Milton Friedman often said: "inflation is always and everywhere a monetary phenomenon."
Except when it isn't, which is never.
Speculation in commodities can and does cause inflation without an increase in money supply (i.e., a monetary phenomenon). It did so in the 1870s, the 1900s, the 1920s, the 1970s, and it does so now.
If you compare the change in commodity prices year to date versus the change in the dollar's value compared to the Euro, you'll find something remarkable. Using copper as an example, both the value of copper (in dollar terms) and the value of the dollar (in Euro terms) are up since the beginning of the year, but the value of copper is up by A LOT more. According to Uncle Miltie, this isn't supposed to happen. Commodity prices and the value of money are supposed to move inversely to one another, not together, and not in a manner that commodity prices move in the same direction as the value of a dollar but as a multiple of it.
I've seen some data from Karl Denninger that suggests the same thing is true in agricultural commodities, and if it isn't it soon will be. The FIRE sector is a parasite on the productive sector, and their rent-seeking in consumer staples is going to cause a lot of pain and probably a few deaths.
'Nuff said.
Tuesday, October 5, 2010
Neoclassical Economics Are to Henry George What Neoliberal Economics are to John Maynard Keynes
I recently learnd about Henry George, a 19th century thinker who figured out in the 1870s that the boom-bust cycle is caused by debt-financed speculation and rent seeking. At the time, he limited his conclusion to debt-financed land speculation, but that's because the secondary equity and bond markets weren't nearly as established in the 1870s as they were in 1907 and later in 1929. (Note: there are a number of 19th century investing texts available at Google Books, and they show that the stock exchanges even in the 1890s were nowhere near what they became by the 1920s. Take a look around there, you'll find it fascinating.)
As Keynes would later do, George proposed his own solution for euthanizing the rentier, which he called the "Single Tax." (My understanding of George's proposal are admittedly cursory, so I'm not going to try to explain them in any kind of detail.)
The response by the rentiers was to fund political economists to develop a new doctrine of political economy, and neoclassical economics was born (at least, this is what Mr. George believed motivated the establishment of this new doctrine).
The key feature of neoclassical economics was that it treated land as capital. According to the classical economics of Smith, Ricardo, Say et al., there were three players in (or drivers of) the economy: labor, land and capital. Essentially, George's Single Tax sought to tax land rents out of existence to leave only labor and capital standing. The neoclassical economists obliged George by "disappearing" land from their lexicon and treating it merely as another form of capital.
Neoclassical economics came to dominate the scene, and George's Single Tax proposal ultimately went nowhere.
Then we had the Great Depression, and John Maynard Keynes offered his own solution to the rentier problem (although he was politic enough to not explicitly assign blame for the Great Depression to the financial speculators).
The first step in undermining Keynes was the so-called "neoclassical synthesis," that grafted some of Keynes' ideas onto neoclassical doctrine.
The second step in undermining Keynes was to repeat what had been done to Henry George: the rentiers funded the founding of the neoliberal movement and its economics in the Chicago and Austrian schools.
Today's "neoclassical" orthodoxy is, in fact, the Chicago School, which is distinctly neoliberal. Thus, as much as Steve Keen still labels the orthodoxy neoclassical, it is more appropriate to label it neoliberal.
Where neoclassical economics whittled the economic drivers from three (labor, land and capital) to two (labor and capital), neoliberal economics left us with only capital. There is no labor any longer. There are only consumers. And the rentier segment of capital is the only part of it that continues to grow.
As Keynes would later do, George proposed his own solution for euthanizing the rentier, which he called the "Single Tax." (My understanding of George's proposal are admittedly cursory, so I'm not going to try to explain them in any kind of detail.)
The response by the rentiers was to fund political economists to develop a new doctrine of political economy, and neoclassical economics was born (at least, this is what Mr. George believed motivated the establishment of this new doctrine).
