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Answering Martin Wolff on deflation, austerity, monetary policy
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oldickeastman
Jul 4, 2014, 6:40:25 AM7/4/14
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Martin Wolfe:
I admire the Bank for International Settlements. It takes courage to accuse its owners - the world's main central banks - of incompetence. Yet this is what it has done, most recently in its latest annual report. It would be easy to dismiss this as the rantings of a prophet of doom. That would be a mistake. Whether or not one agrees with its pre-1930s view of macroeconomic policy, the BIS raises big questions. Contrariness adds value.
One can divide the BIS analysis into three parts: what caused the crisis; where we are now on the way out of it; and what we should do.
---
Dick Eastman reply:
What do I care about courage or lack of it. Have they got it right now? -- that's what counts.
---------------------------------------------------
Martin Wolfe:
On the first, the perspective is that of the "financial cycle". This analysis goes back to the work of the great Swedish economist Knut Wicksell at the turn of the 20th century. The core idea is that if the rate of interest is too low, a boom driven by expanding credit and rising asset prices may ensue. One of the crucial (and correct) implications is that credit and money are endogenous: they are created by the economy. When the financial cycle turns from boom to bust, crises erupt. Then follow the "balance sheet recessions" described by Richard Koo of the Nomura Research Institute - painful deleveraging and extended periods of feeble growth. Such cycles, argues the BIS, "tend to play out over 15 to 20 years on average". To give credit where it is due, the BIS gave such warnings well before the crisis hit the high-income countries from 2007.
---
Dick Eastman reply:
Interest is not market determined. The are administered and therefore exogenous rather than endogeneous. In other words interest is not determined by supply and demand in the loanable funds market. The interest rates are set by the money suppliers who are in no sense price takers in a competitive market. In a boom with plenty of growth and hiring, when aggregate demand is so great that the risk of default is very small -- interest rates get very high. Does that make sense? When risk of default is low interest rates should decline. Also when spending on new investment is running high, the money multiplier from fractional reserve lending should increase the money supply making loans cheaper. This does not happen at all. Instead, acting from outside, as exogenous controllers and manipulators rather than slaves of supply and demand, the banks raise interest rates deliberately. This is not a market response. This is a decision by players outside the markets who are controlling the parameters of the market -- in other words they are rigged markets. The interest rates go up in a boom for the simple reason that bankers do not want successfull entrepreurs to be flush with too much cash! If some Henry Ford or Thomas Edison gets too big profits they might start funding their own expansion and innovation instead of hiring the money from the Lords of Mammon. With absolute monopoly power -- which puts them in the exogeneous realm -- they raise interest rates when money should be cheapest. At the same time the cut lending and call in loans. They turn a healthy economy with solid growth and rising expectation and lots of enterprise and opportunity into a bust -- simply by exogenously cutting lending and administering higher interest rates.
And that's just talking about when they set high interest rates.
When the deflationary spiral and deflation sets in -- and depression -- they say they lower interest rates to near zero -- but do they really. Again remember the deflation. When there is big deflation the nominal interest rate may be near zero at the central bank discount window and for the most favored borrowers -- but where is the real interest rate? In a deflation the real interst rate is much higher than the nominal interest rate. Banks can charge little or now interest because then money is given back it will be much harder for the borrower repaying interest and principal to come buy -- and each dollar of the loan repayment contract will buy much more in real assets because of the deflation (bankruptcy sales, distress sales, privatizations).
Even people without a grasp of the financial machinery can see from the Tibor rate fixing scandal that interest rates are administered -- they are set exogenously -- they are not the result of impersonal "invisible hand" market mechanism workings.
There are no waves and no cycles -- only periods of build up under easy money -- followed by high interest rates to capture the profits from the entrepreneurs -- followed by a deliberate contraction of lending, killing demand so that the real assets built up are transferred from the entrepreneur to his creditors. Interest rates, contrary to almost all economists, do not regulate investment and reflation'/deflation -- they rather follow them like a stalking predator. The high rates are thrust into the backs of entrepreneurs when the economy is at its strongest - and money is most plentiful, until the bankers decide that enough enterprise has been developed and then, by deflation and depression, begin to take it all over.
