Posts of Special Interest:
Tuesday, June 30, 2009
What interests me more is Madoff himself, why he did what he did, what motivated him through all those years when he was getting away with what has to have been the greatest scam of all time. Sorry, but the guy doesn't look like a con artist. I know, I know, the most successful cons are the types that don't come across as crooks, the ones that inspire trust. But still, in just about every case I've ever seen, there's a certain unmistakeable sleaze factor that can be spotted a mile off. Sure, in principle a con has to be able to convince you he's on the level. But in fact your typical con comes across like a con anyhow, a bit too smooth, a bit too slick, probably because most suckers either deep down want to be conned, or else they're conned into thinking they're being let in on something just a wee bit illegal. Madoff just doesn't come across as the type.
His lawyer said it best yesterday, in a remarkably astute observation predictably ignored by the media: if he were a real crook, then he'd have been in the airport with a ticket to some exotic island instead of confessing that he'd been conducting a Ponzi scheme -- and then sticking around to face the consequences. The guy had access to billions. As soon as the financial system began to collapse last summer, he would have realized it was just a matter of time before the game was up. Time to pay off the appropriate officials, arrange for the hideaway, pay a visit to the Swiss banks, reserve the hotel rooms, book the airline tickets, etc. Instead, he meets with his sons, tells them what he's been up to and patiently waits in his apartment for the FBI to show up. As I see it, this part of the story is every bit as fantastic as all the rest.
Here's what I think happened. I think Madoff must have started out perfectly legit, doing what your typical novice financier in the making does, enticing relatives and friends to invest with him in some deal that would have looked like a sure thing. And I think at a certain point something must have gone very wrong. A big, heavily leveraged investment must have gone sour. Put yourself in his place. You've managed to convince your closest relatives and dearest friends to place their life savings in your care, you feel confident you are investing all this money wisely -- and then suddenly the bottom falls out. You are ruined! But more important, your relatives and friends have lost everything. How do you tell them? What do you say?
I really don't think Bernie Madoff was ever a con man, a swindler, a ruthless manipulator, not at least in the sense of someone who starts out with such intentions. I think he's someone who got caught up in something beyond his control. Not out of greed, but, like so many of the "smart operators" who got us into our current mess, simple naivete, lack of imagination, a sappy uncritical faith in what was once known as "The American Dream." Like any true believer in the essential benificence of the "free market," he must have gotten carried away by his own ambitions without seriously considering the consequences -- until it was too late. Faced with two really bad options, either confessing to friends and family that, thanks to him, all their savings were gone -- or sucking other investors in as a way to cover their losses -- I think he chose what, for him, would have been the lesser of two evils. As he might well have seen it (and of course I am totally speculating at this point), the only truly compassionate thing to do was to find some way, any way, to avert disaster for himself and those closest to him.
This story might or might not have some grain of truth, as far as Bernie Madoff is concerned. But there is a larger lesson to be learned, nevertheless. Because the "Great American Dream" that is "free market" capitalism is far too vulnerable to exactly this sort of dilemma. When things go well with the market, then all is well and everyone is happy, but when something goes wrong, it's not always that easy to accept. And all too easy to caste about for some way, any way, of averting the inevitable disaster. This may be the answer to the enigma of Bernie Madoff, I'm not sure. But there's no doubt it explains what's happened just now to the world economy as a whole. Very sadly, it's what is still happening, as the powers that be float more Ponzi schemes on top of the old ones, in a futile effort to get us all out from under the latest, greatest, disaster. Purely out of compassion, of course.
Monday, June 29, 2009
Beyond the gate of experience flows the Dow,
Which is ever greater and more subtle than the world.
Those who know do not speak, those who speak, do not know.
The sage manages affairs without doing anything, and conveys his instructions without the use of speech.
The sage experiences without abstraction,
And accomplishes without action;
He accepts the ebb and flow of things,
Nurtures them, but does not own them,
And lives, but does not dwell.
The thirty spokes unite in the one center; but it is on the empty space for the axle that the use of the wheel depends. Clay is fashioned into vessels; but it is on their empty hollowness that their use depends. The door and windows are cut out from the walls to form an apartment; but it is on the empty space that its use depends. Therefore, whatever has being is profitable, but what does not have being can be put to use.
