By Perry Mehrling, a professor of economics at Barnard College. Originally published at his website
The 85th Annual Report of the BIS is not perhaps the obvious first choice for beach-reading on a holiday weekend, but having read through its 119 pages, the core message reminds me of nothing so much as the most memorable line of the 40-year-old summer blockbuster “Jaws”: “You’re going to need a bigger boat.”
Notwithstanding everything that has been done since the Great Financial Crisis, it is not at all safe to go back in the water. Indeed danger of financial fragility is greater now than a year ago.
The danger this time comes, interestingly, not so much from the banks but from the policymakers, who persist in using empirically discredited pre-crisis thinking as a guide to macroeconomic policy. The problem, in a nutshell, is that “a monetary policy focused on managing near-term inflation and output may do so at the cost of higher fluctuations in credit and asset prices than in the past.” (p. 75)
In the modern financially globalized economy, the connection of monetary policy to domestic inflation and output is much attenuated, while the connection to asset prices is much increased. Monetary authorities who are focused on stabilizing quarterly aggregate demand can and do easily miss the effect of their actions on building up financial imbalances in the longer run, especially so when those imbalances are building up outside their own national borders.
In this respect, the biggest danger comes from the largest policy actors, the Fed and the ECB, since the “dollar zone” accounts for nearly 60% of world GDP, and the “euro zone” much of the rest (p. 87). The major central banks are keeping domestic interest rates low in an effort to stimulate domestic output in the short run, but the consequence is to blow asset bubbles in world as a whole. The problem is “excess financial elasticity” and the current major source of the problem is policy.
Why are they doing it? The problem, suggests the Report, is with the faulty ideas on which policy makers are depending (p. 13):
“If one strips the prevailing analytical view of all its nuances and focuses on how it is shaping the policy debate, its basic logic is simple. There is an excess or shortfall of final demand for domestic production (an “output gap”) that determines domestic inflation, not least by underpinning inflation expectations. Aggregate demand policies are then used to eliminate that gap and so achieve full employment and stable inflation; fiscal policy affects spending directly, and monetary policy indirectly, through real (inflation-adjusted) interest rates. The exchange rate, if allowed to float, permits the authorities to set monetary policy freely in line with domestic needs and will, over time, also balance the current account. If each country adjusts its monetary and fiscal levers so as to close the output gap period by period, everything will be fine, domestically and globally.”
Thus the boats we are using to combat the shark of financial fragility are the macroeconomic policies (and especially the monetary policies) of individual countries, each looking for what seems best for their own domestic economy. The problem is spillover to the rest of the world, and from there spillback to the source. The main problem is not current account imbalances, but growing international financial imbalances, to which standard economic models are blind. “Another year of exceptionally expansionary monetary policy raises the question of whether existing policy frameworks are fit for their intended purpose” (p. 64).
And that’s where the bigger boat comes in. We live in a global economy, and the central problem we face is global liquidity. In times of crisis, central banks have proven ability to cooperate for the good of all. But what we need is more than that, cooperation for crisis prevention. Faulty ideas are part of the problem, and faulty mandates are the other part.
“Two factors have severely hindered monetary policy cooperation outside crises. The first has to do with diagnosis and hence the perceived need to act. As explained above, the prevailing view is that flexible exchange rates, combined with inflation-focused domestic regimes, can foster the right global outcomes. As a result, discussions on how to promote global coordination have centred on how to deal with current account imbalances, which are less amenable to monetary policy measures. Indeed, the terms “imbalance” and “current account imbalance” have been treated as synonymous. The second factor has to do with mandates and hence the incentive to act. National mandates raise the bar: actions must clearly be seen to promote the interests of one’s own country. In other words, there is no perceived need and no incentive.”
Don’t say we didn’t warn you!
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“In times of crisis, central banks have proven ability to cooperate for the good of all. ”
This reminds me of a very old joke where the Lone Ranger and Tonto are surrounded by Indians. I think the lone rangers line was something like “what do we do now Tonto?” And Tonto’s response is “What you mean we, white man?”
I suppose I could just dumb it down and ask who the all is in the quote.
Is it all of us or is it all of the central banks who have traditionally done a great job of taking care of each other.
The report makes specific reference to the $600 billion in liquidity swaps during the financial crisis.
I suppose this bigger liquidity boat is a very narrow point, addressing only the smooth running of the global economy, so no weak point fails. Does anyone consider that it might be good to have multiple points of failure?
The problem is the lack of attentive fiscal policy in this country. Central banks can’t do it, nor should they. They do monetary policy. AFTER the federal government has set fiscal policy.
Governments have to act to revive their various sectors. That’s fiscal policy. That means spending when times are tough. But we have a bunch of nutcases–elected by the people, I might add–who have no clue how the federal monetary system works and therefore fail to understand what it is as lawmakers that they are allowed to do. The biggest problem is that the public and these nutcases think that a federal deficit is something the people have to pay back.
This is the same for Great Britain, Japan, Australia, and Canada.
