Elementary My Dear Watson Or Or It’s Your Private Life, Come On Baby Leave Me Out Or The Economic Dark Ages Or Not With A Bang But A Whimper

sherlock

‘Once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth’.

Arthur Conan Doyle

 

As you know, on December 16th 2015 the American Federal Reserve Committee finally produced a 25 point increase in its short term lending rate indicating that the most recent phase of QE is over. This is what Churchill might have referred to as the ‘end of the beginning’ in the ongoing Quantitative Easing saga that has been unfolding in the seven years since the Credit Crunch…

 

There are pundits and bystanders who said this day could never come- lots of them. The idea that central banks would forever be unable to taper QE became accepted wisdom in a whole host of chat forums, blogs and media outlets.

 

But the Feds clear determination to go ahead with rate increases has recently resulted in much rhetorical trimming. Just as the smart money started to get out of junk bonds so smart mouths began to get out of ‘no taper’ talk.

 

As is always the case with these things, over the coming months it will get increasingly harder to find anyone who will be prepared to admit to having ever argued that the Fed could not taper. By next summer all that will remain of the ‘libertarian’ insurgent critique of Fed policy will be a hard core rump that doggedly maintains:

 

  1. Rate increases don’t mean anything because they are part of some kind of elaborate international financial scam.

 

  1. Rate increases are the cause of imminent fiscal Armageddon; first for the American economy and then for the world.

 

For years Crackernomics has consistently predicted and anticipated increases in interest rates as part of the ongoing democratisation of money. Not only did I argue that interest rates must happen, but I even went so far as to specify what the final general rate of interest would be.

 

I argued that the Federal Reserve, together with the Bank of England will lead a global move to implement gradual interest rate increases until they reach a level of around 3%.

 

There is a solid logical reason why interest rate increases are happening and why they are happening now. This decision is not arbitrary or meaningless. There is also a solid logical reason why central bank interest rates will finally be pegged at around 3%. This is not arbitrary either. But the reasons that interest rates are being modeled this way have nothing to do with the ragbag of guesses and speculations commonly cited in both mainstream and alternative media.

 

We can apply Conan Doyle’s famous dictum: ‘Once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth.’ to the various explanations and excuses usually given for tightening. Once we have finally cleared out of the way what can’t be, we can close in on what the only logical reason for rate raising can be – implementing the democratisation of money.

 

 

Inflation

 

Since the mid 1970’s inflation has been the granddaddy of all excuses for Monetarist central-bank intervention in the setting of bank interest rates. In Monetarist lore inflation is the ISIS of economics necessitating distasteful but necessary waterboarding of the traditional ‘free market’ economy in the interests of defending the status quo. So could inflation (or deflation), be the reason that the Federal reserve has decided to trigger an interest rate rise now?

 

Such an idea will stand up for about thirty seconds. It has become entirely clear that central banks are unwilling or unable to systematically affect the inflation rate in the USA, England or anywhere else –most famously in Japan, (the home of ‘QE’), where the economy is into the second decade of missed inflation targets.

 

It is important to remember that in the initial period of the post Credit Crunch crisis Britain regularly recorded inflation much higher than the target 2% rate. But since the essence of QE was to lower interest rates to the zero bound, after QE started there was no available means of affecting inflation by QE monetary policy.

 

Fair enough, this much was understandable, even predictable given the restraints that QE places on monetary policy. However, when it became apparent that inflation was going to fall a long way below the 2% target mark, you might reasonably ask: Why did the B of E take no effective action and raise rates then ?

 

When inflation started to fall Monetarist central bankers didn’t propose any serious action to prevent it. Instead they immediately cited other factors in support of what was the obviously already made decision to maintain low interest rates.

 

Throughout the entirety of the credit crunch and the ensuing crisis Monetarist central bank targets for inflation have consistently either been over or undershot, and by a significant margin. The failure to achieve two percent inflation is simply avoided or effectively dismissed by the vast majority or economists and media whenever questions are raised about it. For whatever reason it is absolutely clear that the Fed and B of E are unwilling to directly and systematically produce a 2% inflation rate.

 

It is clear that controlling inflation/deflation cannot be the reason why the Fed has decided to raise interest rates now.