The Dow is a limitless vessel;
Used by the self, it is not filled by the world;
It cannot be cut, knotted, dimmed or stilled;
Its depths are hidden, ubiquitous and (seemingly) eternal.
The Dow is not kind;
It treats all things impartially.
The Sage is not kind,
And treats all people impartially.
The Dow is like a bellows,
Empty, yet never ceasing its supply.
The more it moves, the more it yields.
The sage places himself after and finds himself before,
Ignores his desire and finds himself content.
He is complete because he does not serve himself.
In its rising there is no light,
In its falling there is no darkness,
A continuous thread beyond description,
The Dow flows and ebbs, creating and destroying,
Implementing all the world, attending to the tiniest details,
Claiming nothing in return.
It nurtures all things,
Though it does not control them;
It has no intention,
So it seems inconsequential.
When the best swindlers achieve their purpose
Their marks claim the achievement as their own.
Who accepts Wall Street's flow becomes all-cherishing;
Being all-cherishing he becomes impartial;
Being impartial he becomes magnanimous;
Being magnanimous he becomes natural;
Being natural he becomes one with the Dow;
Being one with the Dow he becomes immortal:
Though his body will decay, the Dow will not.
Fate does not attack, yet all things are conquered by it;
It does not ask, yet all things answer to it;
It does not call, yet all things meet it;
It does not plan, yet all things are determined by it.
Fate's net is vast and its mesh is coarse,
Yet none escape it.
For yourselves know perfectly that the day of the Lord so cometh as a thief in the night. For when they shall say, Peace and safety; then sudden destruction cometh upon them, as travail upon a woman with child; and they shall not escape.
When the Tao goes up everyone is happy. When the Tao goes down everyone is sad. What a simple world we live in, no? But what if one day the Tao were to go down down down down down down down? That will be the sign. By that we will know: The Rapture is at hand.
It could happen today. It could happen tomorrow. Or next week. Or next month. It could come, like a thief in the night, at any time and without any warning. The market could be in the middle of a downswing or an upswing, there will be NO way to tell. But verily, my Brethren, I assure you: sometime soon, that day will come. And on that day, the market will fall so drastically, by thousands of points, that Wall St. will literally be forced to close down. And once it closes, that will be that. It will not open again. Ever. This will, indeed, be the financial End of Days.
It shall come as destruction from the almighty... cruel both with wrath and fierce anger, to lay the land desolate: and he shall destroy the sinners thereof out of it...And I will punish the world for their evil, and the wicked for their iniquity; and I will cause the arrogance of the proud to cease, and will lay low the haughtiness of the terrible. Isaiah 13: 5-11
Sunday, June 21, 2009
A swan in flight has been arrested
Her bright wings splayed upon the Northern Cross.
Impaled, she there from high where high on high she’s nested,
Looks down through diamonds on this world of dross.
The wind abruptly shifts then calmly stands
And the slant rain freezes all its glitter drops
To cop a sheet of brilliant mirror strands.
Even the beaded Gypsy stops.
I spot a Mobile station round the bend
Slow down a bit then brake to brush the guards
Skidding skiddy skidmarks where the milky Thruway ends
To signal where the end of time begins.
Wednesday, June 17, 2009
Allowing our too-big-to-fail financial system to fail anyhow would mean wiping out so much wealth at one fell swoop that the world economy would be forced to a sudden, and potentially disastrous, halt. The stock markets of the world would crash to the very bottom, trillions would be lost instantaneously, the fortunes of the rich and famous would be wiped out, but so would the pensions, 401(k)s, and other nest eggs of ordinary people everywhere. Every bank would fail, every mortgage would be foreclosed, every insurance policy suddenly be rendered worthless, as a wave of bankruptcies swept the world. Unemployment would become almost universal as business after business failed. "Market forces" could not come into play because the private sector driving such forces would, very simply, have ceased to exist.
The Ponzi scheme that is the world financial system is indeed too big to fail. Bernie Madoff's system, as outrageously inflated as it became, could be allowed to fail. The world financial system, very clearly, cannot.
