “Credit,” there will be a modelers bias toward the more easily quantified parameter – such as (narrow) money supply. Cause and effect will be, conveniently, in the eye of the beholder.
Dr. Bernanke and I actually have something in common. As he wrote in his book – Essays on The Great Depression, a compilation of his papers on the subject – “I guess I am a Great Depression buff, the way some people are Civil War buffs.” But while my studies and analytical framework lead me to focus on the excesses and distortions of the Roaring Twenties – in particular the commanding effect that speculative liquidity came to possess on the asset markets and, consequently, on the nature of spending, investing and financial claims creation/intermediation – Professor Bernanke’s preoccupation is with supposed policy errors committed by the Fed commencing (late in the game) in late-1928. Apparently, he has little problem with the boom. My view is that the unsound U.S. boom ensured a commensurate bust. Sure, there were post-boom mistakes that worsened the outcome. Yet policy confusion and error should be recognized as an integral and unavoidable aspect of the late-boom and post-Bubble environment, and why the best cure for a Bubble is to ensure it doesn’t develop to begin with (as Dr. Richebacher informs us). “Mopping up” should absolutely never evolve into a concerted strategy, but recognized only as a last resort “long-shot.”
And I have my own theory as to Professor Bernanke’s stunning meteoric rise to prominence. As a disciple of Milton Friedman and as one of the leading academics in the field of post-Bubble reflationary monetary policies, he was a natural selection for the Fed when nominated in late-2001. It was the Greenspan Fed’s view that the U.S. economy had entered a post-Bubble environment, and there were some real advantages associated with procuring the esteemed academic research and analytical firepower to dignify their plan for less-than-admirable inflationary policies.
I will conjecture that if the markets had responded negatively to the new Fed governor’s open discussion of “helicopter money,” “government printing presses,” “pegging the 10-year Treasury yield,” “unconventional measures,” and the “global savings glut,” well, he would have been sent packing back to Princeton and the seasoned central banker Donald Kohn (nominated as Fed Governor with Bernanke) would be slated as our next Chairman. But an anxious Wall Street was quickly smitten with the temerity of “Helicopter Ben” and what he represented for the extreme direction of Federal Reserve policies. If there was ever an “all’s clear” message signaled directly and unmistakably from one of our leading policymakers to the markets, it was given in late 2002 by Dr. Bernanke. Go out and speculate in junk bonds; better cover your short positions in Ford bonds and Credit default swaps; buy stocks and CDOs; aggressively accumulate emerging market debt and equities; load up on commodities, get out of “money” instruments and grab any risk asset available (while you have a chance!). What ensued was one of the greatest redistributions of wealth in history.
Not quite as barefaced, Dr. Bernanke’s long-time emphasis on fighting deflationary risk by inflating the “money supply,” lent strong support to a vulnerable Wall Street “structured finance” apparatus. Recall that in 2002 the corporate debt crisis was at risk of jumping the firewall to the household sector (Household Finance, Ford Credit, etc.), with the potential to engulf the burgeoning ABS marketplace. Wall Street investment bankers working closely with their “financial engineers” had become prominent producers of contemporary U.S. “money” stock. So Dr. Bernanke’s long obsession with remedial “money” supply inflation ensured that he was both a proponent for and potentially powerful asset of Wall Street Finance. When Governor Bernanke made assurances that the Fed would do absolutely anything and everything to avoid “deflation,” Wall Street rightfully understood that Fed inflationary policies were in the process of expunging what had been a looming risk of systemic debt collapse. The sophisticated leveraged speculators were immediately emboldened; bankers were emboldened; investors were emboldened; and Wall Street “structured finance” was really emboldened (outstanding ABS has since doubled). At that point, seemingly no degree of Credit or speculative excess was too much, not with Professor Bernanke and the determined Greenspan Fed ready and more than willing to experiment with “mopping up” strategies.
There is one overriding fundamental issue I have with this whole amazing development: the view that we had fallen into a post-Bubble environment was flawed from the get-go. The technology Bubble had burst, but it was only an offshoot of the much greater Credit Bubble that was very much still Bubbling. Rather than combating deflationary forces and stabilizing some (fictitious) general price level, aggressive inflationary policies were instead poised to most intensely inflate markets already demonstrating the strongest inflationary biases (i.e. real estate, Treasuries, agencies, MBS and asset markets generally). Rather than buttressing an impaired post-Bubble Credit system, reflation stoked the Stalwart Mortgage Finance Bubble to unimaginable excess (and power). Instead of inflationary policies working to “stabilize” financial and economic conditions as the dauntless monetary theorist would ascertain, the resulting unprecedented Credit and speculative excesses guaranteed Precarious Monetary Disorder and Myriad Unwieldy Bubbles Both at Home and Abroad.