The key feature of neoclassical economics was that it treated land as capital. According to the classical economics of Smith, Ricardo, Say et al., there were three players in (or drivers of) the economy: labor, land and capital. Essentially, George's Single Tax sought to tax land rents out of existence to leave only labor and capital standing. The neoclassical economists obliged George by "disappearing" land from their lexicon and treating it merely as another form of capital.
Neoclassical economics came to dominate the scene, and George's Single Tax proposal ultimately went nowhere.
Then we had the Great Depression, and John Maynard Keynes offered his own solution to the rentier problem (although he was politic enough to not explicitly assign blame for the Great Depression to the financial speculators).
The first step in undermining Keynes was the so-called "neoclassical synthesis," that grafted some of Keynes' ideas onto neoclassical doctrine.
The second step in undermining Keynes was to repeat what had been done to Henry George: the rentiers funded the founding of the neoliberal movement and its economics in the Chicago and Austrian schools.
Today's "neoclassical" orthodoxy is, in fact, the Chicago School, which is distinctly neoliberal. Thus, as much as Steve Keen still labels the orthodoxy neoclassical, it is more appropriate to label it neoliberal.
Where neoclassical economics whittled the economic drivers from three (labor, land and capital) to two (labor and capital), neoliberal economics left us with only capital. There is no labor any longer. There are only consumers. And the rentier segment of capital is the only part of it that continues to grow.
I'll Take Stagflation for $100, er $150, er $200, er . . .
With the Federal Reserve maintaining its zero interest rate policy (ZIRP) and promising more quantitative easing (QE), I'm beginning to fear that we will see stagflation in the United States over the next several years. Here's why.
The Fed has proven that the combination of ZIRP and QE can't spur borrowing by an already overleveraged consumer. The housing market is dead, and the foreclosure mess is likely keep it dead for awhile longer. And it's not like there are any jobs out there, and there's a downward pressure on wages, so we won't be seeing price inflation due to wage inflation.
This puts the Fed into quite a pinch. It can't rely on the consumer increasing demand for either goods or debt, so there's no inflation to be found there. Non-financial businesses aren't borrowing, either, certainly not at their traditional levels (yes, there was an increase in borrowing by the non-financial business sector in the last two quarters, but the increase was paltry and nowhere near normal). So, no inflation there, either. And financial businesses have been leading the way in deleveraging.
The banks are in their own pickle. They need to rollover debt by getting new borrowing ASAP. In spite of the continuous backdoor bailouts (e.g., getting paid 3% to hole onto reserves) and "record" profits, some of them have already frozen hiring and are signalling that there may be layoffs.
If only there were a way for the banks to help themselves and the Fed. But wait, there is! Debt-financed speculation in the commodity markets would be a perfect solution! The banks get to extend new debt to financial speculators, who use the leverage to drive up the prices of consumer staples like sugar, wheat and corn, and industrial metals like copper, gold and aluminum. Voila! You have rolled over debt, created inflation for consumers and industry, and you get to make a tidy profit, all in one fell swoop.
Increased speculation in commodities has already driven their prices up by a multiple of 1.5-2x compared to the drop in the value of the dollar, while stock prices have pretty much gone up by as much as the dollar has gone down.
The only question is whether this is a temporary aberration or the new normal. Given the greed of the FIRE sector, I'm betting that this is the new normal, that the financial speculators are going to ravage our economy just as they did in the 1970s. Things will play out differently, however, in part because we no longer have a vibrant manufacturing sector, and in part because various laws and regulations shape the decisionmaking in a different way than it was done in the 70s. I need to put some more thought into how things play out.
The Fed has proven that the combination of ZIRP and QE can't spur borrowing by an already overleveraged consumer. The housing market is dead, and the foreclosure mess is likely keep it dead for awhile longer. And it's not like there are any jobs out there, and there's a downward pressure on wages, so we won't be seeing price inflation due to wage inflation.
This puts the Fed into quite a pinch. It can't rely on the consumer increasing demand for either goods or debt, so there's no inflation to be found there. Non-financial businesses aren't borrowing, either, certainly not at their traditional levels (yes, there was an increase in borrowing by the non-financial business sector in the last two quarters, but the increase was paltry and nowhere near normal). So, no inflation there, either. And financial businesses have been leading the way in deleveraging.