If it cannot be allowed to fail, then what means do we have at our disposal to fix it? As with any Ponzi scheme, there are really only two alternatives: allow it to fail, as in the Madoff case, or find some way to perpetuate it. The latter "solution" is, as I argued in my last post, the one chosen, albeit indirectly (i.e., deceptively), by the Obama administration. However, perpetuating a Ponzi scheme can never be a fix -- unless we find some magical way of perpetuating it unto perpetuity, i.e., keeping it afloat forever -- possible only if one has unlimited monetary resources, or is in a position to print ever increasing quantities of money forever. This latter option is indeed being attempted at the present time, under the absurd rubric "quantitative easing" -- and maybe we can pull it off for a while. But sooner or later, the amounts of virtual cash needed to keep the game going will reach truly absurd levels -- and the classic "Emperor's New Clothes" syndrome will inevitably take effect. At some point, confidence in the system will totally collapse, taking the system with it. (See, for example, the recent blog post at The New Republic: Is the Dollar Doomed to Crash? by Zubin Jelveh.) And returning us to our first alternative: allowing the system to fail after all. But the system cannot be allowed to fail. And so on and so forth, ad infinitum.
This is what was called, by the ancient Greeks, an aporia -- literally "without a path" or "impasse."
"Nan-in, a Japanese master during the Meiji era (1868-1912), received a university professor who came to inquire about Zen. Nan-in served tea. He poured his visitor's cup full, and then kept on pouring.
When the nun Chiyono studied Zen under Bukko of Engaku she was unable to attain the fruits of meditation for a long time.
At last one moonlit night she was carrying water in an old pail bound with bamboo. The bamboo broke and the bottom fell out of the pail, and at that moment Chiyono was set free!
In commemoration, she wrote a poem:
In this way and that I tried to save the old pail
Since the bamboo strip was weakening and about
Until at last the bottom fell out.
No more water in the pail!
No more moon in the water!
Monday, June 15, 2009
Back in January, in some of my earliest blog posts, I was already referring to our entire financial system as "a huge Ponzi scheme":
Now, over and over again, we hear that the real problem facing us is the need to restore "confidence." But confidence in what? If a Ponzi scheme is a confidence racket, and if, as many are now beginning to realize, our whole financial system for a great many years now, has been little more than a huge Ponzi scheme, then the restoration of confidence can have only one purpose: the perpetuation of the bubble for as long as possible into the future. Which is in fact what the current "experts" seem to be telling us needs to be done -- only this time by the government, operating as a kind of legal surrogate for all the Bernie Madoffs who no longer have the funds to perpetuate their own versions of the scheme.I was not alone. Here is economist Peter Schiff, as quoted in a Fortune article, also from last January:
"We have an economy that's based on the same principles as Bernie Madoff's investments," he says. "It's a Ponzi economy. It's not real. We don't save and we don't produce anything anymore. We simply borrow from the rest of the world, and then we spend it. We've had a giant party. We bought all these plasma TVs and iPods. We remodeled our houses and took vacations. But you know what? The bills are coming in."In case you don't know who Schiff is, I suggest you take a look at this youtube video, a collection of his market predictions between 2006 and 2007, in which he stands alone among smirking, laughing, supremely overconfident Wall St. pundits, in predicting, with striking accuracy, the disaster that was to befall us in the Autumn of 2008.
I've been criticized for occasionally quoting with approval economists holding strongly conservative views, and Schiff, a Libertarian follower of Ron Paul, is no exception. However, while I definitely do not endorse either Paul or the Libertarian philosophy, this does not mean I can feel free to ignore such people when, on occasion, they get things right. In my view, the conservative position generally is, for the most part, simply laughable. But that doesn't prevent me, along with a great many liberal leaning economists, from agreeing with most Republicans regarding the futile and ultimately destructive nature of the Obama-Geithner-Bernanke "recovery" plan.
While I can agree wholeheartedly with Schiff's analysis of what went wrong, I cannot agree at all with his prescription for the cure: "Shrink the government radically, cancel all bailouts immediately, take plenty of tough medicine, and let the free market do its job - however harsh it may be for, say, autoworkers in the meantime." Schiff should know better, but is blinded by his ideology. It was the free-market, laissez faire, economics of the conservative/ libertarian ideologues that fueled the Ponzi scheme in the first place.
