Sorry, Jesse, but Stagflation IS Deflation

"Jesse" of Jesse's Cafe Americain is one of my favorite bloggers out there.  He's quite insightful and a bit more left of center than I along some dimensions.  Generally, I stand somewhere between Jesse and Charles Hugh Smith on the political belief spectrum.

Today's links at the Cafe Americain include this one to an interview of Jesse over at Chris Martenson's site.  The quote that prompted this post is front-and-center at the beginning of the interview:

Stagflation has been my forecast for quite some time, as the most likely outcome, with a real protracted deflation or hyperinflation as lesser probabilities.

The dead horse I beat constantly is that there is no monetary-based inflation in "stagflation," that the price inflation is caused by the diversion of credit into speculative excess in staple commodities, not by wage inflation, which neoliberals argued to be the cause of the1970s stagflation. 

Stagflation is actually screwflation, which is the financial terrorists' solution to deflation, i.e., a contracting economy from a money supply standpoint.  But credit diverted into pure speculation does not spur employment because it shifts aggregate demand into staples and, thus, increases unemployment in non-staple industries even while driving down margins in staple industries (because of increased input costs), which, in turn, drives increased unemployment in staple industries.

We're in a spiral to a deflationary bottom.  "Stagflation" is merely a strategy for managing the landing to the benefit of the financial terrorists.

Charles Hugh Smith: An Excellent Take on Neoliberalism

In today's essay, has a great analysis of neoliberalism in the context of describing "Why the European Union Is Doomed."  While his Austrian influences are brought to bear (e.g., he continues to insist there is a distinction between the Central State and the global cartels; he also uses the term "malinvestment," which I view as an intentional misdirection from the fact what is happening is speculation and not investment in any sense), he basically describes neoliberalism in a nutshell.

Rejoining the Corporatist World

Earlier this week I (mostly) left my consulting business to take a position at a publicly traded corporation.  Usually, in this kind of situation, one would say that I rejoined the "corporate world," but my choice of words was quite deliberate: I have once again taken a position as an executive in a publicly traded corporation. 

This whole thing happened VERY quickly.  In less than two weeks, I went from first interview to working in an office again.  What excited me about the opportunity were the magnitude and number of the challenges and the rewards for successfully overcoming them.  And I have to admit that I'm already having a lot of fun putting out fires, on the one hand, and making people feel better (and be better), on the other.

My position puts me in the thick of all sorts of conflicts and disputes.  My early conclusion is this: everybody in the corporate (and corporatist) world is so consumed with their jobs that they have little or no understanding of the broader world. 

In many ways, a "job" is the ultimate escape from reality.

I anticipate that my blogging will increase as a result of my recent change in status.  I find it exhilarating to be working with so many new people, even the people who think they're my enemy because we work at different companies.  Humanity, for all its flaws, is fascinating.

The Excommunicated Neoliberal: Henry Simons' Proposal Re: Corporations and Monopoly Generally

The following is an excerpt from Henry Simons’ 1934 essay “A Positive Program for Laissez Faire.”  I’ve referred to Simons as “the excommunicated neoliberal” because of his role in founding the neoliberal movement, which started out with the intention of a return to classical liberalism without the tendency to devolve into socialism.  What set Simons apart from his colleagues Hayek (who Simons brought to the University of Chicago) and Friedman is that Simons distrusted the concentration of power, regardless of whether it resided in state or private hands.  Simons’ insistence on eliminating private monopoly, even to the point of socializing private industries that become anti-competitive, is what most likely got him “disappeared” from neoliberal history.  If he knew what a monster neoliberalism ultimately became, I’m sure he’d be happy to know that nobody associates him with it today.

The best way to consider what Simons has to say is within the context of the Great Depression and the New Deal proposals that were being discussed at the time he wrote the essay.  Where the New Deal ultimately broke the power of banks to create new industrial monopolies and control existing ones, it also entrenched the existing industrial monopolies and elevated national unions as a check on industry’s political power.  Simons was not hostile to unions, but he hoped they would not be necessary in a truly competitive environment cleared of the evils of financial and industrial monopoly.