The banks are in their own pickle. They need to rollover debt by getting new borrowing ASAP. In spite of the continuous backdoor bailouts (e.g., getting paid 3% to hole onto reserves) and "record" profits, some of them have already frozen hiring and are signalling that there may be layoffs.
If only there were a way for the banks to help themselves and the Fed. But wait, there is! Debt-financed speculation in the commodity markets would be a perfect solution! The banks get to extend new debt to financial speculators, who use the leverage to drive up the prices of consumer staples like sugar, wheat and corn, and industrial metals like copper, gold and aluminum. Voila! You have rolled over debt, created inflation for consumers and industry, and you get to make a tidy profit, all in one fell swoop.
Increased speculation in commodities has already driven their prices up by a multiple of 1.5-2x compared to the drop in the value of the dollar, while stock prices have pretty much gone up by as much as the dollar has gone down.
The only question is whether this is a temporary aberration or the new normal. Given the greed of the FIRE sector, I'm betting that this is the new normal, that the financial speculators are going to ravage our economy just as they did in the 1970s. Things will play out differently, however, in part because we no longer have a vibrant manufacturing sector, and in part because various laws and regulations shape the decisionmaking in a different way than it was done in the 70s. I need to put some more thought into how things play out.
Monday, October 4, 2010
Michael Hudson and Steve Keen, Together!
I was over at Steve Keen's place. His latest post includes links to audio and video of a conference that he spoke at recently.
A couple of the links are to the audio/video for a panel discussion where Hudson and Keen two of the panel members. Here is the audio for the discussion, which I find fascinating. Check out the whole post, though.
A couple of the links are to the audio/video for a panel discussion where Hudson and Keen two of the panel members. Here is the audio for the discussion, which I find fascinating. Check out the whole post, though.
That Other Friedman: Tommy Boy Recognizes the Problem, Fails to Blame Himself
To me, Thomas Friedman defines the term "useful idiot." A tireless cheerleader for neolib/neocon policies, you can always count on Tommy Boy to butcher the English language to almost make a point.
Over the weekend, Tommy Boy had an opinion piece calling for a third political party to "rip open [our] two-party duopoly." While I have no real issue with the concept of the third party, I think the problems we face do not spring from the two-party system but from the common neolib/neocon ideology that underlies both parties' policies, a primary feature of which is Tommy Boy's own Chicago School neoliberal economics.
Here's how TOF ("That Other Friedman") sets up his argument:
Over the weekend, Tommy Boy had an opinion piece calling for a third political party to "rip open [our] two-party duopoly." While I have no real issue with the concept of the third party, I think the problems we face do not spring from the two-party system but from the common neolib/neocon ideology that underlies both parties' policies, a primary feature of which is Tommy Boy's own Chicago School neoliberal economics.
Here's how TOF ("That Other Friedman") sets up his argument:
There is a revolution brewing in the country, and it is not just on the right wing but in the radical center. I know of at least two serious groups, one on the East Coast and one on the West Coast, developing “third parties” to challenge our stagnating two-party duopoly that has been presiding over our nation’s steady incremental decline.Sorry, there is no "revolution" brewing, and there's no "radical center." The "center" is defined by the neoliberal Washington Consensus and its financialized economy. Maybe some of Tommy Boy's neoliberal elite buddies are tired of the polarizing rhetoric of the two parties, but it is doubtful that anybody he knows would actually govern differently.
