Monday, February 22, 2010

Armageddon, or not?

Martin Weiss has written an article this week entitled 'Armageddon' in which he half-describes the absolutely horrific scenario about to play out for Americans as a consequence of the harsh 'medicine' - imminent and 'unavoidable' interest rates hikes - to fix the disease of American debt.
"If you thought Wall Street’s debt crisis was traumatic, wait till you the see the consequences of Washington’s debt crisis! Never before in history has a world power like the U.S. been so utterly buried in debt! And never before has that debt been financed so massively by foreign investors![1]

This analysis strikes me as all very strange. Weiss treats America’s debt problem as if –in the most critical sense - it mostly lives in a vacuum. But this is clearly not the reality. We live in a ‘globalised’ world and globalization is, after all, the process of America’s cultural, political, and economic integration of nation states throughout the world. Those ‘foreign investors’ who Weiss claims funds the American debt may not be so ‘foreign’ at all.

Weiss' article is notable for what is missing. I therefore list a few of my own observations and questions related to America’s debt crisis:

(i) What constitutes a ‘foreign’ investor? It has never been so important to identify who these people are. Who precisely is America is indebted to! Have they been the very recipients of US taxpayer-funded bailouts over the last year and (in fact) decades? Are they, for instance, the propped-up foreign subsidiaries and/or American ‘foreign’ investors in Goldman Sachs, Citigroup, Bank of America and other gigantic money center banks? Or American citizens invested in the foreign subsidiaries of other receivers of American generosity such as General Electric, AIG, General Motors and many others?

(ii) This is a time of extraordinary inequality. A disastrous economic and social outcome – ‘armagedon’ – would certainly come if even further rewards are given to the very tiny minority of individuals who already hold the vast majority of America’s financial wealth. In September 2008 it was noted by Forbes Magazine that the richest 400 Americans had a combined net worth last year of $1.57 trillion. “Less than 10 percent of this vast fortune could resolve the combined budget deficits of 46 states” said Tom Eley [2]. He added, “None of the states are planning increases in taxes on the wealthy.”

(iii) It is quite arguable that the crisis itself came about in the first instance through the process of Governments actively choosing winners and losers in the economy. The US Government, through the Federal Reserve and other agencies, has never imposed its economic discipline equally on everyone. Poorer nations, labor and small enterprises have been consistently scapegoated in one economic crisis after another. This led to the predicament of ‘too big to fail’ and things have clearly fallen apart from there.

(iv) The US Government sets global interest rates by virtue of its hegemonic position [3]. A rise in interest rates in America portends a rise in global rates. Mobile capital will always seek the place of highest return. How can the rest of the world finally disengage from the American governments fiscal and budgetary irresponsibility?

Martin Weiss concludes by urging Americans to ‘bite the bullet’ and accept the ‘sacrifices’. “Ultimately, there is NO choice” he says.
“We must bite the bullet. We must make the sacrifices. Like California and Greece … like every household and any company … our government MUST cut back and accept the rest of the consequences.”

But there is a choice. America and the world can reform its monetary and economic system. It, and other governments, can stop picking the rich as the winners. Non-elected central banks and government agencies need to be required to work in the public and global interests. Elected representatives need to do their job and ensure that regulation and processes of accountability occur. This is a large topic. More on this later.

It is apt for governments to be required to enhance the economic prospects for the many rather than safeguard the accumulated wealth of a few.[4]

“The Roots of Violence:
Wealth without work,
Pleasure without conscience,
Knowledge without character,
Commerce without morality,
Science without humanity,
Worship without sacrifice,
Politics without principles.”
Mohandas K. Gandhi

REFERENCES:
[1] Armageddon by Martin D. Weiss, Ph.D. 02-22-10
http://www.moneyandmarkets.com/armageddon-10-37926

[2] US states’ budget crisis sets stage for new attack on the working class
By Tom Eley. last update 29/06/2009 15:50
http://uruknet.com/?p=m55537&hd=&size=1&l=e

[3] A position America gained through its Wall Street banking cartel, its reserve currency status and through general cultural and military infiltration around the globe. This situation is changing but American dominance around the world remains in place.