The know-nothing Canadian Finance Minister, Joe Oliver, was asked about the Bank of America warning of a coming Canadian recession this morning. He said that as long as we balance our budget (started in 2013, which precipitated their downturn) and avoid deficits and keep taxes low, we’ll have growth. Facepalm
He crowed about a $1.2 billion federal government surplus. Facepalm
Anybody been to a park? Watched two people on a teeter-totter? Well, that’s how the federal monetary system works in a country that issues its own dollars (it’s a closed system): federal government spending on one side, the non-government sector on the other. If the federal government is in surplus (taking in more than it spends), the non-government sector is in deficit (spending more than it earns). Furthermore, if the teeter-totter is “balanced” and there’s no movement, there will be no growth.
You want the exact opposite.
And for that, you need fiscal policy…and deficits, Joe. Even more, you need an educated public.
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Thanks to Perry Mehrling for a good article.
“If the federal government is in surplus (taking in more than it spends), the non-government sector is in deficit (spending more than it earns). “
So by non-government I assume you mean private business. So if the government balances the budget, private companies will lose money, correct? Really? It is very very rare that a federal government balances budgets. In modern history in the US it has only happened once ….during Clinton’s second term. Companies were making tons of money…at least until the dot-com bubble broke. Ipso facto, not a lot of data to support your thesis.
no he’s talking about the entirity of the non government sector. This is not a theory this is just accounting. profits is a gross flow, not a net flow. google sectoral balances. it helps to not straw man.
Any statement glutted in obfuscation will convince no one.
How true. Have you noticed how it’s possible to introduce obfuscation into a single sentence, achieving glut by sheer concentration?
Sure. It’s also very difficult to force even a modicum of understanding into a void. I’ve tried many times here with the same flaccid results. But it’s still fun trying.
Accounting….
I am reminded of what John Kenneth Galbraith said of the Bezel
https://www.creditwritedowns.com/2009/01/quote-of-the-day-john-kenneth-galbraith-the-bezzle.html
So….when the housing boom was in full swing, and my crap shack was supposedly worth 360K (why oh why didn’t I sell??????) in which sector was all that money (an extra 240K over what I paid). And when it went down to 140K, what sector lost all that money?
And say I was the sucker !!!!Oops!!!! I mean, homebuyer who gets a loan for 360K for this crapshack…..
so hopefully I have real money when I sold it, but who lost “real” money when the value of this house went down, and what sector is that???
“And when it went down to 140K, what sector lost all that money?”
It doesn’t go anywhere. No money is gained or lost until you sell your crap shack. Of course the banks’ balance sheet took a hit….that would be the financial sector, of course.
Which of course was pushed through by Budget Director Jack Lew, now our Sec of the Treasury, in the Balanced Budget Act of 1997 (or 1996).
Clinton’s surplus was the first since 1956/57 (see the Historical Tables on the White House website). Of course, there were the back-to-back surpluses in the years just before The Great Depression.
By “non-government sector” I mean everyone and everything that isn’t the US federal government that uses the USD. Therefore: private sector (businesses, households), State and Local govts, and the foreign sector. States have to earn income before they can spend. That’s why I will never vote for another state governor again on the basis that he ‘balanced the state budget’. He or she will never know how to handle federal budgets, which behave 100% opposite of a state government.
Interestingly, if you look at the Monthly Treasury Statements (Bureau of the Fiscal Service), the US Treasury considers a federal government surplus a negative.
Utter nonsense. A government surplus does not mean the money disappears. It gets laundered through, take your pick, lower taxes, repayment of debt or higher government spending in out years. A resulting lower public debt allows for lower interest rates, which accommodates greater private borrowing and spending.
Nice theory. Empirically absolutely untrue. Even the pro-austerity IMF disagrees with you.
Businesses don’t borrow more because money goes on sale (lower interest rates). Any real economy businessman will tell you that. They borrow if they see opportunity to expand. The cost of money might constrain that, but cheap money won’t enable that. The exception is non-real-economy business, that is financial services business. where the cost of money is a major component of their cost of product.
You are basically repeating the loanable funds fallacy.
A government surplus absolutely means the money disappears from the real economy. It means that the non-federal government sector does not have that money, those funds to spend…because the federal government has removed it.
Nothing gets “laundered through.” All new spending is ‘appropriated’ by Congress, by law. Congress, in the past two centuries, appropriated reams of spending that is now automatic year after year (or retired by law). Things like Social Security and Medicare are just two examples. SS spending is mandated by law and paid according to law—Social Security taxes do not pay for Social Security—and does not have to be approved every year, unless Congress authorizes a hike in payments.
That is why you can look at the US Treasury’s consolidated bank statement for the end of Fiscal Year 2014 (September 30), Pg 2of 2, and see in Table-IIIA – Public Debt Transactions that the US Treasury issued (created out of thin air) $69.8 TRILLION in new USD financial assets for the people of the United States (and foreign USD users). See left half under the ‘Fiscal Year To Date’ column.