I will admit to being sympathetic to the theoretical premises supporting post-Bubble monetary stimulus. As we have witnessed, however, such policies will invariably be used prematurely – in the process acting to bolster boom-time dysfunctional Monetary Processes, resulting in only progressively precarious asset/speculative Bubbles, financial fragility and economic maladjustment. And, as we are also living these days, the greater and more precarious the Bubble(s), the more likely seductive notions of benevolent inflation will resonate throughout the entire system. To be an Eager Implementer of Reflationary Programs – an especially natural bias for someone of Dr. Bernanke’s intellectual perspective – virtually guarantees worldly mutation to Closet Bubble Perpetuator. They go (Un-Invisible) Hand in hand. The only hope against such an unfavorable outcome would be a keen understanding and appreciation for the dynamics of Credit and speculative excess, as well some regard for a “Mises” view of economic mal-adjustment. I have seen no indication suggesting that such mitigating factors will be at play for Dr. Bernanke.
What our system desperately needs right now is some Reserve Bank of New Zealand determination to rein in excess – pure and simple. I would be shocked to see such an approach from the new Fed Chairman. He holds special disdain for “Bubble Poppers,” and faults the post-Benjamin Strong Fed for the Great Depression. (“…it is now rather widely accepted that Federal Reserve policy turned contractionary in 1928, in an attempt to curb stock market speculation.”) At Milton Friedman’s ninetieth birthday party, he stated, “Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we [the Fed] did it. We’re very sorry. But thanks to you, we won’t do it again.” These days, he continues to downplay the risk of inflation. And from Nell Henderson’s Wednesday article in the Washington Post: “Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week…. U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke… But these increases, he said, ‘largely reflect strong economic fundamentals,’ such as strong growth in jobs, incomes and the number of new households.”
Take and hour or so and carefully read his April 2005 speech, “The Global Savings Glut and the U.S. Current Account Deficit.” I can honestly say – with a conscious effort to avoid hyperbole – that it is one of the most flawed and suspect pieces of analysis I have ever read from a respected economist. And the subject matter is one of the most pressing issues that must be confronted by our policymakers. It actually does seem like he is oblivious to the fact that our intractable Current Account Deficit is foremost a reflection of unrelenting Credit excess, inflated asset prices, over-consumption and economic distortions. He is similarly oblivious to the reality that this “global savings glut,” being accumulating by our trading partners, is largely IOU’s we created in the process of mortgage and asset-based borrowings. Yet, this line of reasoning is consistent with his analytical framework. From the preface of his book: “I believe that there is now overwhelming evidence that the main factor depressing aggregate demand [during the Great Depression] was a worldwide contraction in world money supplies. This monetary collapse was itself the result of poorly managed and technically flawed international monetary system (the gold standard, as reconstituted after World War I).” Dr. Bernanke has a troubling (Friedman-like)) penchant for looking outside the U.S. Credit apparatus, financial system and markets when it comes to identifying the true source of instability.
And from his 1995 article, The Macroeconomics of the Great Depression: A Comparative Approach: “To understand The Great Depression is the Holy Grail of macroeconomics… We do not yet have our hands on the Grail by any means, but during the past fifteen years or so substantial progress toward the goal of understanding the Depression has been made… To my mind…the most significant recent development has been a change in the focus of Depression research, from a traditional emphasis on events in the United States to a more comparative approach that examines the experiences of many countries simultaneously.”
And from his March 2004 speech, Money, Gold, and the Great Depression: “Some important lessons emerge from the story. One lesson is that ideas are critical. The gold standard orthodoxy, the adherence of some Federal Reserve policymakers to the liquidationist thesis, and the incorrect view that low nominal interest rates necessarily signaled monetary ease, all led policymakers astray, with disastrous consequences. We should not underestimate the need for careful research and analysis in guiding policy. Another lesson is that central banks and other governmental agencies have an important responsibility to maintain financial stability. The banking crises of the 1930s, both in the United States and abroad, were a significant source of output declines, both through their effects on money supplies and on credit supplies. Finally, perhaps the most important lesson of all is that price stability should be a key objective of monetary policy. By allowing persistent declines in the money supply and in the price level, the Federal Reserve of the late 1920s and 1930s greatly destabilized the U.S. economy and, through the workings of the gold standard, the economies of many other nations as well.”