 

Employment

 

The rate of employment is often cited as the most important secondary factor in the decision to raise interest rates. The rate of employment is often given as a rough and ready measure of the health of the economy.

 

In the USA the official estimate of employment at this time stands at around 5% but credible unofficial estimates of unemployment can be as high as 10-15%. This is a massive discrepancy and not one that is easily explained. No problem though; just like the unachieved inflation target, mainstream economics simply does not bother trying to explain it.

 

Whether or not the actual unemployment figures stack up, we should ask the question: Does tightening monetary policy help create sustainable employment?

 

The answer must certainly be no. Restricting the money supply by increasing interest rates always has an adverse effect on employment rates. The actual argument employed by rate hawks is that the economy can stand increased interest rates despite the adverse effect this will have on employment.

 

So promoting increased employment (whatever the actual rate of employment is), cannot be the reason for tightening interest rates.

 

Credit bonds and markets

 

Bond and equity markets have increasingly become skewed towards riskier activity as a result of QE. The energy sector, in particular bonds issued by fracking companies, are often cited as a particularly egregious example of this ‘misallocation’ of capital.

 

It is generally agreed across the board that increasing interest rates means that a disordered exit from bonds and equities is made more likely. It follows from this that companies with dodgy credit will not able to fund further development and expansion. It is only a matter of time before this inability to raise capital and service debt will have serious, and probably fatal, consequences for a whole range of business concerns. Systematic financial breakdown is baked into this interest rate rise cake.

 

The trend for stock buy backs and other forms of equity manipulation will also begin to shut down under the effect of incrementally increased interest rates. We can expect a whole raft of stock market activity to cease and indexes to shift permanently significantly lower. Again, like employment this is a negative factor, but the argument from hawks is that rates should be raised despite these effects.

 

So protecting and improving the prospects for bond and equity markets cannot be the reason for increasing interest rates

 

International Movement Of Capital

 

Closely related to the effect on domestic bonds and equities is the effect on international capital markets of an increase in American interest rates. This will result in a rise in the exchange rate of the dollar, making access to dollar capital more difficult for developing economies and existing dollar denominated debt much more difficult to pay back. As a result developing nations will inevitably be forced to move further away from the dollar denominated sphere of influence.

None of this is positive for dollar trade with the world. Rebalancing the international credit and debt markets in favour of dollar trade cannot be the reason for increasing interest rates.

Personal debt

 

Personal debt is always threatening to get out of hand in both America and Britain. This new credit reality is closely related to semi permanent bubbles in both the housing sector and long term educational expenses which continue to expand relentlessly in the Anglo Saxon world. Any interest rate rise can only have one effect on personal debt- and it is not a good one.

 

So preventing widespread personal debt meltdown cannot be the reason for raising interest rates.

There you have it. I have briefly reviewed the main factors that are supposed to have been taken into consideration in the feds deliberations and shown how in each case they argue against a rate raise, if they affect the outcome at all.

 

Central bank rates:

 

  • Have had no direct calculable effect on inflation or deflation so far
  • If increased, raise unemployment
  • If increased, cause dislocation in capital equity and bond markets
  • And cause dislocation in developing economies
  • If increased, exacerbate personal debt problems

 

Does this mean that interest rate manipulation has no relationship to the real economy? Not at all, but it is not the relationship we are encouraged to discuss.

 

The Real Relationship Between ZIRP, QE And The Economy

 

Things have changed over the past seven years and QE has worked- in some territories more comprehensively than others. It has provided the time and space for a systematic restructuring of both consumer and labour markets.

 

We can easily observe that what has changed dramatically over the past seven years is the definition of employment (and therefore unemployment). It would not be an exaggeration to say that this change in the definition of what employment is has become the defining factor in describing the modified post credit crunch economy.

Changes in the form and content of labour are portrayed as technical innovations but in fact they can more accurately be described as the effects of the democratisation of money. The ‘sharing’ or ‘gig’ economy created by ‘Uber’ etc. is not an expression of supposed advances in mobile technology anymore than Bitcoin is the result of a few lines of code; it is an expression of a comprehensive breakdown of the post WWII social order.