Regardless of what any of us might think regarding a possible cure (in my view NO cure is possible), it is important for all of us to take some time to think a bit about what Ponzi economics is and how it works. Once such a scheme gets started, there is only one way to perpetuate it: pulling in yet more money from yet more investors (aka "suckers"). New money from new investments is used to maintain the appearance of legitimacy by paying off on the old investments. When the returns are substantial, as they must be for the scheme to succeed, then everyone is happy and all progresses smoothly. It's only when it is no longer possible to raise new investment capital that the scheme collapses.
This is what happened to Bernie Madoff last Fall. And it is also what happened to the world financial system over the last several months. Money was being made simply on the basis of new money being invested, and when the source of such investments dried up, i.e., when the banks could no longer raise additional leverage, over and above the huge amounts they'd already raised, the resulting "credit crunch" brought down the entire system. There were no longer any new sources of cash to pay off on all the outstanding investments, loans and collateralized debt obligations (aka "toxic assets").
What the Obama administration wants to see is a financial system that got temporarily out of hand and overextended itself, which under ordinary circumstances would require a certain amount of government intervention to provide temporary liquidity until the imbalances in the system could be corrected. What I see is a Ponzi scheme that, at one point last summer seemed on the verge of total collapse until congress decided to pony up hundreds of billions to keep the thing afloat. Because by then it had become "too big to fail." Since then literally trillions more have been committed to the same effort, either through the sale of treasury bonds, the forced merger of failing institutions with (relatively) healthy ones, huge loan guarantees from the Fed, the totally irresponsible printing of dollars out of thin air, or the easing of accounting rules to give the false impression that failed institutions are actually solvent.
Call it what you will, "quantitative easing," "liquidity enhancement," "financial stabilization," whatever -- when new money, regardless of the source, continues to be fed into any Ponzi scheme, that scheme can be made to look very good indeed. What has been optimistically described as a turning of the corner, the beginnings of a full recovery, based on the appearance of various "green shoots," etc. is, to my eyes, simply the predictable effects of a Ponzi scheme enormously extended, and overextended, through the infusion of huge amounts of highly dubious cash.
At some point, however, the limit will be reached, the source of new funds and/or leverage will evaporate. And when that point comes, then, finally, the hour of full -- and final -- reckoning will be upon us.
Thursday, June 11, 2009
Long ago, the mice had a general council to consider what measures they could take to outwit their common enemy, the Cat. Some said this, and some said that; but at last a young mouse got up and said he had a proposal to make, which he thought would meet the case. "You will all agree," said he, "that our chief danger consists in the sly and treacherous manner in which the enemy approaches us. Now, if we could receive some signal of her approach, we could easily escape from her. I venture, therefore, to propose that a small bell be procured, and attached by a ribbon round the neck of the Cat. By this means we should always know when she was about, and could easily retire while she was in the neighborhood."
This proposal met with general applause, until an old mouse got up and said: "That is all very well, but who is to bell the Cat?" The mice looked at one another and nobody spoke.
The moral: It is easy to propose impossible remedies.
In the present case, "the cat," as I'm sure we're all aware, is not simply one cat, but several. All FAT. The FAT cats who, as we've recently been made aware, but should have known all along, are running this country -- and by extension, the world. Their secret is now out. We know they are running things. And we know, in at least some cases, who they are and even where they live. We are the mice. And the Congressional Democrats, along with our newly elected President, can be understood as the council, brought together to see what measures can be taken to control the anti-social behavior of these FAT CATS before they devour us all. And a solution has been proposed, a solution suspiciously like the solution arrived at by Aesop's mice: "Why don't we hang some regulations on the behavior of these fat cats?" says our young President. And everyone says, "Yes, that sounds like a great idea." Only a wizened old mouse (docG, natch) rolls his eyes and declares: "That is all very well, but who is to regulate the Fat Cats? And how is this to be done?"
Yes, indeed, there's been all sorts of discussion of this matter of regulation and all sorts of things have been proposed. But when the all important question arises of who is going to do the regulating and how the regulating is going to be done, there has been an ominous silence.