I do agree with the notion that “ideas are critical.” Unfortunately, our new Fed chief has some very flawed and dangerous ideas of how to deal with critical events that could very well develop early in his term. He should be talking restraint and the risks associated with attempting a “soft-landing.” But he and his fellow Inflationists will have none of that. And while the stock market has already demonstrated its stamp of approval, the bond market and dollar could not quite shield their grimaces. There remains this dogged hope that a housing cool-down will damp inflationary pressures – allowing Dr. Bernanke to cut rates early next year. At this point, I wouldn’t bet that a moderation in mortgage Credit growth will significantly alter the inflationary backdrop. Inflationary pressures are becoming only increasingly pronounced and oblivious to little baby-step rate increases. The system beckons for an actual tightening of financial conditions, a development certainly not accomplished by a little restraint employed at the fringe of mortgage lending excesses.
And, if I had to place a bet, I would wager that the more folks (certainly including our foreign creditors) delve into Dr. Bernanke, the more the bond and currency markets will question his credibility. And a novice Fed Chairman with credibility issues is not – I would hope – going to quickly reverse course and stimulate. Where’s the “continuity” in that? And whether he does or does not, we’ve not heard the last growl from the Dollar Bear. I do not envy Dr. Bernanke. He attained the pinnacle of success he has always dreamed. His chairmanship is quite likely going to be a nightmare. The wrong man - and his deeply flawed analytical framework - at the wrong time. How could it be? A Bubble Perpetuator.
By Doug Noland
To frame my analysis of Dr. Bernanke as Fed Chairman, I thought it worthwhile to highlight comments made yesterday by the highly respected Reserve Bank of New Zealand (RBNZ): “The Reserve Bank has increased the Official Cash Rate (OCR) by 25 basis points to 7.00 percent. Reserve Bank Governor Alan Bollard said: ‘As noted in our September Monetary Policy Statement, medium term inflation risks remain strong. Persistently buoyant housing activity and related consumption, higher oil prices and the risk of flow-through into inflation expectations, and a more expansionary fiscal policy are all of concern. While there has been a noticeable slowing in economic activity, and a particular weakening in the export sector, we have seen ongoing momentum in domestic demand and persistently tight capacity constraints. Hence, we remain concerned that inflation pressures are not abating sufficiently to achieve our medium term target, prompting us to raise the OCR today. The most serious risk to medium term inflation is the continuing strength of household spending, supported by a relentless housing market and rapid growth in mortgage lending. Significant dis-saving by the household sector is showing through in a worsening current account deficit, now 8 percent of GDP. Borrowers and lenders alike need to recognise that the current rate of debt accumulation is unsustainable. The correction of these imbalances and associated inflation pressures will require a slowdown in housing, credit growth and domestic spending. We also expect a significantly lower exchange rate. The longer these adjustments in behaviour and asset prices are deferred, the more disruptive they are likely to be. Today’s increase in the OCR, combined with higher world interest rates and pipeline effects from the repricing of fixed rate mortgages, are expected to slow the housing market and household spending over the coming months. However, the prospect of further tightening may only be ruled out once a noticeable moderation in housing and consumer spending is observed. Certainly, we see no prospect of an easing in the foreseeable future if inflation is to be kept within the 1 percent to 3 percent target range on average over the medium term.”
RBNZ Governor Alan Bollard is successfully filling the large shoes left by his predecessor - the legendary Dr. Donald Brash, in the process upholding the high esteem long afforded the Reserve Bank. Please note how their pronouncement leaves little doubt where the Reserve Bank stands or what key fundamental factors drive policy decisions. No obfuscation necessary: “The correction of these imbalances and associated inflation pressures will require a slowdown in housing, credit growth and domestic spending.” Policymaking becomes unduly complex only when central banking drifts from traditional central banking analysis and doctrine, as it has (and is about to take another giant step) in the U.S.
We will certainly not be reading RBNZ-like language from the Bernanke Federal Reserve. Dr. Bernanke comes at central banking from a completely different perspective and analytical framework (note: the issues of transparency and inflation targeting become moot when applied within the context of a flawed framework). And while there is some media banter with respect to the “dove” or “hawk” label, there is no question that Dr. Bernanke is An Impassioned Inflationist. As for fighting inflation: he’ll talk the talk – of course, and there will come a day when talk will not suffice. In the past, I have labeled chairman Greenspan both an Inflationist and monetary policy radical. Incredibly, Professor Bernanke takes these to a whole new, dangerous extreme.