---------------------------------------------------
Martin Wolfe:
On the second, the BIS notes that growth has picked up over the past year, with advanced economies gaining momentum, while emerging economies lose it. Nevertheless, recovery has been slow and weak in crisis-hit countries. While global growth is not far from rates seen in the 2000s, the shortfall in the path of gross domestic product persists. Meanwhile, overall indebtedness continues to rise. Crises, we are reminded, cast a long shadow.
---
Dick Eastman reply:
The latest GDP figures for the US explode that notion. And look at the real economy in the US. It is being sucked away to nothing by this deliberate deflation. The "picking up of the economy" is not a myth -- it is a calculated falsehood. Look how the DOW has named an investment bank, Goldman-Sachs as on of the "Dow Industrials" -- the plundering and draining of domestic production and small business around the country is being hidden by economists and big finance. Look how finance is measured along with burger flippers and fingernail polishers as "service industries." An honest economist would tell you that the real economy -- the lower loop -- the big majority of households and domestic business and public goods -- are in depression. Only banks and the people who do their public lying for them are doing well. And you talk about "recovery" as if there really is one -- sick and weakly or otherwise. There is no recovery. The deflationary spiral is increasing its velocity of rotation and downward pull.
---------------------------------------------------
Martin Wolfe:
Furthermore, the policies of central banks are exerting extraordinary influence on financial markets, generating a "search for yield", a disappearance of pricing for risk and a collapse in market volatility. This is true even though balance sheets remain so stretched. Meanwhile, credit excesses have emerged in a number of emerging economies. The BIS is particularly concerned about new sources of vulnerability in the latter, including foreign borrowing by non-financial corporates. Overall, concludes the BIS wryly, "it is hard to avoid the sense of a puzzling disconnect between the markets' buoyancy and underlying economic developments".
---
Dick Eastman reply:
The central banks are passive to the policy of the exogenous merchant banking houses. Open Market Operations are dictated to the FOMC by the dealers and brokers who make the market with the Fed. They ordered QE so they could trade out their bad securities for money. This was no effort by the central banks to "ease money" in the real economy of the nation. That was a lie -- a cover story that they figured most people would not catch on to. None of that money the Fed gave the securities sellers has touched the real domestic economy -- except to buy assets sold cheaply following defaults and bankruptcies and government debt crises - buying and privatized lands and utilities.
The problem with you and the BIS is that your whole focus is on the international investor -- the very guy who has let us down by not investing -- the one who in countries where he has made loans -- suddenly takes the money back and lets that economy fall flat. We don't need to be thinking of what reforms would be best for them. We need to get rid of them and the system that lets them hold nations hostage -- listen to how they insist that a country has to squeeze the people with more and more austeirty before they will feel it is safe to return some of their funds so the people can have money to buy and sell again.
The heck with them. We need a system where there is plenty of permanent money and where interest rate has no effect on money supply. Banks and money creation should be separate. We don't need central banks. We don't need their monetary policy when in fact all the levels are being pulled to plundere us and prosper a den of theives.
---------------------------------------------------
Martin Wolfe:
It is on the third point - what is to be done - that the BIS turns into a prophet from the Old Testament: it demands austerity now. In countries that have experienced a financial crisis it recommends balance sheet repair and structural reform - deregulation, improved labour flexibility and "trimming public sector bloat". It demands fiscal retrenchment. But unlike, say, George Osborne, the UK chancellor of the exchequer, the BIS wants to see monetary stimulus withdrawn, too, emphasising the risks of "exiting too late and too gradually". It plays down both risks and costs of deflation, despite the huge overhang of debt that it also stresses. Even Jens Weidmann, the Bundesbank president, does not do that. Being more hawkish than the Bundesbank is quite something. Meanwhile, in countries that have experienced financial booms (the report points to Brazil, China and Turkey), it recommends pre-emptive monetary tightening and imposition of macroprudential restraints.
To me, then, this is a blend of the wise, the foolish and the doubtful.