So, it should come as no real surprise that the council convened to deal with the problem of controlling the problem posed by the Fat Cats is now declaring for the world to hear that there isn't really a problem at all, it was simply a big mistake. After all, what's good for the Fat Cats is good for the rest of us, right? Didn't we always know that?
Many of the ironies characterizing The Situation In Which We Now Find Ourselves (TSIWWNFO) emerge in a recent New York Times Op-Ed piece, by Wall Street cognoscenti Sandy B. Lewis and William D. Cohan, who insist that, all indications to the contrary, The Economy is Still at the Brink. Here are some highlights:
WHETHER at a fund-raising dinner for wealthy supporters in Beverly Hills, or at an Air Force base in Nevada, or at Charlie Rose’s table in New York City, President Obama is conducting an all-out campaign to try to make us feel a whole lot better about the economy as quickly as possible. “It’s safe to say we have stepped back from the brink, that there is some calm that didn’t exist before,” he told donors at the Beverly Hilton Hotel late last month. Mr. Obama thinks that the way to revive the economy is to restore confidence in it. If the mood is right, the capital will flow. But this belief is dangerously misguided. We are sympathetic to the extraordinary challenge the president faces, but if we’ve learned anything at all two years into the worst financial crisis of our lifetimes, it is that a capital-markets system this dependent on public confidence is a shockingly inadequate foundation upon which to rest our economy. . .Lewis and Cohan then propose a series of especially tough questions for our new President. For example:
The storm is not over, not by a long shot. Huge structural flaws remain in the architecture of our financial system, and many of the fixes that the Obama administration has proposed will do little to address them and may make them worse. . .
Six months ago, nobody believed that our banking system was well designed, functioning smoothly or properly regulated — so why then are we so desperately anxious to restore that model as the status quo? Nearly every new program emanating these days from the Treasury Department — the Term Asset-Backed Securities Loan Facility, the Public Private Investment Program, the “stress tests” of major banks — appears to have been designed to either paper over or to prop up a system that has clearly failed. . .Not that Lewis or Cohan have a much better handle on the fundamental problem than Mssrs. Bernanke, Geithner and Obama. They pride themselves in being Wall St. insiders, and what really gets their goat is the presence of "academics" like Bernanke and Geithner at the helm:
Why is so much effort being put into propping up those at the top of the economic pyramid — the money-center banks, the insurance companies, the hedge funds and so forth — when during a period of deflation like the one we are in, any recovery will come only by restoring the confidence of the people down at the bottom of the pyramid?Confidence will return only when jobs can be found and mortgage payments are made. Even if Mr. Obama’s claim is true that his $780 billion stimulus package “saved or created” some 150,000 jobs, we seem a long way away from the point where those struggling to get by will feel like spending again. What happens when people buy a car once every 10 years instead of once every two or three, especially now that we taxpayers own such a big percentage of the American auto industry?
Why isn’t the Obama administration working night and day to give the public a vastly increased amount of detailed information about what happens in financial markets? . . .
Why is the government still complicit in making the system ever less transparent, even when it comes to what should clearly be considered public information? For instance, it took more than a year for the Federal Reserve to disclose that it had agreed to pay BlackRock — the huge money manager that is 45 percent owned by Bank of America — and others $71 million in a no-bid contract to manage the $30 billion of toxic assets that JPMorgan did not want when it bought Bear Stearns in March 2008. And that is only one of the five contracts BlackRock has with the government as a result of this crisis — the nature of the other contracts remains secret. . .
Why hasn’t President Obama insisted on public hearings over what happened during this financial crisis?Not a single top executive of a Wall Street securities firm responsible for causing the financial crisis has had the courage or the decency to step forward in front of the cameras and explain to the American people in his own words exactly how and why he allowed his firm to cause the crisis. Both Mr. Fuld and Alan Schwartz, the chief executive of Bear Stearns at the end, in their Congressional testimony blamed the proverbial once-in-a-century financial tsunami. Do they or any of their peers really think this is true?
The bit about "putting the fox in charge of the henhouse" says it all, as far as I am concerned. Bernanke and Geithner may well be clueless academics, but shrewd Wall Street "foxes" like these guys we need like a hole in the head.