I was very much hoping Donald Kohn would be Alan Greenspan’s replacement, but would have been satisfied with several potential candidates including Roger Ferguson and Larry Lindsey. And I can say with complete seriousness that of all the leading economists in the country, Mr. Bernanke would be my least favored pick. Is it mere coincidence that the candidate at the very bottom of my list is at the top of the Administration’s and Wall Street’s? Of course not.
I have no reason to doubt that Dr. Bernanke is a “kind and decent man,” as such described by our President. He conveys an aura of integrity, and he is clearly extremely intelligent and a very hard worker. He is said to be a nice guy, and I like nice guys. I very much respect all of these attributes. And I do sense that his instincts are to be a straight-shooter. The nature of his new position, however, will demand a change, and it appears this process is well underway. He has no chance of becoming the master obfuscator, like his predecessor, or attaining Greenspan's amazing capacity to dodge every tough question and “never take a punch.” Dr. Bernanke will provide an easy target. I am tempted to fault Dr. Bernanke for “being an academic,” although it is more clearly stated that I view his background as a distinct handicap for presiding over this New Age of Wall Street Market and Speculation-based Finance in what I expect to be an increasingly hostile environment.
Candidly, I am concerned that he is such an accomplished econometrician and theorist. He has decades invested in his models and analytical framework; he’s too intellectually, analytically and emotionally committed to a perspective of how the financial sector and economy work, one I don’t expect will serve him well. Not only will his talents and perspective bias his view of the uncertain world in which we live, it is my fear that an econometrician’s analytical framework leaves one today at a decided disadvantage in discerning and appreciating the nuances of contemporary Wall Street Finance.
From Steven Pearlstein of the Washington Post: “Bernanke is smart and will figure out the markets before long.” Well, I’m not sure it’s that easy. It’s not about “smarts” or even so much with his lack of market experience. I don’t believe career “marketicians” would be well-suited for economic research. Do econometricians have an analytical perspective conducive to “figuring out the markets”? I believe the Bernanke chairmanship is likely to illuminate the major divide that exists today between academic research and real world markets – a chasm not commonly recognized. (note: warning to academia – your research is being set up as The Fall Guy.)
I don’t believe there’s any hope for effectively modeling complex financial systems or markets. Greed, fear and speculative dynamics are not generally the favored elements of the econometrician. Furthermore, it is my view that models don’t offer much value (negative value?) when it comes to the underlying complexities, subtleties, and whims of Credit expansion, financial flows, speculative dynamics and asset inflation/Bubbles. The model-maker must work to radically simplify a perplexing, convoluted and changing world. For example, instead of the nebulous and difficult to quantify “Credit,” there will be a modelers bias toward the more easily quantified parameter – such as (narrow) money supply. Cause and effect will be, conveniently, in the eye of the beholder.
Dr. Bernanke and I actually have something in common. As he wrote in his book – Essays on The Great Depression, a compilation of his papers on the subject – “I guess I am a Great Depression buff, the way some people are Civil War buffs.” But while my studies and analytical framework lead me to focus on the excesses and distortions of the Roaring Twenties – in particular the commanding effect that speculative liquidity came to possess on the asset markets and, consequently, on the nature of spending, investing and financial claims creation/intermediation – Professor Bernanke’s preoccupation is with supposed policy errors committed by the Fed commencing (late in the game) in late-1928. Apparently, he has little problem with the boom. My view is that the unsound U.S. boom ensured a commensurate bust. Sure, there were post-boom mistakes that worsened the outcome. Yet policy confusion and error should be recognized as an integral and unavoidable aspect of the late-boom and post-Bubble environment, and why the best cure for a Bubble is to ensure it doesn’t develop to begin with (as Dr. Richebacher informs us). “Mopping up” should absolutely never evolve into a concerted strategy, but recognized only as a last resort “long-shot.”
And I have my own theory as to Professor Bernanke’s stunning meteoric rise to prominence. As a disciple of Milton Friedman and as one of the leading academics in the field of post-Bubble reflationary monetary policies, he was a natural selection for the Fed when nominated in late-2001. It was the Greenspan Fed’s view that the U.S. economy had entered a post-Bubble environment, and there were some real advantages associated with procuring the esteemed academic research and analytical firepower to dignify their plan for less-than-admirable inflationary policies.