---
Dick Eastman reply:
Yes, the BIS calls for makin it easier for corporations to hire cheap imported labor, and easier to to get out of labor contracts now deemed not austere enough. And wost of all they want the fractional reserve banks to increase the fraction of money they receive which they must hold back as idle legal reserve. Increaseing reserve requirements by international treaty is a way of forcing deflation on many nations at the same time -- regardless of whether the goverments and populations have gotten wise to the deflation racket or not.
All of these people are calling for continuing deflation. No stimulus is being withdrawn for the real economy -- because none has been applied so it could be withdrawn. And of the "fiscal retrenchment" -- which means less deficit-financed government payouts to the domestic economy -- is also deflationary to the present domestic economy.
You, the exchequer, the BIS, the central banks you all carry on this charade as though someone has been trying to get money to households and domestic businesses through added purchasing power when no one has done this at all. Deflation is theft. It forces real wealth transfer from borrower to creditor. Deflation is not cured by "austerity" it is aggrevated by it.
The philosophy here is that at all costs the people who whom all of these trillions of dollars and euros are owed must be protected from loosing wealth by inflation -- and much more quietly -- they must be given big windfalls from deflation, windfalls that come at the expense of the people borrow money in good faith. The people who borrow money never dream that the bank that lends to them is connected to a nework of bankers acting as a cartel that has gained control of the macroeconomic variables of money supply and credit.
The who conversation about having to tighten money because "impersonal market forces" might -- like threatening but still unpredictable weather -- send inflation this way "if we are not careful." That is a big horrible lie. No inflation can come without the bankers willing it and pulling the levers they have always had in reach. And given that fact -- the talk about "pre-emptive money tightening" is even more outrageous.;
---------------------------------------------------
Martin Wolfe:
Start with the doubtful. The BIS is right to emphasize the enormous costs of credit-driven booms. But it ignores the context in which policy makers allowed these to occur. In particular, it ignores the evidence of a global savings glut shown in low pre-crisis long-term real interest rates and huge net flows of capital from countries with good investment opportunities to countries with far worse ones. Similarly, it ignores the impact of adverse shifts in the distribution of income and in business behaviour on propensities to save and invest.
---
Dick Eastman reply:
You're right about the global "savings glut" -- except all that offshore money is not "savings" but "interest earnings" that are neither being invested nor consumed. They are not saving the money. They are holding it as a speculatve asset, as a financial investment instrument -- the dollar -- that is being bet on deflation. And they are betting on deflation -- knowing full well that the they themsleves have rigged the casino gaming table -- so that deflation is a sure bet.
Sure we don't want international speculators showing their money on a country that bends its laws and exploits its people -- turning their children into child prostitutes to sweeten the pot - so these international billionaires will invest in their country -- but when some populist movement rises up -- they pull their money and bring the country to their knees until one of their hurt agents starts move to shoot and jail all the populists and outlaw their movements.
I don't see you offering any solutions, Mr. Wolf, but I sure as heck have some. We need to nationalize currencies -- repudiate debt -- shut down central banks -- create debt-free thin-air currency which can only be introduced to the economy through a regular and always equal-for-all household dividend that people can spend or save as they choose. This will immediately raise aggregate demand, bring revenue to firms so they can move inventory from their shelves and place orders for more, so they carn hire and plan for expansion. Expansion grows upon expansion as long as the money medium grows apace, We need to end overseas investing and internatinal speculation. Each nation should be allowed to provide their citizens with ample money -- thin-air national money, provided as a public utility, as part of the necessary infrastructure that preceeds markets and which makes markets possible. Then we must set up machinery to ensure balanced trade. And all of the bankers and all of theri international bureaucrats which they hire and put in exalted international power to do their bidding must asked withdraw themselves. The people are soverein in each land. The goverments are always and only their servants. International finace should not exist. All international finance has given us has been manipulated economic disasters and wars that are deficit-financed and leave a world in ruin so bankers can lend to build it up again.
I've got a solution to all that. See below - in blue font.
---------------------------------------------------
Martin Wolfe:
Again, the BIS insists that losses in output relative to trend are inevitable. There is no doubt that most crises end up with huge long-term losses. But, by the 1950s, the US had recovered fully from the gigantic losses relative to the pre-1929 trend in GDP per head caused by the biggest crisis of all: the Great Depression (see chart). Is this not because, unlike in the pusillanimous present, the US subsequently experienced the biggest fiscal stimulus ever - the second world war? I can imagine how the BIS would have warned against such fiscal irresponsibility.