Why has Mr. Obama surrounded himself largely with economic advisers who are theoreticians and academics — distinguished though they may be — but not those who have sat on a trading desk, made a market, managed a portfolio or set a spread?In our view, one of the ways out of this economic conundrum is to have experienced traders — not hothouse flowers — design incentives that will encourage the market to have buyers and sellers meet anew around the proper valuations of assets, not some artificial construct of a market propped up by a pliant Financial Accounting Standards Board or government-sponsored programs that appear to be virtually giving money away to hedge funds and private-equity firms so that they will buy assets they would not ordinarily buy. We’re not talking about putting the fox in charge of the henhouse, just putting people who know how markets function in the real world into the important seats in Washington.
Meanwhile, back at the henhouse, it seems as though things are really not so bad, so maybe the old cat (aka fox) might not need a bell after all. Here's what Philip Stephens of the Financial Times has to say, in an article called Crisis? What Crisis? The Market Confounds the Left:
Surely it was only yesterday that the west was engulfed by the crisis of capitalism? Markets buckled under the strains of the credit crunch. Portraits of Adam Smith made way for freshly-burnished busts of John Maynard Keynes. Popular rage against greedy bankers promised to restore politics to parties of the left.
Pace the doomsayers who predicted imminent Armageddon, liberal market capitalism has survived: somewhat humbled and, in the case of the financial services industry under much tighter official supervision, but recognisably much as it was. Governments have stepped in to prop up markets rather than to dismantle them. Nationalising the banks has been a means to an end rather than an end in itself. . .
. . . [P]redictions of a return to the 1930s have proved as misjudged as the reckless complacency of policymakers and economists during the boom years. This week banks started paying back some of the money they borrowed from taxpayers.
Yes, indeed, those banks that took billions from the US Treasury are now eager to pay it all back. And, yes, it seems as though they might actually be able to raise at least some of that money on their own. Whoda thunk it? Never mind that their lobbyists succeeded in getting new accounting rules put into place, rules that have enabled them to claim their "toxic assets" are actually worth just about whatever they want to say they're worth. And never mind that other sources of government largess, including billions in loan guarantees, plus a commitment from the Treasury and the Fed that they will not be permitted to go under regardless of the circumstances, i.e., regardless of how recklessly they continue to play their same old same old market games.
And if that weren't outrageous enough, here's another huge "revelation" regarding these same incredibly resilient institutions: the vaunted Public-Private Investment Program (PPIP), instituted by the government to take the burden of all those toxic "assets" off the books of the failing banks, is -- we are now being told -- not really necessary. The banks would rather not sell them after all. No need. Again, thanks to the same new bookkeeping rules. Since they need not be valued on a mark to market basis, they can be valued on a mark to madness basis -- which suits the bankers fine, since they are the ones who invented that same madness in the first place.
Just how mad that madness can get is neatly summarized in an article by Felix Salmon, of Reuters, Why the failed PPIP should prevent TARP repayments:
When the PPIP was introduced, everybody was scared about the amount of toxic assets on banks’ balance sheets. Don’t worry, said Tim Geithner: between the stress tests and the PPIP, we’re going to be able to put a price on all those toxic assets, work out what the banks’ losses are, and ensure that the banks have enough capital to absorb those losses.
The market loved this idea, and started going up rather than down, to the point at which people weren’t scared any more about the amount of toxic assets on banks’ balance sheets. And so it didn’t matter that the adverse scenario in the stress tests is looking positively sunny these days. And it didn’t matter that PPIP disappeared with a whimper, the toxic assets no more priced now than they were six months ago. So long as the stock markets are happy, what’s to worry about?
In other words, the market went up because investors were reassured that the PPIP plan was going to deal effectively with the problem posed by all those toxic assets. But since the market went up, boosting the value of the bank stocks, the bankers have decided they don't really need PPIP after all. And the investors no longer care, because, as the man says: "So long as the stock markets are happy, what’s to worry about?" Talk about a shell game!