I will conjecture that if the markets had responded negatively to the new Fed governor’s open discussion of “helicopter money,” “government printing presses,” “pegging the 10-year Treasury yield,” “unconventional measures,” and the “global savings glut,” well, he would have been sent packing back to Princeton and the seasoned central banker Donald Kohn (nominated as Fed Governor with Bernanke) would be slated as our next Chairman. But an anxious Wall Street was quickly smitten with the temerity of “Helicopter Ben” and what he represented for the extreme direction of Federal Reserve policies. If there was ever an “all’s clear” message signaled directly and unmistakably from one of our leading policymakers to the markets, it was given in late 2002 by Dr. Bernanke. Go out and speculate in junk bonds; better cover your short positions in Ford bonds and Credit default swaps; buy stocks and CDOs; aggressively accumulate emerging market debt and equities; load up on commodities, get out of “money” instruments and grab any risk asset available (while you have a chance!). What ensued was one of the greatest redistributions of wealth in history.
Not quite as barefaced, Dr. Bernanke’s long-time emphasis on fighting deflationary risk by inflating the “money supply,” lent strong support to a vulnerable Wall Street “structured finance” apparatus. Recall that in 2002 the corporate debt crisis was at risk of jumping the firewall to the household sector (Household Finance, Ford Credit, etc.), with the potential to engulf the burgeoning ABS marketplace. Wall Street investment bankers working closely with their “financial engineers” had become prominent producers of contemporary U.S. “money” stock. So Dr. Bernanke’s long obsession with remedial “money” supply inflation ensured that he was both a proponent for and potentially powerful asset of Wall Street Finance. When Governor Bernanke made assurances that the Fed would do absolutely anything and everything to avoid “deflation,” Wall Street rightfully understood that Fed inflationary policies were in the process of expunging what had been a looming risk of systemic debt collapse. The sophisticated leveraged speculators were immediately emboldened; bankers were emboldened; investors were emboldened; and Wall Street “structured finance” was really emboldened (outstanding ABS has since doubled). At that point, seemingly no degree of Credit or speculative excess was too much, not with Professor Bernanke and the determined Greenspan Fed ready and more than willing to experiment with “mopping up” strategies.
There is one overriding fundamental issue I have with this whole amazing development: the view that we had fallen into a post-Bubble environment was flawed from the get-go. The technology Bubble had burst, but it was only an offshoot of the much greater Credit Bubble that was very much still Bubbling. Rather than combating deflationary forces and stabilizing some (fictitious) general price level, aggressive inflationary policies were instead poised to most intensely inflate markets already demonstrating the strongest inflationary biases (i.e. real estate, Treasuries, agencies, MBS and asset markets generally). Rather than buttressing an impaired post-Bubble Credit system, reflation stoked the Stalwart Mortgage Finance Bubble to unimaginable excess (and power). Instead of inflationary policies working to “stabilize” financial and economic conditions as the dauntless monetary theorist would ascertain, the resulting unprecedented Credit and speculative excesses guaranteed Precarious Monetary Disorder and Myriad Unwieldy Bubbles Both at Home and Abroad.
I will admit to being sympathetic to the theoretical premises supporting post-Bubble monetary stimulus. As we have witnessed, however, such policies will invariably be used prematurely – in the process acting to bolster boom-time dysfunctional Monetary Processes, resulting in only progressively precarious asset/speculative Bubbles, financial fragility and economic maladjustment. And, as we are also living these days, the greater and more precarious the Bubble(s), the more likely seductive notions of benevolent inflation will resonate throughout the entire system. To be an Eager Implementer of Reflationary Programs – an especially natural bias for someone of Dr. Bernanke’s intellectual perspective – virtually guarantees worldly mutation to Closet Bubble Perpetuator. They go (Un-Invisible) Hand in hand. The only hope against such an unfavorable outcome would be a keen understanding and appreciation for the dynamics of Credit and speculative excess, as well some regard for a “Mises” view of economic mal-adjustment. I have seen no indication suggesting that such mitigating factors will be at play for Dr. Bernanke.