---
Dick Eastman reply:
All of this talking about waves and trends is hogwash. The right political moves can end the current lower-loop bust right now. We can have a system of permanent money and a permanent separation of banks from money creation - and a system of even money distribution regularly provided that will give us strong aggregate demand for an expansion and boom and good times that will never have to end -- because the money will be permanent and not created with any obligation to return principal and compound interest totally twice, three times and sometimes five times the sum of the original loan.
---------------------------------------------------
Martin Wolfe:
Turn, now, to the wise. First, the BIS is right to add to warnings over credit booms. Their joy is fleeting and the hangover agonising. This is particularly true for countries unable to borrow easily in their own currencies or without large holdings of foreign exchange reserves. Pre-emptive action is indeed required. Second, the BIS is right to emphasise the case for accelerating post-crisis recognition of bad debt and reconstruction of balance sheets of both borrowers and intermediaries. This process of deleveraging is nearly always too slow. Professors Atif Mian and Amir Sufi, of Princeton and Chicago universities respectively, make much of this argument in their important book, House of Debt . Unfortunately, it is also politically difficult to make this process work.
---
Dick Eastman reply:
You are speaking very foul and evil doctrine here. You are telling your readers taht countries unable to borrow easily in their won countries should be prevented from getting a credit boom (reflation) started, that pre-emptive action must be taken to keep them from reflating their currencies. And you want faster deleveraging -- a quick acting deflationary cancer.
Mian and Sufi see what Irving Fisher saw long before them -- the debt-deflation explanation of economic depressions. Unfortunately all Mian and Sufi are offering by way of solution are fixes like faster writing off of bad debt. They don't see the solution that would make such after-the-fact remedies necessary. (See below).
And look at this term "credit boom" that you are using. You are talking about something very good and something very bad together as if they were all one thing. A credit boom is two things. It is reflation operating right away where the money makes contact with the real economy; and it is an obligation to pay to the financial sector the principal and the interest over time. Get money now, pay back that amount and the same amount and more later on in the serviceing of the debt that was created with the loan. Money need not be created with the loan.
You can have a boom from an ample supply of permanent money, quite apart from the amount from increases in extended bank credit.
Everyone associated with BIS, the IMF, the World Bank, the central banks, the big think tanks paid for by the Rockefeller Turst and other banking family trusts -- all of these people who hire Ph.D. prostitutes to write up Basel Accords and what not - they all are committed to the crooked system that steals from entrepreneurs and other working people to transfer wealth to them or to their family trusts that own the banks and all the corporations.
Why don't you tell them that, Mr. Wolf? Oh, I remember. You write for the Financial Times.
---------------------------------------------------
Martin Wolfe:
Finally, consider the foolish. There is indeed an important argument to be had over the right balance to strike between fiscal and monetary reactions to financial crises.
I believe we have relied too much on monetary policy, which does carry with it many of the risks the BIS rightly emphasises. But the notion that the best way to handle a crisis triggered by overleveraged balance sheets is to withdraw support for demand and even embrace outright deflation seems grotesque. The result, inevitably, would be even faster rises in real indebtedness and so yet bigger waves of bankruptcy that would lead to weaker economies and so to further increases in indebtedness. The reasons for abandoning the pre-Keynesian consensus were powerful, whatever the BIS (and many others) may think. The BIS is entitled to warn. Central banks should listen to it politely. But they must reject important parts of what it advises.
marti...@ft.com
---
Dick Eastman reply:
There is no right balance when the fiscal spending is deficit financed and when the monetary easing releases money that comes as X but then must be taken away as X + INTEREST and if the interest cannot be found then you have to turn over whatever house or business or government land or utility was pledged as collateral.
Not in a million years would you ever tell your readers what the people of the United Kingdom -- who are not your readers -- really need. The problem with you is that your brain is not exogenous. Look at mankind as God sees them and you will have a much different idea about the need for more deflation balanced with deficit-financed fiscal stimulus.