Now look at the right half under Table-IIIA. That’s what the US Treasury redeemed in 2014: $68.7 TRILLION. Vamoose. Disappeared.
The difference between those two numbers is $1.1 TRILLION. That’s the “Net Change in Public Debt Outstanding,” or what was added to the ($18 trillion) National Debt, another name for Public Debt Outstanding. That’s what the US Treasury allowed the American people to keep. Where is this Public Debt Outstanding/National Debt? It’s in your bank account, mine, Yves’, President Obama’s, and GEICO’s, to name a few. AKA our own money. If we ‘pay it off’, we will all be penniless.
While you’re looking at the The Daily Treasury Statement, Brian, look at Table IV – Federal Tax Deposits. The total federal tax paid in 2014 was $2.6 TRILLION. That’s 3.7% of the total amount of financial assets (money) the US federal government issued in 2014.
Taxes don’t pay for anything. But they do regulate the economy when they are used properly, their proper purpose under the a fiat currency system. Also note that the majority of people paying taxes are the working class who had it withheld from their employment income: $2 trillion. Individual income taxes, which includes the 1%, was $72.4 billion.
[BTW, all figures on the Daily Treasury Statement are in millions.]
No. That’s not how it works.
When Congress first authorizes new spending (say $100 billion) and the US Treasury authorizes its banker (the Federal Reserve) to distribute that dough to all the vendors its buying stuff from, there’s $100 billion filling people and business bank accounts.
In other words, all that new government money floods the real economy. But in techno-banking language, this new government money floods the banking system with excess reserves. If they left it alone, it would reduce the overnight inter-bank (interest) rate—the rate that banks charge each other—to zero.
So the Federal Reserve has to mop up the excess reserves somehow. The US Treasury issues treasury securities at auction in the amount of the spending—$100 billion—which the Fed can’t buy, just the public. But auctions aren’t held every day. The Federal Reserve, however, can buy on the open market through ‘primary dealers’ and it uses that purchasing, and selling, power to keep the interest rate at the Fed’s target rate on a daily basis.
The public debt, lowered or otherwise, has nothing to do with it.
You need to get it into your head that the “public debt” (at the federal level) is the public ‘money’ or the public equity. It’s what we own, not what we owe. People use the term ‘debt’ to describe how much money the federal government has issued because it’s an accounting artifact. The government uses double entry-accounting*. What the federal government is buying goes in the left column under “Assets.” What the federal government issued to purchase the asset goes in the right column under Liabilities. This is done after the fact. It’s recording its action. Debt is another word for liabilities. Call it sloppy nomenclature, call it what you will. But federal debt is not the same as household, business, state or local govt. debt. It’s the opposite.
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* technically, quadruple-entry accounting.
A government surplus absolutely means the money disappears from the real economy. It means that the non-federal government sector does not have that money, those funds to spend…because the federal government has removed it.
Nothing gets “laundered through.” All new spending is ‘appropriated’ by Congress, by law. Congress, in the past two centuries, appropriated reams of spending that is now automatic year after year (or retired by law). Things like Social Security and Medicare are just two examples. SS spending is mandated by law and paid according to law—Social Security taxes do not pay for Social Security—and does not have to be approved every year, unless Congress authorizes a hike in payments.
That is why you can look at the US Treasury’s consolidated bank statement for the end of Fiscal Year 2014 (September 30), Pg 2of 2, and see in Table-IIIA – Public Debt Transactions that the US Treasury issued (created out of thin air) $69.8 TRILLION in new USD financial assets for the people of the United States (and foreign USD users). See left half under the ‘Fiscal Year To Date’ column.
Now look at the right half under Table-IIIA. That’s what the US Treasury redeemed in 2014: $68.7 TRILLION. Vamoose. Disappeared.
The difference between those two numbers is $1.1 TRILLION. That’s the “Net Change in Public Debt Outstanding,” or what was added to the ($18 trillion) National Debt, another name for Public Debt Outstanding. That’s what the US Treasury allowed the American people to keep. Where is this Public Debt Outstanding/National Debt? It’s in your bank account, mine, Yves’, President Obama’s, and GEICO’s, to name a few. AKA our own money. If we ‘pay it off’, we will all be penniless.
While you’re looking at the The Daily Treasury Statement, Brian, look at Table IV – Federal Tax Deposits. The total federal tax paid in 2014 was $2.6 TRILLION. That’s 3.7% of the total amount of financial assets (money) the US federal government issued in 2014.
Taxes don’t pay for anything. But they do regulate the economy when they are used properly, their proper purpose under the a fiat currency system. Also note that the majority of people paying taxes are the working class who had it withheld from their employment income: $2 trillion. Individual income taxes, which includes the 1%, was $72.4 billion.
[BTW, all figures on the Daily Treasury Statement are in millions.]
“In times of crisis, central banks have proven ability to cooperate for the good of all.”