[4] And how has much of that wealth been accumulated to begin with? Naked Capitalism has a revealing article posted this week describing the financial vulture behaviour of Goldman Sachs and its link to the sovereign debt crisis of Greece:
Auerback/Wray: Memo to Greece: Make War, Not Love, With Goldman Sachs
Monday, February 22, 2010

http://www.nakedcapitalism.com/2010/02/auerbackwray-memo-to-greece-make-war-not-love-with-goldman-sachs.html


17 comments:

TheTrucker said...

We all know what "financial capital" is. But do we really?

One view (the current view) is that money is created by bankers, subject to reserved requirements and fractional reserves. These reserves are supplied by the central bank which is the bank in which the government is the primary control/authority.

In the view of others it is government that creates the _base_ money and the banks use this _base_ as their "reserves" in creating credit.

In the United States we are currently trying to figure out which one if these two things are true. We are also trying to figure out if the Supremes have decided that the central bank actually owns the government.

rosserjb@jmu.edu said...

Wiess joins a long list of hysterics, including such supposedly "centrist" commentators as journalist Robert Samuelson. Doom is at hand, although there is no evidence of such if one looks at interest rates in current markets, despite some small increasae in some spreads recently.

TheTrucker said...

(i) What constitutes a ‘foreign’ investor? It has never been so important to identify who these people are. Who precisely is America is indebted to! Have they been the very recipients of US taxpayer-funded bailouts over the last year and (in fact) decades? Are they, for instance, the propped-up foreign subsidiaries and/or American ‘foreign’ investors in Goldman Sachs, Citigroup, Bank of America and other gigantic money center banks? Or American citizens invested in the foreign subsidiaries of other receivers of American generosity such as General Electric, AIG, General Motors and many others?

All very nice... A "foreign saver" or "foreign investor" is any entity that "invests/saves" in US assets of any kind but does not pay income taxes to the United States government. That should be pretty clear whether one agrees with it or not. And it is quite important to identify who is the beneficiary of decisions concerning money and finance in the United States. The latest Supreme Court ruling says that the Bank of Japan and the Bank of China can actively participate in the elections of the United States government simply by buying shares in any multinational corporation such as Exxon.

The big banks and individuals who invest in enterprises offshore are not "foreign investors" even though they invest offshore. They were bailed out, not T-Bill owners. If the economy had crashed, the T-Bill owners would have been dancing and celebrating.

Min said...

"Weiss treats America’s debt problem"

What debt problem is that?

"Martin Weiss concludes by urging Americans to ‘bite the bullet’ and accept the ‘sacrifices’. “Ultimately, there is NO choice” he says."

Ultimately, we are never going to "repay" the debt. So what?

"But there is a choice. America and the world can reform its monetary and economic system. It, and other governments, can stop picking the rich as the winners. Non-elected central banks and government agencies need to be required to work in the public and global interests. Elected representatives need to do their job and ensure that regulation and processes of accountability occur. This is a large topic. More on this later."

Sounds interesting. :)

Brenda Rosser said...

Trucker: "One view (the current view) is that money is created by bankers..."

What is 'money'? Coins and notes in circulation. Credit created by banks? Anything that has exchange value.

The volume of money is now outside the control of the US Fed and the banks.

Regarding the central bank's relation to government. I think that it's been very convenient for parliamentary reps to blame the Fed for everything. It get them off the hook, after all.

And what's an 'investor' and 'investment'. A purchase/r of a credit default swap? Owning water in order to charge the public for access to it?

Barkley,
the Reserve Bank of Australia has increased interest rates here recently. This has happened in the context of a general drop in workforce participation and large corporate losses everywhere. It's been warning of future rises as well. And the tightening in the US. Why have they?

Min,
You ask, 'what debt problem is that'?
(i) Diminishing returns on each dollar of new debt
(ii) The declining value of the US dollar on international markets as nations seek alternatives to this currency. Particularly when the US Government turns on the printing presses to pay its foreign debt.
(iii) The drop in real output that is occuring (whilst households and businesses pay off their debt) may not be such a bad thing for the environment. However it doesn't leave much in the way of funding for alternative infrastructure needed for a sustainable economy. See:
LABOR'S SHARE
Posted by spencer | 10/27/2009 04:50:00 PM
jobless recovery, labor, labor markets, productivity
http://www.angrybearblog.com/2009/10/labors-share.html

etc

Min said...