Quit the times, sell the yacht and see if you can't find God.
I admire the Bank for International Settlements. It takes courage to accuse its owners - the world's main central banks - of incompetence. Yet this is what it has done, most recently in its latest annual report. It would be easy to dismiss this as the rantings of a prophet of doom. That would be a mistake. Whether or not one agrees with its pre-1930s view of macroeconomic policy, the BIS raises big questions. Contrariness adds value.
One can divide the BIS analysis into three parts: what caused the crisis; where we are now on the way out of it; and what we should do.
---
Dick Eastman reply:
What do I care about courage or lack of it. Have they got it right now? -- that's what counts.
---------------------------------------------------
Martin Wolfe:
On the first, the perspective is that of the "financial cycle". This analysis goes back to the work of the great Swedish economist Knut Wicksell at the turn of the 20th century. The core idea is that if the rate of interest is too low, a boom driven by expanding credit and rising asset prices may ensue. One of the crucial (and correct) implications is that credit and money are endogenous: they are created by the economy. When the financial cycle turns from boom to bust, crises erupt. Then follow the "balance sheet recessions" described by Richard Koo of the Nomura Research Institute - painful deleveraging and extended periods of feeble growth. Such cycles, argues the BIS, "tend to play out over 15 to 20 years on average". To give credit where it is due, the BIS gave such warnings well before the crisis hit the high-income countries from 2007.
---
Dick Eastman reply:
Interest is not market determined. The are administered and therefore exogenous rather than endogeneous. In other words interest is not determined by supply and demand in the loanable funds market. The interest rates are set by the money suppliers who are in no sense price takers in a competitive market. In a boom with plenty of growth and hiring, when aggregate demand is so great that the risk of default is very small -- interest rates get very high. Does that make sense? When risk of default is low interest rates should decline. Also when spending on new investment is running high, the money multiplier from fractional reserve lending should increase the money supply making loans cheaper. This does not happen at all. Instead, acting from outside, as exogenous controllers and manipulators rather than slaves of supply and demand, the banks raise interest rates deliberately. This is not a market response. This is a decision by players outside the markets who are controlling the parameters of the market -- in other words they are rigged markets. The interest rates go up in a boom for the simple reason that bankers do not want successfull entrepreurs to be flush with too much cash! If some Henry Ford or Thomas Edison gets too big profits they might start funding their own expansion and innovation instead of hiring the money from the Lords of Mammon. With absolute monopoly power -- which puts them in the exogeneous realm -- they raise interest rates when money should be cheapest. At the same time the cut lending and call in loans. They turn a healthy economy with solid growth and rising expectation and lots of enterprise and opportunity into a bust -- simply by exogenously cutting lending and administering higher interest rates.
And that's just talking about when they set high interest rates.
When the deflationary spiral and deflation sets in -- and depression -- they say they lower interest rates to near zero -- but do they really. Again remember the deflation. When there is big deflation the nominal interest rate may be near zero at the central bank discount window and for the most favored borrowers -- but where is the real interest rate? In a deflation the real interst rate is much higher than the nominal interest rate. Banks can charge little or now interest because then money is given back it will be much harder for the borrower repaying interest and principal to come buy -- and each dollar of the loan repayment contract will buy much more in real assets because of the deflation (bankruptcy sales, distress sales, privatizations).
Even people without a grasp of the financial machinery can see from the Tibor rate fixing scandal that interest rates are administered -- they are set exogenously -- they are not the result of impersonal "invisible hand" market mechanism workings.
There are no waves and no cycles -- only periods of build up under easy money -- followed by high interest rates to capture the profits from the entrepreneurs -- followed by a deliberate contraction of lending, killing demand so that the real assets built up are transferred from the entrepreneur to his creditors. Interest rates, contrary to almost all economists, do not regulate investment and reflation'/deflation -- they rather follow them like a stalking predator. The high rates are thrust into the backs of entrepreneurs when the economy is at its strongest - and money is most plentiful, until the bankers decide that enough enterprise has been developed and then, by deflation and depression, begin to take it all over.