I believe “all” in this sentence means “all the other members of the 0.1% that flew in via private jet to attend the World Economic Conference at Davos, Switzerland.” You know, like the ones complaining about how the 99% have this unreasonable expectation of being able to pay the rent and still have a little left over for food:
The crisis of capitalism operating under NeoLiberal ideology is the failure to adequately balance “isolated” (individual) interest with “general” (collective) interest. Adam Smith only got right half the story we should tell ourselves. The baker, the brewer and the butcher can’t provide us with our dinner if the money isn’t in the pockets of those who need to dine.
Your fallacy is that you forget, the butcher, the baker and the candlestick maker all paid their staff to produce in the first place. That’s where the money came from to buy the products.
This is interesting coming from the BIS and seems similar to the IMF research branch showing that austerity is not the best policy.
They seem to be recognizing the non-neutrality of money and that it can affect output and growth and not only prices. This almost sounds similar to public banking.
I get a little worried when they talk about liquidity though. Are they talking about liquidity for jobs and social safety nets or are they talking about liquidity for derivative positions?
As observed above, the takeaway line for a lot of us is “In times of crisis, central banks have proven ability to cooperate for the good of all.”
All the stuff I read here leads to the impression that liquidity, simple version https://en.wikipedia.org/wiki/Accounting_liquidity, is maybe analogous to the flow of blood in your body, which body you are expected to work, ever harder, to get the feedstocks for more blood. And that body, maybe analogous to “the totality of the human political economy,” carries growing metastatic malignancies that, like actual cancers, know how to trick your body into growing new, large arteries to feed more of your blood to the tumors.
Tumors “cooperate” in that trick, sharing the DNA coding for the processes of angiogensis, https://en.wikipedia.org/wiki/Angiogenesis Tumors only care about their own growth and “success.” Sort of like the people who are positioned to use and direct the power given to central banks (power that got created in the first instance by the fellas who saw it as a means to foster their own personal growth), who decide where the money (whatever that is, not even consensus in this space) goes, flows and grows. And who are, like tumors, largely invisible and immune to the regulatory mechanisms that protect our frail little bodies from runaway “Me First, and More For Me” tumorogenesis, and but for the world-spanning gaming of “the system,” might be “regulated” and put out of business by healthier homeostatic processes. Like this, continuing the bio-analogy: http://cancer.osu.edu/news-and-media/news/survival-molecule-helps-cancer-cells-hide-from-the-immune-system
We do need some kind of blood flow to survive. Where it gets directed is kind of the big problem? And how to keep Banker cells from going rogue and proliferating uncontrollably, when they have all those incentives and trickeries to avoid detection and “regulation?” And can control the creation and flow of blood? And apparently, individually and as a group, to also resemble tumors in that they don’t care if they kill the host and burn its house down, even if it means they don’t survive?
Funny, you should bring up derivatives when neither the post nor the BIS report, AFIK, mention them. Even if they are unregulated, derivatives make the entire system totally safe and stable by tying the entire global financial network into on gigantic safety harness…don’t they? If all the climbers are tied to the same rope, what could go wrong? Pay no attention to the quadrillion-dollar elephant in the room.
http://www.nakedcapitalism.com/2013/03/worldwide-derivatives-market-estimated-as-big-as-1-2-quadrillion-as-banks-fight-efforts-to-rein-it-in.html
From Bruce Wilds:
“The more and more I study derivatives it now appears the main goal of QE may have been to hold up the underlying value of assets that feed into and support the massive derivative market more than help the economy. QE has up to now stopped an implosion of derivatives and the resulting contagion and shock that would have spread throughout the financial system. The irony is how little of this money has reached Main Street in a constructive way while the damage to savers has been massive. While the Fed has essentially abolished the most basic rules of macro-economics do not be surprised if the natural laws of economics show their dominance over Yellen and others who dare to toy, tinker, and write a new script.”
http://brucewilds.blogspot.com/2014/03/derivatives-house-of-cards.html?m=1
Reminds me of another joke:
https://en.wikipedia.org/wiki/Streetlight_effect
policeman sees a drunk man searching for something under a streetlight…
In fact, going farther back, maybe the difference between Keynesian fiscal stimulus and Milton Friedman type monetarism boils down to whether or not the consumer perceives the stimulus as something of a surprise, or a predictable expansion of spending. News media are the Streetlight I suppose.
But in modern high finance, where things are hidden is a moving target, so its not easy to predict when the light will happen to illuminate some old forgotten keys.
As I recall, the Greek crisis came to the fore only after the Dubai world farce, though there was no direct link between them.
Actually, I think its more akin to a vampire movie I once saw.
The priest, thinking himself an expert, convinces the peasants to follow him; they are equipped with garlic, crosses, and wooden stakes, only to be confronted by a small army of vampires, armed with swords. When the lead vampire says, “Lord, we thank you for this meal we are about to receive,” it becomes evident just how deep their ignorance and arrogance truly was.
It always strikes me to read pieces such as this who claim to openly challenge the official pyridine, but not really, and the ideas that they claim to challenge are still deeply entrenched.