Regarding Simons' proposal for corporations, I agree with the goals of eliminating monopoly and promoting competition.  I also agree with many of the details of his proposal.  Where I get hung up is on his view that the FTC should be the primary mechanism for preventing monopoly.  As we've seen, adminstrative agencies can and do get captured by the industries they're supposed to regulate (e.g., the SEC).  I'd decentralize enforcement and administration to prevent such capture.

On a related note, check out this link to access the complete reports of FDR’s Temporary National Economic Committee, which was established to study monopolies and the concentration of economic power.

And now, to the Simons excerpt (please forgive any typos):

The case for a liberal-conservative policy must stand or fall on the first proposal, abolition of private monopoly; for it is the sine qua non of any such policy.  Reasonable differences of opinion may appear as to methods; but there can be no intelligent dispute, among liberals or conservatives, as to the objective.

This proposal contemplates deliberate avoidance of the regulation expedient— or, if you please, adherence to the kind of regulation which works only through the preservation of competitive controls.  It implies that every industry should be either effectively competitive or socialized and that governments should plan definitely on socialization of the railroad and utilities and every other industry where competitive conditions cannot be preserved.  On the other hand, it should be a main objective of policy to prevent the development, in the case of other industries, of conditions which would necessitate political control of prices, or socialization.  It must suffice here merely to sketch some of the requisite measures.

There must be outright dismantling of our gigantic corporations and persistent prosecution of producers who organize, by whatever methods, for price maintenance or output limitation.  There must be explicit and unqualified repudiation of the so-called “rule of reason.”  Legislation must prohibit, and administration effectively prevent, the acquisition of any private firm, or group of firms, of substantial monopoly power regardless of how reasonably that power may appear to be exercised.  The Federal Trade Commission must become perhaps the most powerful of our governmental agencies; and the highest standards must be maintained, both in the appointment of its members and in the recruiting of its large technical staff.  In short, restraint of trade must be treated as a major crime by a vigilant administrative body.

As a main feature of the program, there must be a complete “new deal” with respect to the private corporation.  As many writers have pointed out, the corporation is simply running away with our economic (and political) system— by virtue merely of an absurd carelessness and extravagance on the part of the states in granting power to these legal creatures.  The following proposals, while tentative in detail and obviously inadequate in scope, will suggest the kind of reform which seems imperative:

             I.        Transfer to the federal government of the exclusive power to charter ordinary, private corporations, and subsequent annulment of all charters granted by the states

          II.        Enactment of federal incorporation laws, including among other the following provisions:

1.    That no corporation which engages in manufacture or merchandising of commodities or services shall own any securities of any other such corporation

2.    Limitation upon the total amount of property which any single corporation may own

                                                a.    A general limitation for all corporations, and

                                                b.    A limitation designed to preclude the existence of any industry of a single company large enough to dominate the industry— the principle being stated in legislation, the actual maxima for different industries to be fixed by the Federal Trade Commission

3.    That corporations may issue securities only in a small number of simple forms prescribed by law and that no single corporation may employ more than two (or three) of the different forms

4.    Incorporation of investment corporations under separate laws, designed to preclude their becoming holding companies or agencies of monopoly control— with limitations on their total property, on percentage holdings of securities of any single operating company, and on total investment in any single industry (again under the immediate control of the Federal Trade Commission)

5.    That investment corporations shall hold stock in operating companies without voting rights, and shall be prohibited from exercising influence over such companies with respect to management

6.    That no person shall serve as an officer in any two corporations in the same line of business and that no officer of an investment corporation shall serve as an officer of any operating company

7.    That corporate earnings shall be taxed on shareholders in such manner as to prevent evasion of personal income tax with respect to undistributed earnings (see below, pp. 66-68)

The corporation is a socially useful device for organizing the ownership and control in operating companies of size sufficient to obtain the real economies of large-scale production under qualified management.  It should not be made available, however, for financial consolidation of operating enterprises which are (or which, without serious loss of efficiency, might be) essentially independent as to production management.  Horizontal combinations should be prohibited, and vertical combinations (integration) should be permitted only so far as clearly compatible with the maintenance of real competition.  Few of our gigantic corporations can be defended on the ground of their present size is necessary to reasonably full exploitation of production economies: their existence is to explained in terms of opportunities for promoter profits, personal ambitions of industrial and financial “Napoleons,” and advantages of monopoly power.  We should look toward a situation in which the size of ownership units in every industry is limited by the minimum size of operating plant requisite to efficient, but highly specialized, production— and even more narrowly limited, if ever necessary to the maintenance of free enterprise.