---------------------------------------------------
Martin Wolfe:
On the second, the BIS notes that growth has picked up over the past year, with advanced economies gaining momentum, while emerging economies lose it. Nevertheless, recovery has been slow and weak in crisis-hit countries. While global growth is not far from rates seen in the 2000s, the shortfall in the path of gross domestic product persists. Meanwhile, overall indebtedness continues to rise. Crises, we are reminded, cast a long shadow.
---
Dick Eastman reply:
The latest GDP figures for the US explode that notion. And look at the real economy in the US. It is being sucked away to nothing by this deliberate deflation. The "picking up of the economy" is not a myth -- it is a calculated falsehood. Look how the DOW has named an investment bank, Goldman-Sachs as on of the "Dow Industrials" -- the plundering and draining of domestic production and small business around the country is being hidden by economists and big finance. Look how finance is measured along with burger flippers and fingernail polishers as "service industries." An honest economist would tell you that the real economy -- the lower loop -- the big majority of households and domestic business and public goods -- are in depression. Only banks and the people who do their public lying for them are doing well. And you talk about "recovery" as if there really is one -- sick and weakly or otherwise. There is no recovery. The deflationary spiral is increasing its velocity of rotation and downward pull.
---------------------------------------------------
Martin Wolfe:
Furthermore, the policies of central banks are exerting extraordinary influence on financial markets, generating a "search for yield", a disappearance of pricing for risk and a collapse in market volatility. This is true even though balance sheets remain so stretched. Meanwhile, credit excesses have emerged in a number of emerging economies. The BIS is particularly concerned about new sources of vulnerability in the latter, including foreign borrowing by non-financial corporates. Overall, concludes the BIS wryly, "it is hard to avoid the sense of a puzzling disconnect between the markets' buoyancy and underlying economic developments".
---
Dick Eastman reply:
The central banks are passive to the policy of the exogenous merchant banking houses. Open Market Operations are dictated to the FOMC by the dealers and brokers who make the market with the Fed. They ordered QE so they could trade out their bad securities for money. This was no effort by the central banks to "ease money" in the real economy of the nation. That was a lie -- a cover story that they figured most people would not catch on to. None of that money the Fed gave the securities sellers has touched the real domestic economy -- except to buy assets sold cheaply following defaults and bankruptcies and government debt crises - buying and privatized lands and utilities.
The problem with you and the BIS is that your whole focus is on the international investor -- the very guy who has let us down by not investing -- the one who in countries where he has made loans -- suddenly takes the money back and lets that economy fall flat. We don't need to be thinking of what reforms would be best for them. We need to get rid of them and the system that lets them hold nations hostage -- listen to how they insist that a country has to squeeze the people with more and more austeirty before they will feel it is safe to return some of their funds so the people can have money to buy and sell again.
The heck with them. We need a system where there is plenty of permanent money and where interest rate has no effect on money supply. Banks and money creation should be separate. We don't need central banks. We don't need their monetary policy when in fact all the levels are being pulled to plundere us and prosper a den of theives.
---------------------------------------------------
Martin Wolfe:
It is on the third point - what is to be done - that the BIS turns into a prophet from the Old Testament: it demands austerity now. In countries that have experienced a financial crisis it recommends balance sheet repair and structural reform - deregulation, improved labour flexibility and "trimming public sector bloat". It demands fiscal retrenchment. But unlike, say, George Osborne, the UK chancellor of the exchequer, the BIS wants to see monetary stimulus withdrawn, too, emphasising the risks of "exiting too late and too gradually". It plays down both risks and costs of deflation, despite the huge overhang of debt that it also stresses. Even Jens Weidmann, the Bundesbank president, does not do that. Being more hawkish than the Bundesbank is quite something. Meanwhile, in countries that have experienced financial booms (the report points to Brazil, China and Turkey), it recommends pre-emptive monetary tightening and imposition of macroprudential restraints.
To me, then, this is a blend of the wise, the foolish and the doubtful.