“We basically have two bankrupt parties bankrupting the country,” said the Stanford University political scientist Larry Diamond. Indeed, our two-party system is ossified; it lacks integrity and creativity and any sense of courage or high-aspiration in confronting our problems. We simply will not be able to do the things we need to do as a country to move forward “with all the vested interests that have accrued around these two parties,” added Diamond. “They cannot think about the overall public good and the longer term anymore because both parties are trapped in short-term, zero-sum calculations,” where each one’s gains are seen as the other’s losses.No, we don't have "two bankrupt parties bankrupting the country," we have a morally bankrupt ideology-- neoliberalism-- bankrupting the country, and the fundamentals of that ideology are shared by both parties as well as by Tommy Boy. The reason why neoliberals "cannot think about the overall public good and the longer term" is because neoliberalism deleted the very concept of "the overall public good" (i.e., "there is no society"), and the financialized neoliberal economy forces politicians to focus on the short term. That's how neoliberalism works: citizens are reduced to narcissistic consumers and political and business leaders have to focus on their respective "business cycles" to ensure they stay on top.
We have to rip open this two-party duopoly and have it challenged by a serious third party that will talk about education reform, without worrying about offending unions; financial reform, without worrying about losing donations from Wall Street; corporate tax reductions to stimulate jobs, without worrying about offending the far left; energy and climate reform, without worrying about offending the far right and coal-state Democrats; and proper health care reform, without worrying about offending insurers and drug companies.Spoken like a true neoliberal technocrat.
“If competition is good for our economy,” asks Diamond, “why isn’t it good for our politics?”If competition were good for the economy, we'd have it. We don't. The reality is that competition is BAD for a financialized economy because real competition disrupts the illusion of perpetual growth that makes the FIRE sector a lot of money. J.P. Morgan realized in the late 19th century that competition is bad for business, if you're an investment banker. Monopoly is a feature of neoliberal policy.
We need a third party on the stage of the next presidential debate to look Americans in the eye and say: “These two parties are lying to you. They can’t tell you the truth because they are each trapped in decades of special interests. I am not going to tell you what you want to hear. I am going to tell you what you need to hear if we want to be the world’s leaders, not the new Romans.”That's a good idea in theory, but in practice all we're likely to see from a third party is somebody like Tommy Boy pimping the same neoliberal policies that got us into this mess. The problem is not the polticial system but the rules that define how that system operates, and those rules are embodied in the neoliberal Washington Consensus. All the political theater is just a show meant to distract the masses from what's really happening, and Tommy Boy is playing his own role by keeping people focused on the spectacle of politics instead of the reality that neoliberal policies like "free" trade and globalization (both championed by TOF) are the real cause of the economic disaster that we're living through.
Sunday, October 3, 2010
The Postcatastrophe Economy
I'm now halfway through Eric Janszen's excellent The Postcatastrophe Economy: Rebuilding America and Avoiding the Next Bubble.
The first half of the book is devoted to providing his analysis of where the economy is right now and how it got there. His views are quite consistent with my own, but it is clear that he has been thinking about the issues longer and has a more complete view of the field.
I'll provide a full review of the book when I'm finished. I can say just from reading the first half that the book is a must read.
The first half of the book is devoted to providing his analysis of where the economy is right now and how it got there. His views are quite consistent with my own, but it is clear that he has been thinking about the issues longer and has a more complete view of the field.
I'll provide a full review of the book when I'm finished. I can say just from reading the first half that the book is a must read.
Calls For Ending ZIRP Now Coming From the Financial Sector
Charles Schwab has a WSJ op-ed calling for the end of the Fed's zero interest rate policy.
While Schwab's piece is behind a pay wall, Henry Blodget of Business Insider weighs in to second the motion:
While Schwab's piece is behind a pay wall, Henry Blodget of Business Insider weighs in to second the motion:
The Fed's zero-interest-rate policy is also still giving a gigantic subsidy to banks by allowing them to borrow money from the government for nothing and then lend it back to the government at a ~3% interest rate. The spread on this trade continues to produce massive Wall Street profits, and, with them, enormous bonuses--without any of the risk that is normally supposed to accompany such profitability. Once again, this policy rewards those who helped cause the crisis in the first place, at the expense of those who didn't. (If you don't understand how great it is to be a banker right now, read "How To Make The World's Easiest $1 Billion").
Go read the whole thing.
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