Only a special class of investment corporations should be permitted to hold stock in other corporations; and their powers should be circumscribed narrowly, in order to assure that they continue to confine themselves to performing the important and legitimate functions of the investment trust.  These corporations should be merely passive investors, protecting their own stockholders by diversification rather than by exercising control over operating companies; and full precautions should be taken against their becoming, in effect, holding companies or devices of producer organizations.

All corporations should be held to a Spartan simplicity in their capital structure.  There should be the sharpest distinction between owners and creditors; and, where this distinction becomes impaired through financial adversity, reorganization should be compulsory and immediate.  It would seem wise, indeed, to require the maintenance of a predominant residual equity to limit narrowly (say to 20 per cent) the percentage of contractual obligations to total asse

Sauce for the Gander: Charles Hugh Smith Gives the Same Treatment to "Conservatives"

The Paradoxes at the Heart of the "Conservative" Project

I have the same criticisms for this piece as I had for yesterday's piece about "progressives."  The political labels are much broader than the leading Washington Consensus archetypes that CHS is tilting at.

Here's hoping he gives us a new political label that lets the majority of Americans who don't see themselves in his description of progressives and conservatives.

Charles Hugh Smith Does an Anti-Denninger, Goes Ideological

The Paradoxes at the Heart of the "Progressive" Project

Okay, I'm being unfair.  Sort of.

CHS made the mistake of painting with too broad brushstrokes.  If he had identified the "progressives" he was thinking of, I probably would have agreed with everything he said.  For example, there's no doubt that "progressives" like Robert Reich and Arianna Huffington fit CHS's description.  But other self-identifying progressives, like Glenn Greenwald and Jane Hamsher, don't. 

In many ways, the fault does not lie with CHS but the imprecision of the English language.  The "progressive" tent, like the "Tea Party" tent, covers a bit more surface area than that occupied by the apparent leaders of the project/movement.  If we'd just foreswear the security of political labels we wear and focus on the actual ideals we profess, a real majority could emerge. 

Better Title: 27 Pages of "Fluffing"

Karl Denninger, who has been embracing his inner wingnut lately, finally has a good non-ideological post up:

Flush The AGs: 27 Pages Of Fluff

But I like my title better . . .

The state attorneys general are now accomplices to the federal corporatist agenda, so states' rights won't save us, either.  Whether local, state or federal, all American government is now corrupt.  Isn't life grand?

Disclaimer: I actually believe that government need not be corrupt and can (and should) serve a legitimate and needed role in our daily lives.  I'm just convinced that our governments as currently constituted cannot do so. 

Fed Confirms Screwflation

MarketWatch headline: Businesses getting pricing power, Fed survey finds.

From the innards of the piece:

WASHINGTON (MarketWatch) — Some manufacturers and retailers are finding that they can raise their prices, which is one key pre-condition for inflation to take hold, according to the Federal Reserve’s latest Beige Book survey of economic conditions released Wednesday.

“Manufacturers in many districts conveyed that they were passing through higher input costs to customers or planned to do so in the near future,” the survey found.

Meanwhile, “retailers in some districts mentioned that they had implemented price increases or were anticipating such action in the next few months,” the report said.

Firms have been reporting higher prices for input prices for months but have always said they have been unable to raise prices for fear of losing market share.

The ability of firms to pass along higher costs will be a matter of concern for Fed officials.

But the central bankers will draw some comfort because wages are not rising. Wages are another key inflation ingredient.

Oh, I get it.  Prices are rising, while wages are flat.  And that's a good thing?   Doesn't that just mean shifting aggregate demand, i.e., GDP, not growing it?  And as higher input prices for consumer staples get passed onto consumers, doesn't that mean they will engage in less discretionary spending?  And doesn't that mean that there will be less demand for consumer discretionary goods?  And won't that mean more layoffs in consumer discretionary goods and services?

And this is a good thing?

If even the Fed will today accept that price inflation due to increased input prices caused by speculation in commodities, then we need to go back and rethink the cause of the 1970s stagflation.  I'm sure that we'll find it wasn't the American worker or union wages, but financial terrorists, just like it is today.