"You ask, 'what debt problem is that'?
(i) Diminishing returns on each dollar of new debt"

The diminishing marginal utility of debt is nothing new. I did skim the Fekete article, and it seems that he is playing a numbers game. If increasing debt is not being productive, the obvious question if whether it is being spent wisely. For instance, in regards to the energy crisis of the 70s, Carter inaugurated a program to wean the U. S. off of oil. Reagan scrapped that program, and we are now facing the prospect of peak oil unprepared. In the private sector, a lot of debt has fueled speculation and bubbles. That has not been productive. Infrastructure has deteriorated badly in the U. S. Debt could have financed maintaing it, even creating new infrastructure, such as extending the electronic grid to bring wind farms online in the West. New debt is not going to be productive if you piss it away.

"(ii) The declining value of the US dollar on international markets as nations seek alternatives to this currency."

Many in the U. S. would regard the declining value of the dollar as a plus, since it would build up our exports, revitalize industry and create jobs.

"Particularly when the US Government turns on the printing presses to pay its foreign debt."

And when is that? We are not doing that now, and there is no prospect that we will do so in the near future. Besides, if we did, that would decrease our debt, if the debt is a problem. :)

"(iii) The drop in real output that is occuring (whilst households and businesses pay off their debt) may not be such a bad thing for the environment. However it doesn't leave much in the way of funding for alternative infrastructure needed for a sustainable economy."

Assuming that the export/import difference remains the same, for the non-governmental sector to increase its savings, the government must increase the deficit. That is not, I trust, a controversial statement, it is a bookkeeping identity.

It follows, then, that if we wish to encourage or enable non-governmental saving, we need to increase the deficit or increase exports vs. imports. Fear of government debt is then politically problematical, because it inhibits increasing the deficit. OTOH, if we are happy with the level of non-governmental indebtedness, who cares?

rosserjb@jmu.edu said...

Brenda,

I don't know, although all the reports I see have Australia as one of the top performing economies in the world. I suppose they are fearing inflationary pressures, but I really do not know.

rosserjb@jmu.edu said...

Brenda,

I don't know, although all the reports I see have Australia as one of the top performing economies in the world. I suppose they are fearing inflationary pressures, but I really do not know.

TheTrucker said...

Brenda asked:

"What is 'money'? Coins and notes in circulation. Credit created by banks? Anything that has exchange value."

A rare painting is not money. So "anything that has exchange value" is not the definition of money. As a matter of fact, money is what the kings men will take as opposed to taking your chickens. It is that particular medium of exchange that the sovereign government will accept so as to discharge _your_ tax liabilities.

Whales teeth and tobacco leaves and Ithica dollars might work as ways to account for the residue of local trades, but money is what the sovereign says it is.

Most people currently believe that money is created in banks and that value is imparted to this money by virtue of contracts for repayment. Yet the bankers cannot use their ball point pens to force repayments. Only government can do that, and enforcement of the contracts is what gives value to bank money.

Read Warren Mosler and William Hummel.

MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Brenda Rosser said...

BjR: "Particularly when the US Government turns on the printing presses to pay its foreign debt."

Min replied: And when is that? We are not doing that now, and there is no prospect that we will do so in the near future. Besides, if we did, that would decrease our debt, if the debt is a problem. :)"

The US and UK governments have been engaged in 'quantitative easing'(QE) since March last year (that I know of).