For one thing, the argument that it’s the policy makers that betrayed the banks. Yes, the banks have no part in this and are victims. The bribes, the regulatory capture, have nothing to do with any of this, setting up the ultimate deniability. Politicians, especially those from democratic governments, are disposable.
When things go south, it will be their heads who will role, not the banks who actually set the policy. The banks will then play there role in selecting the next round of leaders, insuring that they are all students of the new theory of the day needed to legitimize the existing pyridine.
It seems that today’s pet theory is “the lack of global cooperation”. After all, the banks have shown themselves to cooperate for the public interest in the past (ah, citation please) right?
I also love the so called “output-gap” problem. Industry is over-producing, just as they were supposed to. It’s government policy that failed to deliver enough consumers to the market. (Honestly, government has raised their taxes, cur their earnings, mandated various insurance and investment plans, and feed them with as much “happy news” of a strong stock market as could be fit in a 24 hour news cycle, why are they not buying stuff?)
Maybe if the government beat the peasants, prosperity will happen.
I think Steve Keen has it right. What we have are models which don’t have money, banks, or debt in them.
Austerity actually removes money from the economy. Forcing the privet sector to go to the banks to barrow the money they need. Money that must ultimately be paid back. The primary use of this barrowed money is not to build things however, but to speculate in commodities such as oil. But at some point they reach the limit to what they can barrow. This becomes the “chase for yield.”
The whole thing suddenly snaps back into revisers and dose so rapidly. When they stop barrowing, there is no new money for the economy to grow with, plus there are no new perches in commodities, thus prices begin to fall. Assets become worthless, and the ability to support existing debt evaporates.
This gives rise to the “liquidity crises”, itself a misnomer for what would be better called an insolvency crises.
Industry has a very good reason to be afraid. They suddenly find themselves surrounded by banks giving thanks for the meal they are about to receive. At this point, it’s a little too late to be afraid.
Happy 4th of July every one.
And for all the non-Americans out there… um, have a happy 4th of July any way. :-)
“And that’s where the bigger boat comes in. We live in a global economy, and the central problem we face is global liquidity.”
It is supremely ironic that global liquidity should be “the central problem” when the $IMFS has no brake on credit/debt creation. How is it possible that a monetary system that has no brake on credit creation, operating as it does like a veritable oil gusher, could produce a condition where global liquidity is the central problem? It’s quite a feat to be sure and one of the monstrous wonders of our time, but a monetary system whose most outstanding characteristic is producing one way emissions of credit inevitably drowns the economic system it is meant to serve. Exactly how does it achieve this end? In myriad ways that are usually described by analysts employing such generic terms like misallocation of capital and mal-investment.
A lot of the aforesaid, I daresay the lion’s share of the mis and the mal have occurred in the financial arena, because, to make a long story less long, as might have been expected in the wake of the collapse of the Bretton Woods system, the financial, cough, services industry became the biggest growth industry in the west, particularly in the U.S. This is not to say that there hasn’t been a boatload of ill advised investment in other industries, there has, but the financial industry is the proverbial tail that wags the dog.
But wait, I have good news, the great, seemingly out of control financial, cough cough, services industry, will shrink even more than mushrooms in the frying pan come the arrival of the next system The great financial churn that exists todays will be like whale tails when folks who would prefer to save purchasing power (as opposed to act like frantic, yield chasing rabbits), have a means to do so. When all their passive savings savings are no longer available to be hovered up by those doing (anything but) God’s work, well, say farewell to the monks of Wall Street and their kith and kin.
Now, please pardon the following conclusion in the form of a digression:
Memo to (the misguided Larry Summers) and all fellow travelers: There is no secular stagnation, but, rather there does exist a monetary system that acts like a cancer on the body of the global economy. Sec stag things the picture may look like, but’s it is simply an effect of the present dying $IMFS, which, after decades of doing its thing, has choked the life out of economies from sea to shining sea.
How is it possible that a monetary system that has no brake on credit creation, operating as it does like a veritable oil gusher, could produce a condition where global liquidity is the central problem?
It doesn’t take a rocket scientist to answer this question. If you had the power to create money out of nothing (ex nihilo) and use it to buy up the world’s wealth, what would YOU do? Probably what The Sorcerer’s Apprentice did in Walt Disney’s Fantasia – create so much of it you inundate the world. Just creating ex nihilo money is much easier and less risky, especially when you can rely on the state’s (or in the future global government’s) legal system to enforce the sanctity of contracts and / or the state-backed ‘lender of last resort’ to back bad bets.
The collapse of the Bretton Woods system was indeed a watershed event. The necessity to preserve at least the fiction of some relationship between the amount of money being created and some finite substance like gold at least established some limits on ex nihilo money creation for creative accountants and the ancestors of today’s financial engineers – fractional reserve bankers. In the post 1971 world all limits were off.