What our system desperately needs right now is some Reserve Bank of New Zealand determination to rein in excess – pure and simple. I would be shocked to see such an approach from the new Fed Chairman. He holds special disdain for “Bubble Poppers,” and faults the post-Benjamin Strong Fed for the Great Depression. (“…it is now rather widely accepted that Federal Reserve policy turned contractionary in 1928, in an attempt to curb stock market speculation.”) At Milton Friedman’s ninetieth birthday party, he stated, “Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we [the Fed] did it. We’re very sorry. But thanks to you, we won’t do it again.” These days, he continues to downplay the risk of inflation. And from Nell Henderson’s Wednesday article in the Washington Post: “Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week…. U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke… But these increases, he said, ‘largely reflect strong economic fundamentals,’ such as strong growth in jobs, incomes and the number of new households.”
Take and hour or so and carefully read his April 2005 speech, “The Global Savings Glut and the U.S. Current Account Deficit.” I can honestly say – with a conscious effort to avoid hyperbole – that it is one of the most flawed and suspect pieces of analysis I have ever read from a respected economist. And the subject matter is one of the most pressing issues that must be confronted by our policymakers. It actually does seem like he is oblivious to the fact that our intractable Current Account Deficit is foremost a reflection of unrelenting Credit excess, inflated asset prices, over-consumption and economic distortions. He is similarly oblivious to the reality that this “global savings glut,” being accumulating by our trading partners, is largely IOU’s we created in the process of mortgage and asset-based borrowings. Yet, this line of reasoning is consistent with his analytical framework. From the preface of his book: “I believe that there is now overwhelming evidence that the main factor depressing aggregate demand [during the Great Depression] was a worldwide contraction in world money supplies. This monetary collapse was itself the result of poorly managed and technically flawed international monetary system (the gold standard, as reconstituted after World War I).” Dr. Bernanke has a troubling (Friedman-like)) penchant for looking outside the U.S. Credit apparatus, financial system and markets when it comes to identifying the true source of instability.
And from his 1995 article, The Macroeconomics of the Great Depression: A Comparative Approach: “To understand The Great Depression is the Holy Grail of macroeconomics… We do not yet have our hands on the Grail by any means, but during the past fifteen years or so substantial progress toward the goal of understanding the Depression has been made… To my mind…the most significant recent development has been a change in the focus of Depression research, from a traditional emphasis on events in the United States to a more comparative approach that examines the experiences of many countries simultaneously.”
And from his March 2004 speech, Money, Gold, and the Great Depression: “Some important lessons emerge from the story. One lesson is that ideas are critical. The gold standard orthodoxy, the adherence of some Federal Reserve policymakers to the liquidationist thesis, and the incorrect view that low nominal interest rates necessarily signaled monetary ease, all led policymakers astray, with disastrous consequences. We should not underestimate the need for careful research and analysis in guiding policy. Another lesson is that central banks and other governmental agencies have an important responsibility to maintain financial stability. The banking crises of the 1930s, both in the United States and abroad, were a significant source of output declines, both through their effects on money supplies and on credit supplies. Finally, perhaps the most important lesson of all is that price stability should be a key objective of monetary policy. By allowing persistent declines in the money supply and in the price level, the Federal Reserve of the late 1920s and 1930s greatly destabilized the U.S. economy and, through the workings of the gold standard, the economies of many other nations as well.”
I do agree with the notion that “ideas are critical.” Unfortunately, our new Fed chief has some very flawed and dangerous ideas of how to deal with critical events that could very well develop early in his term. He should be talking restraint and the risks associated with attempting a “soft-landing.” But he and his fellow Inflationists will have none of that. And while the stock market has already demonstrated its stamp of approval, the bond market and dollar could not quite shield their grimaces. There remains this dogged hope that a housing cool-down will damp inflationary pressures – allowing Dr. Bernanke to cut rates early next year. At this point, I wouldn’t bet that a moderation in mortgage Credit growth will significantly alter the inflationary backdrop. Inflationary pressures are becoming only increasingly pronounced and oblivious to little baby-step rate increases. The system beckons for an actual tightening of financial conditions, a development certainly not accomplished by a little restraint employed at the fringe of mortgage lending excesses.
And, if I had to place a bet, I would wager that the more folks (certainly including our foreign creditors) delve into Dr. Bernanke, the more the bond and currency markets will question his credibility. And a novice Fed Chairman with credibility issues is not – I would hope – going to quickly reverse course and stimulate. Where’s the “continuity” in that? And whether he does or does not, we’ve not heard the last growl from the Dollar Bear. I do not envy Dr. Bernanke. He attained the pinnacle of success he has always dreamed. His chairmanship is quite likely going to be a nightmare. The wrong man - and his deeply flawed analytical framework - at the wrong time. How could it be? A Bubble Perpetuator.
Saturday, October 22, 2005
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