Friday, May 29, 2009

Has Bernanke's bluff been called?

The Canadian government is posting its first deficit (and a big one) in thirteen years and still our currency is on a free flight upwards against the US dollar. What's going on? The markets seem to be losing faith in the US currency and debt and, among other things, flocking to buy into oil and gas as a hedge.

Like the rest of humanity, a government can only borrow against collateral, perceived or real. While a government has some ordinary assets, like buildings and real estate, its main asset is its ability to command the taxpayer to pay. However, there are even limits, somewhere, to the value of this asset. The US taxpayer, long the most favored by bond buyers, because deemed most reliable (at least in the long term) of all taxpayers is currently being saddled with unprecedented debt and at the same time, with the economy in decline, tax revenues going into government coffers are plummeting. This week the market has responded by pushing up interest rates, despite Federal Reserve Chairman Ben Bernanke's attempts to keep interest rates down by flooding money into the bond market. If this continues, the cost of borrowing for both the US government and consumer goes up and the government has to either print more money and risk an inflationary spiral or stop borrowing and face the music of cutting spending and paying down debt and letting banks and others who have made bad loans into the housing bubble go bankrupt. Either scenario suggests further economic collapse and decline in government revenues (in hard money).

Still, we see much talk out there of "green shoots" in the economy as people look for positive signs in the economy, and in bank balance sheets, engendered by the first surge of government spending and money printing. How real are these "shoots", and not just just a short-term artefact of an increased money supply? Can the supposedly independent Bernanke pull back on the money supply once the economy shows signs of growth and not be countermanded by an Obama government bent on expanding government spending according to Keynesian theories and political demands from the left?

Fear of inflation, which could lead to either hyperinflation and hence a destroyed economy, or to a collapse in government borrowing and hence massive cuts in government spending leading to deflation,  seem to be on the rise in money markets as the US dollar tumbles. Are we heading towards another depression? Some think so: Bernanke: How's The Vise Feel? - The Market Ticker

In any case, we will probably have to learn again that our desire for great men to provide us with magical solutions, or free money, to our economic stumbling blocks is misplaced. Real growth has to be built on a trust and faith in the covenants that structure the economic system. Credit and bankruptcy need to be seen to be given where credit and bankruptcy are due, at least a good part of the time.


Anonymous said...

We are not getting out of this depression anytime soon. Its going to get a lot worse for most of us. It didn't have to be this way. Greed ruins everything.

"As mass production has to be accompanied by mass consumption; mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery. Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped."

Marriner Eccles, FDR's Chairman of the Federal Reserve Bank - 1959

In other words, the first Great Depression was caused by greed. The rich couldn't settle for reasonable pay. They had to have more and more and more. That caused a giant shift in buying power from the majority to the rich. When the majority lost their buying power, they lost their ability to support the economy. Einstein said basically the same thing in 1949.

Its even worse now. Ordinary people havn't only lost their relative buying power. They have also lost their savings, home values, pensions, and benefits. This didn't happen overnight. Its been happening gradually for the last 30 years. Meanwhile, the rich have become super incredibly rich. The richest 500 Americans are worth about two trillion dollars. More than the bottom 40% of American housholds combined. The richest 1 percent are worth about 15 trillion dollars. More than the bottom 98% of American households combined. Thats just insane. I don't care how much work for humanity the rich claim to do. Its nothing but a cover for their own greed. We don't need anymore rich people to entertain us or create jobs or make donations for charity. We need them to get reasonable about how much money and assets they keep for themselves.

Don't believe their excuse about paying more income taxes. They don't pay enough. For every tax they pay, they get an obscene profit, bailout, or kickback from our government to cover it. We had a progressive tax system that worked for over 40 years. It prevented too much wealth from accumulating at the top. In 1976, the middle 80% owned about 2/3 of America's total wealth. Reagan lowered taxes for the rich. Bush lowered them again. Now, the richest 5% own about 2/3 of America's total wealth. The lower 95% own about 1/3. America's wealth has been transfered from poor to rich again. Now, we have another depression.

Don't believe it when the rich claim to be getting poorer. Property values have gone down for everyone. Thats because of the concentration of wealth and income. When the economy slows down, property values tank. So when rich people complain about lower net worth, thats a trick. They still have the same buying power on average.

Everything that is happening with the economy is happening because too much wealth has been taken away from the majority and concentrated into the private vaults of rich people. The same ones on TV and radio telling us how much they want to help the world. Its a big lie. Just another way to promote their own business and get more of our money. Rich people don't want to help the world. They want to own it.

Now, the economy is ruined. Obama can't fix it because the rich won't let him. There will be no bailout for the people because the ones with all the money won't settle for less. They want more. Its going to get a lot worse. Say goodbye to the American dream and hello to the American nightmare.

truepeers said...

How can greed ruin everything? Greed, i.e. desire for things sacred or desirable in one or another form, is an aspect of something fundamentally human. And how can we accuse what is fundamentally human as "ruining everything"? Human history has been a process of growth, all things considered. We are not still in the stone age. Yes, sometimes our desire/resentment ruins things, but by the same toke it also pushes us to produce things: it is hence paradoxical in nature.

I think the 1930s depression was caused by a debt crisis that became exacerbated when addressed with ineffective government policies. But why blame the rich for a debt crisis? Aren't the many who borrow equally to blame for taking part in debt-asset bubbles? Those who loan money provide others with opportunities which can do much good, at least until bubbles get out of hand and voters look for governments to save them from a hard reckoning. Once the bubble collapses, few ask how poor we'd still be if credit had never been made available; they just complain that no one saved them from the bubble in which all who partook with a lack of caution are to blame.

In any case, the real power in our times are not "the rich" but those in government who can tax and influence government budgets on behalf of many many interests and constituencies that no one controls, budges that are so huge that a billionaire is, by comparison, economically inconsequential.

Taxing further the rich might make you feel good, but at the end of the day there have to be producers of wealth - and much of modern production requires concentrations of capital - if there is to be anything to tax and consume in future. Good government is about getting the balance right between the need to foster private capital accumulation in free, efficient and transparent capital markets, and to address the needs of those truly left on the margins of the economy. But it seems to me that complaining about the fact that some people control/allocate a lot more capital than you or I ever will is to miss the real concern: is the system creating more wealth over the long term in a way that most people enjoy? If most people are enjoying rising standards of living, we should not give in to the destructive resentment that focusses on the fact that Bill Gates has billions more than I do. BIll should control more capital than I do: he has a much better idea of how to use it for the creation of wealth than I do. As for consumption, I'd guess his dinner plate, his medicine, his clothes, even his car don't look much different from most peoples'. He has a bigger house, can travel, control his time, but all things considered he is not a person unlike most Americans.

The current debt crisis is not really about an imbalance between rich and poor but about an imbalance between producing and saving and consuming nations. Americans have been living off the backs of other people to too great an extent. Ask the Chinese worker whose government holds large amounts of American debt if he wouldn't rather see the money spent at home than cycled into yet more American debt.