In the post Bretton Woods world, the military industrial complex, having burned through the wealth accumulated by preceding generations of Americans also freed itself from the limitations imposed by the requirements of national solvency, allowing it to pursue dreams of global hegemony – or in the parlance of ‘public diplomacy’ (i.e. propaganda) liquidate the Red Menace and then begin a Global War on Terror. All this on someone’s else’s dime (or whatever) because “It’s our currency but your problem.”
Soddy, Frederick M.A., F.R.S.. Wealth, Virtual Wealth and Debt (Kindle Locations 1883-1884). Distributed Proofreaders Canada.
If Ruskin were alive today he would probably have added “- and the survival of our species.”
A parting shot at ‘monetary reformers’ in which crowd I include ‘public bankers’. Having discovered The Sorcerer’s Secret, rather than denounce the whole ex nihilo money creation process as counterfeiting, a fraud on the public (and throw out the money changers), they propose to use that Secret for the public’s welfare. Rather than a claw back of the vast fortunes accumulated over the centuries by the miracle of compound interest as those fortunes are passed from generation to generation of rentiers – or in the post-2008 world manufactured out of whole cloth by financial engineers – they propose to let those fortunes fester in off-shore tax havens and Swiss bank accounts. They bill this as political realism, apparently assuming the global oligarchy and its hired hands are too stupid to realize what they are up to; that they will be content to play their Monopoly Money games with ‘wealth’ that never finds its way into the Main Street economy, becoming a ‘Giant Squid’, a parasite sucking the life out of the world.
P.S. I am all for a return to sovereign money (Kucinich’s NEED Act), to allowing the people for whom ex nihilo money is created to be the principle beneficiaries of its creation (public banking); but NOT as an alternative to confronting the dead weight of history, the neo-feudal Lords of Finance who threaten to plunge the world into a new Dark Age of debt peonage; NOT as an alternative to (finally!) defining wealth and insuring that money is used efficiently to finance its creation AND distribution – and nothing more.
Economist Paul Davidson covers the issue of economics being a science in his latest book, THE KEYNES SOLUTION The Path to Global Economic Prosperity.
In it he describes how Paul Samuelson, Larry Summer’s uncle and first Nobel Laureate in Economics, said economics is a science because they used ergodic economic models, which he helped invent. Ergodic models say that what was true in the past will be true in the future, the way astronomy (science) models work. But Davidson calls bullshit on that. It was only by coming up with these ergodic models that Samuelson could convince the world that economics was a science. Davidson cited the fine print in all financial documents that says ‘past performance is no guarantee of future returns’ as the laughable proof that Samuelson was wrong. The future is nonergodic, i.e. uncertain. And so is economics.
It is worth the price of the book alone for the blistering and entertaining Appendix: Why Keynes’s Ideas Were Never Taught in American Universities. Davidson decimates Samuelson who claimed the title of keeping Keynes’ ideas alive after William F. Buckley Jr. in a flawed essay conflated Keynes with either Communism or McCarthy (can’t remember). Samuelson even claimed that his ideas were based on Keynes. Davidson describes how Samuelson never even read the book when he first made his statements, and cited a 1989 interview in which Samuelson said he never understood Keynes ideas to begin, they were too confusing, so he ignored them.
I loved your comment. Careful, though, it’s an MMT site, where far from being called “counterfeiting”, the *ex nihilo* process is considered sound and manageable. I happen to think if we separated money and credit then every banking crisis would not automatically also be a monetary crisis, banks could be set free to operate as every other business on the planet does: if they suck, they die. Instead we have a system where, *when* they suck, they suck it out of all of us.
Firstly your mental phobia about debt is more about conditioning as it is couched in antisocial mythology, the next interesting bit is those that arrive at that state of mind, through the preponderance of ex nihilo axiom and a priori before they even take a peak out side the window, across the vast swaths of history or new knowlage by which to flesh out the human condition.
Skippy… which funnily enough every human system is susceptible to the tool user problem, so what guiding mythology during the build up to this mess was advocated and whom drove that agency…. santa, easter bunny, gnomes[?] or was it the mob that reductive simplifies everything to boom and bust?
Actually, I am not completely against ex nihilo money creation. If done correctly, it CAN be a force for good. Paraphrasing (misinterpreting?) Michael Hudson the economist, the idea is to embezzle the purchasing power inherent in the newly created ex nihilo money, do something profitably productive with it – as in create some real wealth, something people can actually use – and then return the ‘borrowed’ purchasing power before anyone notices.
Thank you steven, for the wake-up. I’d almost forgotten about Kucinich’s NEED act. Nothing so valuable as a clear foundation.
“And that’s where the bigger boat comes in. We live in a global economy, and the central problem we face is global liquidity.”
It is supremely ironic that global liquidity should be “the central problem” when the $IMFS has no brake on credit/debt creation. How is it possible that a monetary system that has no brake on credit creation, operating as it does like a veritable oil gusher, could produce a condition where global liquidity is the central problem? It’s quite a feat to be sure and one of the monstrous wonders of our time, but a monetary system whose most outstanding characteristic is producing one way emissions of credit inevitably drowns the economic system it is meant to serve. Exactly how does it achieve this end? In myriad ways that are usually described by analysts employing such generic terms like misallocation of capital and mal-investment.