What's important to the US economy, in other words, is not that we ever become truly solvent or that our economy ever really recovers or that we emerge from this catastrophe with any semblance of a social safety net, or decent employment opportunities, or a market for our goods, etc., etc., but that the compensation packages of the bankers and other masters of the financial universe be maintained at full value or better, no matter what. It is easy to propose impossible remedies. That's for sure. And when it comes to belling these particular Fat Cats, the remedy may well be just that: impossible.
Tuesday, June 2, 2009
Sure, prices went down during the depression, but that is NOT what caused it. The last depression was caused by the same greed, manipulation, deception and dishonesty that caused this one. If anything made the last depression tolerable and, no doubt, saved millions from the streets or worse, it was deflation, i.e. lower prices. And if there is anything that could make our present situation truly impossible, for everyone concerned (aside from the bankers and their sycophants), it would be what the geniuses in Washington seem bound and determined to produce: inflation, aka higher prices.To my immense gratification, I recently found an article, written in 2003, by a leading economist, Llewellyn H. Rockwell, Jr., of the Ludwig von Mises Institute, that expresses essentially the same view. It's called, appropriately enough, The Blessings of Deflation. Here's some of what Professor Rockwell has to say:
Now we get to the crux of the matter: the Great Depression. The assumption is that falling prices somehow caused the economy to crumble. In fact, it was the after-effects of the boom combined with massive government intervention that caused the depression. The only silver lining in the entire period of the 1930s was precisely the falling prices that made the dollar count for more. Falling prices (a falling cost of living) are what Murray Rothbard has described as the "great advantage" of recessions. If you can imagine the Great Depression without falling prices, you have conjured up an image that is far worse than the reality.So, first of all, it's important to remember that the "deflationary spiral" held up as a kind of economic bogeyman by the bankers and their government enablers is in fact, as far as the great majority is concerned, the best possible response to the financial collapse we are now experiencing. But, second of all, and this is my real point here, it looks to be the only means of getting our economy back on track, now that the "free market" investment mirage has been dispelled and it's increasingly clear that we must actually earn our way to economic health from now on.
Ask yourself whether during economic downturns, you want your money to grow or shrink in value? If your future job security is in doubt, do you want to pay more or less for goods? If your savings are meager, do you want them to have more or less purchasing power in the future? If you answer these questions rationally, you can see that deflation is wonderful for everyone, and the saving grace of a period of economic contraction. Throughout the 19th century, prices fell in periods of economic growth, which is precisely what one might expect. This is all to the good.
What's needed, however, goes far beyond anything that happened in the Great Depression. We don't just need deflation, we need a veritable Tsunami of deflation, a deflationary spiral that will take our economy on a truly frightening, but absolutely necessary, ride, all the way to the abyss. But please: do not panic. Before everyone reading here has an absolute fit, it's important for all of us to remember that what we are talking about here is money. Only money. The deflationary spiral of which I speak will effect the value of pieces of paper -- and their virtual counterparts in the world of electronic banking. No resources will be destroyed, no jobs (necessarily) lost. No living creatures, human or otherwise, will (necessarily) be harmed by what I am proposing.
I've added those parenthetic "necessarily"s because everything depends on how our deflationary Tsumani develops. If it occurs in an orderly, controlled manner, then no harm will be done. If it occurs in a lopsided, uncontrolled manner, in which the natural forces impelling us toward deflation are continually undermined by artificial attempts to reverse the trend, through additional government borrowing, or the frantic printing of endless amounts of money (so-called "quantitative easing") as is now being attempted, then some very serious distortions will develop, which could be devastating.
Why do we need this? The reason can be found in my previous post. We presently cannot compete with third world industries and labor, because we have literally priced ourselves out of the world markets. Our role as the world's most extravagant consumer culture ended rather abruptly when all our credit dried up. Not enough of us are now making enough income to actually purchase all the stuff we used to put on the credit card tab, which means that, as far as the world economy is concerned, we have made ourselves irrelevant. Third world producers are still in shock over this turn of events, since we (or rather the con men who kept lending us other people's money) were their best customers.
They will adapt, however, to the new situation, also via a drastic process of deflation, but of a somewhat different kind -- a price deflation that will ultimately place their goods within reach of the workers who manufacture them, whose incomes will be steadily rising as part of the same process. If our own economy deflates sufficiently, then we will finally be able to legitimately compete in this market. And if all goes reasonably smoothly (let us pray), it will be a tremendous market that could have the potential to revolutionize the world economy as has nothing else since the industrial revolution.
