‘Reports that say there’s — that something hasn’t happened are always interesting to me, because as we know, there are known knowns; there are things that we know that we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns, the ones we don’t know we don’t know’.
Donald Rumsfeld famously fashioned his wonderfully surrealist philosophy of American intelligence in 2002. In specifics he was referring to weapons of mass destruction. Fundamental to his (cough) reasoning was that the fact of Iraqi WMD, which was a given that could not be contradicted.
Planning was simply a matter of organising events so that they never could contradict this given, even when it was obvious that there was no prospect of weapons ever being found. After a decade of resulting chaos, slaughter and suffering in Iraq it can be said that in contradistinction to the well known aphorism: There is madness in his method.
Methodical madness is an appropriate way to sum up what is going on in Crackernomics.
The Known Knowns-That Is What We Know We Know.
We know that Bank of England base rate is going to be two and a half percent. How do we know this ?- because George Carney says it is 1
Carney tells us we should know that
“The old normal is not the new normal. It is not likely to be the new normal,”
The “vulnerable position” of family finances means any increases will be “more limited and more gradual than in the past”.
‘Things have changed. Households have a lot of debt. The Government is consolidating its financial position. Europe is weak. The pound is strong.
Apart from a disconcerting similarity to the ‘war is peace ‘ catechism in 1984 this is unremarkable. But then Carney says this:
‘The financial system has been fundamentally changed – it has to carry a lot more capital,‘ it has to carry a lot more liquidity insurance and it will pass on those costs to borrowers’
Keep that last bit in mind. It simply doesn’t make sense-does it? Surely permanently increased costs for the banks should mean rates higher than the previous long term average-not lower? What could be the explanation for this apparent contradiction?
We’ll come back to this.
Another thing we know that we know is that less is never more when it comes to banks and banking:
In the Telegraph:
‘In an attempt to make the banking market more competitive, the Government has given the FCA and PRA new powers after a perceived failure of their predecessor, the Financial Services Authority (FSA), to encourage new entrants’.
‘Whereas just five new banks were given the green light in the year to April – roughly the average over the previous seven years – 25 applicants met the regulators to discuss entering the banking market, the FCA and PRA said in a review of barriers to entry for banks’.3
So we need more institutions that can potentially fail to choose from. Which is a bit like keeping a house fire going until the firefighters can arrive to put it out…
After the ‘known knowns’ there are the:
Known Unknowns Or Things We Know We Don’t Know
We don’t know why the USA economy shrunk in the first quarter- could be something to do with the weather( Isn’t this usually an English excuse?)
We don’t know why British manufacturing showed a surprise drop in output5
The Bank of International Settlements is telling everybody that it knows that the Wall Street party must end but it doesn’t know what is going to happen4
We also know that banking in Europe is in a perilous condition6 There is a constant low level rumble of banking failure stories, particularly on the periphery of Europe. It seems inevitable that one of them is going to get out of hand.
Which brings us to:
The Unknown Known
‘Psychoanalytic philosopher Slavoj Žižek extrapolates from (these) three categories a fourth, the unknown known, that which we intentionally refuse to acknowledge that we know’….
‘Abu Ghraib scandal shows that the main dangers lie in the “unknown knowns” – the disavowed beliefs, suppositions and obscene practices we pretend not to know about, even though they form the background of our public values.”
What links all the economic stories I have referred to is the element of ‘surprise’- a ‘surprise’ fall in output, a ‘surprise’ run on the bank. Everything seems to be a surprise. Like the ‘surprise’ lack of WMD and the ‘surprise’ decent of Iraq into chaos. The ‘surprise’ heart attack on the way to your daily visit to Dunkin Donuts. Why is there no general attempt to link cause and effect in the mainstream media?
There seems to be an unwritten agreement in the mainstream media to express general bafflement when disconcerting stories come up. They simply don’t make sense do they? Not if interest rates are going to be 2 ½ %. And interest rates ARE going to be 2 ½ %. So these stories probably don’t mean anything…
Which brings us finally to
Unknown Unknowns or more accurately The Great Unknown
The size and nature of the shadow economy is the greatest unknown of all. And this is deliberate. The Democratisation of Money is the privatisation of information, (Secret Economy). This seems hardly believable, but it is happening. The democratisation of money is linked directly to the figure of two and a half percent itself.
I can usefully return to the metaphor of a bookie. When you bet on a horse race you are not actually betting on which horse will come first. You are actually betting on whether the bookie will pay out or not. That is what a bet is- a number of people put money in a specific pot and generally a smaller number of people take money back out, triggered by a specific event. The ‘odds’ that you are given reflect this risk of being paid out. The smaller the book for any given race, the smaller the odds (potential payout) that can offered by the bookie. If only two people bet on a race and the total amount of their bets is $14, the bookie can’t offer odds of 100/1 on one or another horse. He would simply go bankrupt in short order.
The same is true of money. The central bank interest rate is the odds on money being exchangeable for value at any given time. The odds are directly related to the total size of the book- the economy.
The two and half percent interest rate and increased capital (state money) requirements go hand in hand. They are a reflection of the fact that the state money book has shrunk. That a significant proportion of the economy is now in the hands of derivatives.
Just like nation states, financial institutions that create and trade in privately issued money- democratised money, are required to hold foreign currency as a hedge. In other words forced to hold an increased amount of dollars or pounds to offset the risk of holding derivatives. This increased requirement to hold state money currency is called macro prudential policy.
It is not banks and financial institutions that are being squeezed by the new rules. It is the state money component of their assets that is being squeezed. State money is being squeezed by MONETARIST politicians. The state money book is smaller so the odds (interest rate) it can offer is smaller. What state money there is, will now permanently be used in part as a guarantee for privately issued money derivatives. That is how interest rates can be lower despite bank costs being higher.
So what proportion of the economy is in the hands of derivatives?
The long term average for interest rates in the post war period was around 5%. Previously I have suggested in line with a number of other commentators that the new normal for interest rates would be somewhere around 3-3 ½ %. Now Carney says 2 ½ %.
Which means the proportion of the economy which will be allocated to privately issued money- derivatives, is going to be bigger than I thought. Given the difference between 5% and 2 ½% it indicates that HALF the economy will be allocated to democratised money.
Which is a lot of democratised money.
Know what I mean?
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