A lot of the aforesaid, I daresay the lion’s share of the mis and the mal have occurred in the financial arena, because, to make a long story less long, as might have been expected in the wake of the collapse of the Bretton Woods system, the financial, cough, services industry became the biggest growth industry in the west, particularly in the U.S. This is not to say that there hasn’t been a boatload of ill advised investment in other industries, there has, but the aforesaid industry is the proverbial tail that wags the dog.
But wait, I have good news, the great, seemingly out of control financial, cough cough, services industry, will shrink even more than mushrooms in the frying pan come the arrival of the next system The great financial churn that exists todays will be like whale tails when folks who would prefer to save purchasing power (as opposed to act like frantic, yield chasing rabbits), have a means to do so. When all their passive savings savings are no longer available to be hovered up by those doing (anything but) God’s work, well, say farewell to the monks of Wall Street and their kith and kin.
Now, please pardon the following conclusion in the form of a digression:
Memo to (the misguided Larry Summers) and all fellow travelers: There is no secular stagnation, but, rather there does exist a monetary system that acts like a cancer on the body of the global economy. Sec stag things the picture may look like, but’s it is simply an effect of the present dying $IMFS, which, after decades of doing its thing, has choked the life out of economies from sea to shining sea.
I’d question where do those policy ideas come from? Who did they all work for before they came to the positions they are in? There is a built in blindness at work here and I think they will all follow each other off the cliff while still insisting that reality is what they say it is.
Don’t say we didn’t warn you!
I have been seeing evidence that central bankers and economists in general are clueless for at least the last twenty years.
Magoo, along with the Rubin crime family and the fatuous Larry Summers convincing the chief narcissist at the time, Bill Clinton to get rid of commercial – investment bank barriers, and then a few years later, a financial blowup due to the ensuing financial crime wave those changes unleashed.
Remember those asshats? On the cover of Time and hailed as saviors of mankind. Magoo has the gall to go in front of congress and claim that he just couldn’t imagine the banksters would defraud everybody like that.
Now those fraudsters and banksters have the biggest boats, while the rest of the little people get run over by the bankster’s boats, if they don’t manage to swim aside. The view from the top is “fuck you, I’ve got mine”, after destroying millions of people.
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And that’s where the bigger boat comes in. We live in a global economy, and the central problem we face is global liquidity. In times of crisis, central banks have proven ability to cooperate for the good of all. But what we need is more than that, cooperation for crisis prevention. Faulty ideas are part of the problem, and faulty mandates are the other part.
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We have been warned. Banksters and their economist enablers are self serving. If only they had more power, things would be perfect. For them. A further descent into insanity for the rest.
I don’t know, to me the problem IS the “global economy”, ie… “global liquidity” and “global banksters” running things with the taxpayers on the hook. This “global economy” comes at too high a cost for the everyday citizen, obviously, and it’s a race to the bottom for the global peasants where global balance means raising standards of some at the bottom A LITTLE, while continually lowering the standards of those citizens near the top in a way to seek global peasant equilibrium. The recent history of America shows clearly that “global” economics is turning us quickly into a 3rd or 4th world country.
“Democracy, national sovereignty and global economic integration are mutually incompatible. It’s possible to have any 2 but not all 3. It’s the inescapable trilemma of a world economy” – Dani Rodrik
The Plan- Normalization of crime. Normalization of war. Normalization of gambling. Support inequality. Support speculation by confusing the practice with investment. Keep your population uneducated and confused. Base the function of labor in society on exploitation. Is it possible to dismantle a system build on such a foundation piecemeal?
While it is true that everyone is complicate in this development, the architects of this monstrosity must be held accountable. Lame attempts at passing the blame for failure won’t cut it. You can only fail “Upward” for so long until the system your are constructing comes crashing down. Will nature let you Double-Down forever?
I never felt comfortable describing the elites in power as misguided, clueless, or unintelligent. They know exactly what they are doing and why.
The question then becomes are we, the common people of this country, going to allow the purveyors of neoliberalism a continued voice in the future. I vote no.
There will always be an economy. The question is what type of economy do you have. Can we, as a society, define what is fair and just?
LOL, “held accountable”, we live in Gore Vidal’s United States of Amnesia, 60 seconds go by and we can’t even remember that our vaunted military has not won a major engagement since Normandy. Steal $14 trillion, get a bonus and a raise, buy a politician over lunch and by dinnertime you’ve got your own personal loophole so the looting can continue unabated. Imagine a patient, a big brawny steroid-ridden thug with delusions of superiority, who also has complete and total memory loss, how does he act? He does the only thing he knows, he starts throwing punches, he flails and lashes out on all sides at once. He staggers from blow to blow from unseen and unrecognized quarters, but he still hears the crowd cheering him on “USA! USA! USA!”.