---
Dick Eastman reply:
Yes, the BIS calls for makin it easier for corporations to hire cheap imported labor, and easier to to get out of labor contracts now deemed not austere enough. And wost of all they want the fractional reserve banks to increase the fraction of money they receive which they must hold back as idle legal reserve. Increaseing reserve requirements by international treaty is a way of forcing deflation on many nations at the same time -- regardless of whether the goverments and populations have gotten wise to the deflation racket or not.
All of these people are calling for continuing deflation. No stimulus is being withdrawn for the real economy -- because none has been applied so it could be withdrawn. And of the "fiscal retrenchment" -- which means less deficit-financed government payouts to the domestic economy -- is also deflationary to the present domestic economy.
You, the exchequer, the BIS, the central banks you all carry on this charade as though someone has been trying to get money to households and domestic businesses through added purchasing power when no one has done this at all. Deflation is theft. It forces real wealth transfer from borrower to creditor. Deflation is not cured by "austerity" it is aggrevated by it.
The philosophy here is that at all costs the people who whom all of these trillions of dollars and euros are owed must be protected from loosing wealth by inflation -- and much more quietly -- they must be given big windfalls from deflation, windfalls that come at the expense of the people borrow money in good faith. The people who borrow money never dream that the bank that lends to them is connected to a nework of bankers acting as a cartel that has gained control of the macroeconomic variables of money supply and credit.
The who conversation about having to tighten money because "impersonal market forces" might -- like threatening but still unpredictable weather -- send inflation this way "if we are not careful." That is a big horrible lie. No inflation can come without the bankers willing it and pulling the levers they have always had in reach. And given that fact -- the talk about "pre-emptive money tightening" is even more outrageous.;
---------------------------------------------------
Martin Wolfe:
Start with the doubtful. The BIS is right to emphasize the enormous costs of credit-driven booms. But it ignores the context in which policy makers allowed these to occur. In particular, it ignores the evidence of a global savings glut shown in low pre-crisis long-term real interest rates and huge net flows of capital from countries with good investment opportunities to countries with far worse ones. Similarly, it ignores the impact of adverse shifts in the distribution of income and in business behaviour on propensities to save and invest.
---
Dick Eastman reply:
You're right about the global "savings glut" -- except all that offshore money is not "savings" but "interest earnings" that are neither being invested nor consumed. They are not saving the money. They are holding it as a speculatve asset, as a financial investment instrument -- the dollar -- that is being bet on deflation. And they are betting on deflation -- knowing full well that the they themsleves have rigged the casino gaming table -- so that deflation is a sure bet.
Sure we don't want international speculators showing their money on a country that bends its laws and exploits its people -- turning their children into child prostitutes to sweeten the pot - so these international billionaires will invest in their country -- but when some populist movement rises up -- they pull their money and bring the country to their knees until one of their hurt agents starts move to shoot and jail all the populists and outlaw their movements.
I don't see you offering any solutions, Mr. Wolf, but I sure as heck have some. We need to nationalize currencies -- repudiate debt -- shut down central banks -- create debt-free thin-air currency which can only be introduced to the economy through a regular and always equal-for-all household dividend that people can spend or save as they choose. This will immediately raise aggregate demand, bring revenue to firms so they can move inventory from their shelves and place orders for more, so they carn hire and plan for expansion. Expansion grows upon expansion as long as the money medium grows apace, We need to end overseas investing and internatinal speculation. Each nation should be allowed to provide their citizens with ample money -- thin-air national money, provided as a public utility, as part of the necessary infrastructure that preceeds markets and which makes markets possible. Then we must set up machinery to ensure balanced trade. And all of the bankers and all of theri international bureaucrats which they hire and put in exalted international power to do their bidding must asked withdraw themselves. The people are soverein in each land. The goverments are always and only their servants. International finace should not exist. All international finance has given us has been manipulated economic disasters and wars that are deficit-financed and leave a world in ruin so bankers can lend to build it up again.
I've got a solution to all that. See below - in blue font.
---------------------------------------------------
Martin Wolfe:
Again, the BIS insists that losses in output relative to trend are inevitable. There is no doubt that most crises end up with huge long-term losses. But, by the 1950s, the US had recovered fully from the gigantic losses relative to the pre-1929 trend in GDP per head caused by the biggest crisis of all: the Great Depression (see chart). Is this not because, unlike in the pusillanimous present, the US subsequently experienced the biggest fiscal stimulus ever - the second world war? I can imagine how the BIS would have warned against such fiscal irresponsibility.