See:
Bank of England halts quantitative easing
UK's £200bn programme of asset purchases – known as quantitative easing – on hold, Bank of England announces
* Ashley Seager
* guardian.co.uk, Thursday 4 February 2010 18.25 GMT
http://www.guardian.co.uk/business/2010/feb/04/quantitative-easing-bank-of-england

and
May 7, 2009, 2:10 p.m. EDT · Recommend (34) · Post:
China's central bank frets over Fed bond purchases
http://www.marketwatch.com/story/chinas-central-bank-fed-moves-put-bonds-at-risk

Other evidence of the US Govt printing money (out of nothing) to pay off its debt:

"....Now yesterday China announced that they've decreased their treasuries that they're holding. Those treasuries were not sold in the open market. There was a conference call between China and the Federal Reserve saying that we're going to unload these treasuries. We don't want to sell them in the open market. That will destroy the price we'll get on these treasuries and the Federal Reserve calling Japan and asking them to buy those treasuries and I think the Federal Reserve printed the money for Japan to buy them. Essentially monetising the debt which is what they have done in the past through backdoor channels like this one. But it's still monetisation of the debt...."

** http://eclipptv.com/viewVideo.php?video_id=10316
Viewed tonight (22nd February 2010).

Min said...

@Brenda Rosser:

Quantitative easing is "printing money". However, that money does not enter the economy unless the banks lend, which is why some call it "pushing on a string".

As for the Fed monetizing the debt, they express themselves as firmly against that policy. Maybe that is hot air, but we do know that the Fed values its credibility. Conspiracy theories aside, the treasuries sold by China are in other foreign hands, right? (I saw some stats, but I do not remember where, sorry.) Besides, if the Fed did surreptitiously monetize some of our Chinese debt, good for them, right? -- assuming that our foreign debt is bad.

TheTrucker said...

The people cannot pay their taxes in US dollars until US dollars exist in the accounts of the people. Dollars are created by government spending them into the economy. Then, and only then, can taxes be paid or money be borrowed.

The US government does not need to borrow money in order to spend it. As a matter of logic it is not possible to borrow it or collect it with a tax (before it is spent) unless we want the amount of money in the economy to shrink. The current amount of dollar based financial wealth in the world is exactly equal to the money spend by the US government and not yet reclaimed by taxation. To the penny. (says Mosler).

Brenda Rosser said...

Min said "However, that money does not enter the economy unless the banks lend, which is why some call it "pushing on a string"."

And the banks are lending to large private equity corporations who are buying up businesses all over the world. A lot of further consolidation, mergers and acquistions are happening at present.

Min: "if the Fed did surreptitiously monetize some of our Chinese debt, good for them, right? -- assuming that our foreign debt is bad."

Well, as long as all nations and peoples can monetise their debts. But that's not what the IMF and World Bank have been saying to the rest of the world.

The distinct privileges of the US and its global corporations are noteable and more well known these days. Consequences will play out over time.

vimothy said...

The liabilities of one sector are the financial assets of another--right? And foreign govts can choose not to hold treasuries if they want. But $ cash is also a US govt liability (albeit one bearing no interest).

Govt debt itself is not a problem. By my reading, we have just lived through a period where there was not nearly enough govt debt.

Finally, surely it's trivial to note that every sector in the economy can't be in surplus at the same time. If the private sector is deleveraging, and the trade balance is negative, the govt must be in deficit.

The deficit hawks want to push the economy back into the debt-deflation spiral that the deficit spending prevented in the first place, seemingly without any recognition of the fact that most of the deficit is not actually discretionary.

vimothy said...

Sorry, should be "net liabilities of one..."

Brenda Rosser said...

Vimothy, when you say that "most of the deficit is not actually discretionary" what do you mean? could you elaborate on this?

You also said: "And foreign govts can choose not to hold treasuries if they want."

The choices for foreign governments aren't that good whichever way they go. See Michael Hudson's online publication entitled 'Superimperialism'

vimothy said...

Any foreign govt can hold US govt liabilities in the form of currency (reserves), which is non-interest bearing, or they can convert these to treasuries, which are. Either way, they are holding liabilities of the US govt. The exact mix of govt liabilities held by non-govt sector is not significant WRT US govt funding.

By non-discretionary, I mean that the growth of the deficit was in the main driven by 1, falling tax revenues, and 2, transfer payments (i.e. the automatic stabilisers). Have a look at this graph: http://3.bp.blogspot.com/_a-xfgIB_zfs/S4bs8DDqAJI/AAAAAAAAAUM/s5p0mmiLlvw/s1600-h/Picture1.bmp