My handle on another site is Patriot77077 because that’s precisely what I am.
“The major central banks are keeping domestic interest rates low in an effort to stimulate domestic output in the short run, but the consequence is to blow asset bubbles in world as a whole. ”
Hasn’t bubble creation been the exact policy goal for the past 30 years?
A bigger boat? So we can throw more democracy overboard? I’d go beyond Steve Keen’s complaint that what we have are models which don’t have money, banks, or debt in them, and say what we have are models that don’t have value in them. And so we are always jumping the gun. Like if we run faster and go bigger the truth won’t catch up to us. We alternatively refer to value as money itself, gold, precious things, various financial assets, houses, you know the list. Food, water, air. But our practice of economix let’s the market balance it all out. The market will take care of it. Supply and demand. Then along comes strong-dollar/strong-euro freaks and they decide, for the sake of keeping inflation down, that we really don’t need demand, just supply. Build it and they will come. Nuttiest economic theory in the history of the world. But trickle-down is prevailing against all sanity to the contrary. China. And a global boat will certainly be loaded with more trickle-down. And as globalism destroys democracy, of the sovereign variety, (pretending to replace it with “market democracy”, aka supply side bullshit) there will be no voices left to deliberate on just exactly what value even is. Once they realize it isn’t money.
It’s 2 AM and you’ve been partying hard, like everybody else. There’s a frenzied look on everyone’s face, the blood pressure needles are pegged at TILT. Everyone knows the host is getting antsy and the hangover is gonna be truly epic, but HEY somebody just poured another gallon of vodka in the grog, and Smith’s wife just took all her clothes off and jumped up on the table! This I gotta see!
We used to have central bankers like Bill Miller and Volcker who had internalized that part about “taking the punch bowl away”…but no longer, we replaced them with types like Greenspan and the Wizard of Ben, who thought they just might corner Smith’s wife in the upstairs bedroom and scoot out the door before the cops showed up.
By my count it’s now 4 A.M. and some very ugly fights are starting to break out.
In reading their report, it is encouraging to see the BIS acknowledge the over reliance on and failure of negative real interest rates, debt-fueled money in pushing up financial asset prices through global financial markets to generate economic growth. By acknowledging this, and the window being afforded by economic stimulus of temporarily low oil prices, the BIS is implicitly supporting sovereign fiscal spending policy initiatives.
That the BIS position also contradicts the policy views of Larry Summers and his fellow travelers concerning the economic desirability of engineering recurring debt-fueled financial asset price bubbles also has a certain charm.
I would have liked to have seen a deeper analysis of the broader implications of the People’s Bank of China’s very aggressive expansion of the money supply in China in the BIS report.
Also, the specific events that are most likely in the eyes of the BIS to trigger a “Minsky Moment” would be welcome.
Further, if they are recommending transfer of monetary policy away from sovereign central banks, I believe the BIS is proposing a deeply flawed solution. Given what has occurred in Greece and elsewhere, I am concerned about the potentially adverse effects of concentration of monetary policy at the supranational level.
A bigger boat? Maybe we need smaller sharks.
So BIS have finally understood that monetary policies are national when money is global. Eureka!
I am surprised no one(Cb-people) talks about other factors like overindebtness, under-investments(wage-cycles), outsourcing, foreign labor-arbitrage, de-powering of labor unions/shareholdervalue, weaker matching of workers skill(new and different labor-market), the exponential steps in the IT-revolution started in the 80´s(in the financialization of society productivity-gains were absorbed by capital(shareholders) more than by wage-owners), the repeal of Glass-Steagall leading bankers to frontrun more and more parts of the economy(bankprofits can be deflationary per se), demographics usw.
Above factors are part of a longterm structional cycle(in i.e output gap) which is deflationary. When this cycle is fading or coming to an end inflation will return. But surely deflation could be extended when monetary policy creates i.e asset bubbles(when they pop).
So sure, BIS is telling the truth that old economic thinking is the problem. But it is not primary a monetary problem…….. except that rates are to low. They shoot horses, don´t they?
I would state that part of our deflationary trend is good in many ways because it´s also a result from high competition. The younger generations with purchasing power adapts new consumer-tech habits which have increased new real demand in the economy. But not always in nominal terms when prices have been driven down. The internet have changed the economy tremendously in a deflationary way. Why fight this phenomen with negative interest-rates? It´s about debt, ehh?
Centralbankers are derived from macro-economist with old thinking and old models how the economy works.
We are always in the dark. And afraid of the dark. Just as Minsky showed us that the good times go bad exponentially and destroy themselves, isn’t the opposite just as possible? That the bad times can also go exponential and become impossible to revive? I mean if we start from a situation where things are bad and become progressively worse. Maybe a reliable computer is in order to always tweak the money supply going in and coming out according to what we have decided to achieve. Better than Euro burocrats posing as sovereign officials. Better than the deaf and dumb decisions the free market “makes.” Better than a congress of elected officials who fail to make fiscal decisions.