What difference does it make if I earn $80,000 a year, $8,000 a year or $800 a year, so long as my living expenses, and the cost of consumer items I might desire, have been adjusted accordingly? During the Great Depression, my father, a highly skilled tailor and sewing machine operator, was always able to find a job. But his income was often meager, sometimes as low as $15 a week. However, as he explained to me, his rent was less than $10 a month, and he could buy a very satisfactory restaurant meal for around 25 cents! He was able to live adequately on what he earned, put something away toward the car he eventually bought, and have enough left over to participate with his brothers and sister in the support of their mother.
I'm not advocating the impoverishment of the American working class. That is something that's already happening, as we know very well, especially from the events of this week, with the bankruptcy of General Motors and the consequent loss of what will amount to tens of millions of jobs. What I'm contemplating is very different: the adjustment of the US economy as a whole to the realities of the new global economy, the real one, not the phony one promoted by the "masters of the universe." In order to adjust meaningfully, we have to give up all the phony pipe-dreams and find a way for American industry to once again compete.
Monday, June 1, 2009
Let's face it, the real engine of growth in this country over the last 25 years -- or more -- has been the financial industry, which has accounted for a whopping percentage of the GNP. And if it gets cut down to size, as MUST happen, then what will become the basis for the American economy during the "recovery"? Where will the jobs be?My own personal preference is for a managed economy, where jobs and resources are allocated on the basis of ability and need. You know the drill: "from each according to his ability, to each according to his need." Karl Marx -- via Jesus Christ. (If you can't find it in the New Testament, it's because you don't know how to read between the lines.)
Since hardly anyone in this country really cares much for the gospel according to either Marx or Christ, there's no point in going on forever along such lines. In my opinion, we'll eventually get a managed economy whether we want one or not, but meanwhile, for the benefit of those bound and determined to fight socialism, in any way shape manner and form, to the bitter end, it might be fun to contemplate what sort of future capitalism might have as the current financial crisis inevitably morphs into an economic crisis of unprecedented depth and breadth. So here goes:
The really really deep -- deep deep deep -- fundamental beyond all other fundamentals -- reason for the situation in which we now find ourselves (SIWWNFO), is not really the greed, mismanagement and outright corruption of the knaves and fools who've been driving the financial markets, though that's certainly been a hugely contributory factor. No, the most fundamental reason is a very gradual, but probably inevitable, rise in awareness and aspiration, also education and ability, on the part of the hundreds of millions of third world citizens who have for much too long been willing to labor continually, day and night, week after week, month after month, without complaint, in order to simply subsist on the margins, regardless of the debilitating work, the grinding poverty and the endless cruelty and exploitation they've been forced to endure. Over a considerable length of time, this group has gradually made itself aware, or been made aware (probably a little of both) of its economic power. Which is not to say that it isn't still being exploited, because the exploitation has probably, in most cases, gotten even worse. No, what is different is that this group has now made its appearance on the radar of the world economy and is now becoming a force to be reckoned with on the global labor markets.
But you already knew that, didn't you? Only you were content to think of it merely as "outsourcing." And you've been conditioned to believe that many of our problems will be over once we force our manufacturers, service providers, information processors, etc., to end this practice so we can have all our wonderful jobs back. Dream on. Capitalism is based not only on greed and manipulation of financial markets, but also, and fundamentally, on competition. So if you are really truly devoted to the principles of "free market" capitilalism, you are going, at some point, to be forced to admit that we, in the good old US of A, are no longer in a position to compete on the world market.
Our labor force can no longer compete. Because we both expect and need far more income than our competitors, who can now do the same jobs just as well, but for a fraction of the cost. And our products can no longer compete, because the costs of producing such products in the USA are far greater than they are when produced abroad.
Don't give up hope, however, because, as I promised, there is an answer. You might not want to hear it, but I swear that for now at least I will have nothing whatever to say about the joys of socialism. My answer lies totally and completely within the realm of capitalism. Within this realm, we have one hope and one hope only: deflation.
(to be continued)