---
Dick Eastman reply:
All of this talking about waves and trends is hogwash. The right political moves can end the current lower-loop bust right now. We can have a system of permanent money and a permanent separation of banks from money creation - and a system of even money distribution regularly provided that will give us strong aggregate demand for an expansion and boom and good times that will never have to end -- because the money will be permanent and not created with any obligation to return principal and compound interest totally twice, three times and sometimes five times the sum of the original loan.
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Martin Wolfe:
Turn, now, to the wise. First, the BIS is right to add to warnings over credit booms. Their joy is fleeting and the hangover agonising. This is particularly true for countries unable to borrow easily in their own currencies or without large holdings of foreign exchange reserves. Pre-emptive action is indeed required. Second, the BIS is right to emphasise the case for accelerating post-crisis recognition of bad debt and reconstruction of balance sheets of both borrowers and intermediaries. This process of deleveraging is nearly always too slow. Professors Atif Mian and Amir Sufi, of Princeton and Chicago universities respectively, make much of this argument in their important book, House of Debt . Unfortunately, it is also politically difficult to make this process work.
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Dick Eastman reply:
You are speaking very foul and evil doctrine here. You are telling your readers taht countries unable to borrow easily in their won countries should be prevented from getting a credit boom (reflation) started, that pre-emptive action must be taken to keep them from reflating their currencies. And you want faster deleveraging -- a quick acting deflationary cancer.
Mian and Sufi see what Irving Fisher saw long before them -- the debt-deflation explanation of economic depressions. Unfortunately all Mian and Sufi are offering by way of solution are fixes like faster writing off of bad debt. They don't see the solution that would make such after-the-fact remedies necessary. (See below).
And look at this term "credit boom" that you are using. You are talking about something very good and something very bad together as if they were all one thing. A credit boom is two things. It is reflation operating right away where the money makes contact with the real economy; and it is an obligation to pay to the financial sector the principal and the interest over time. Get money now, pay back that amount and the same amount and more later on in the serviceing of the debt that was created with the loan. Money need not be created with the loan.
You can have a boom from an ample supply of permanent money, quite apart from the amount from increases in extended bank credit.
Everyone associated with BIS, the IMF, the World Bank, the central banks, the big think tanks paid for by the Rockefeller Turst and other banking family trusts -- all of these people who hire Ph.D. prostitutes to write up Basel Accords and what not - they all are committed to the crooked system that steals from entrepreneurs and other working people to transfer wealth to them or to their family trusts that own the banks and all the corporations.
Why don't you tell them that, Mr. Wolf? Oh, I remember. You write for the Financial Times.
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Martin Wolfe:
Finally, consider the foolish. There is indeed an important argument to be had over the right balance to strike between fiscal and monetary reactions to financial crises.
I believe we have relied too much on monetary policy, which does carry with it many of the risks the BIS rightly emphasises. But the notion that the best way to handle a crisis triggered by overleveraged balance sheets is to withdraw support for demand and even embrace outright deflation seems grotesque. The result, inevitably, would be even faster rises in real indebtedness and so yet bigger waves of bankruptcy that would lead to weaker economies and so to further increases in indebtedness. The reasons for abandoning the pre-Keynesian consensus were powerful, whatever the BIS (and many others) may think. The BIS is entitled to warn. Central banks should listen to it politely. But they must reject important parts of what it advises.
marti...@ft.com
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Dick Eastman reply:
There is no right balance when the fiscal spending is deficit financed and when the monetary easing releases money that comes as X but then must be taken away as X + INTEREST and if the interest cannot be found then you have to turn over whatever house or business or government land or utility was pledged as collateral.
Not in a million years would you ever tell your readers what the people of the United Kingdom -- who are not your readers -- really need. The problem with you is that your brain is not exogenous. Look at mankind as God sees them and you will have a much different idea about the need for more deflation balanced with deficit-financed fiscal stimulus.
Quit the times, sell the yacht and see if you can't find God.
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