 

Work is increasingly becoming casualised; the traditional protections and benefits that have been associated with full-time working in the developed world have been eroded to the extent that they are now only really applicable to a small and ever decreasing minority of workers in the public service sector and government.

 

The proliferation of zero hour contracts are a striking example of this casualisation of labour, and for a very specific reason. It is not simply a matter of worse terms and conditions or the failure of wages to keep up with prices.

 

Innovations such as zero hour contracts make it virtually impossible even to be able to understand who is actually employed and who is not employed. Employment and unemployment as we previously understood them have been defined out of existence. Is someone on a zero hours contract employed or unemployed? There is no way of telling until you go and take a look- just like Schrodinger’s  Cat…this is quantum employment.

 

A massive leap in the number of people who are effectively self employed has produced a corresponding leap in the numbers who are effectively self unemployed.

 

One of the major victories of Monetarism in the Anglo Saxon world has been to redefine unemployment as a private, not a public matter. Just like Grace Jones’ sociopathic 80’s anthem has it: ‘It’s your private life.. leave me out..’

 

Changes in the definition of employment feed directly into changes in the way that inflation is calculated and understood. The main justification of monetarist central-bank interventionists has always been the danger of a wage inflation spiral. In other words, it is primarily regulating and disciplining wage settlements that make the decisive difference in the battle against inflation.

 

Without an integrated social labour market mechanism supported by trades union and collective bargaining there is simply no means to systematically produce wage inflation.

 

This is reflected in the continued failure of wage growth over the past seven years. In response to this developing problem even a nominally right wing government in Britain adopts a long term ‘socialist’ strategy of increasing minimum wage levels to create wage ‘growth’. And across Europe we see the emergence of various guaranteed income proposals and ‘peoples QE’.

 

Everywhere the state is being forced to consider stepping in to create wage/income ‘growth’ because the complex social structures that supported collective wage bargaining have been deliberately collapsed.

 

Without systematic wage growth there can be no systemic inflation. This was always the dream of Monetarists; to make inflation episodic and isolated, breaking what they called the ‘wage inflation spiral’. In Monetaristland where inflation broke out it would be suffered in isolation by small groups who would be unable to pass it on to the economy as a whole through wage increases or price rises.

 

As a consequence, we experience high rates of inflation in some specific areas and deflation in others. Since these isolated and specific patches of embedded long term inflation are becoming the norm, it is becoming untenable to claim that a generalised inflation rate as it is calculated is an adequate reflection of the reality of the economy. Monetarists are entirely aware of this and are making their plans accordingly…

 

A pattern is beginning to emerge here.

 

Economic Dark Age

 

As expressed through employment and inflation democratised money is being used to restructure, redefine, and reinterpret the labour market and the relationship between consumers and workers and the economy as a whole.

 

The nature of this restructuring is to create a situation where it is harder and harder to see the overall picture- understanding is deliberately being fragmented. I have referred to this on previous occasions as the creation of The Secret Economy. How much employment there is like how much inflation, is becoming unknowable. The economy and the information it represents is becoming balkanised.

 

This Economic Dark Age is entirely intended. Politics in the last century was about justifying the discrepancy between the wealth that accrues to capital and the wealth that accrues to labour. And elites comprehensively lost that argument. This century is going to be all about obscuring the discrepancy between the wealth that accrues to capital and the wealth that accrues to labour. Elites are moving the fight onto ground that suits them better…

 

What has been particularly striking about the past year has been the way in which even well established economic perspectives have begun to break down and become episodic and increasingly incoherent.

 

The entire ‘will she, won’t she?’ rate raising game itself is part of reducing any comprehensive view of the economy to a meaningless tussle over week to week tactics with no consideration of what these changes will mean in the long run. To be perfectly frank, I believe this is entirely intentional.

 

Intellectual and political elites in developed economies have no interest in contributing to a comprehensive narrative now. In the same way that a declining American empire prefers confusion and chaos to international law and order, the intellectual elites of late term capitalism prefer intellectual chaos to trying and failing to dominate a global argument about economics. The elite is preparing to effectively abandon ordered thought itself, and it was always entirely and inevitably the case that this would be done in silence..

‘This is the way the world ends

This is the way the world ends

This is the way the world ends

Not with a bang but a whimper..’

 

 

But Crackernomics is here to prove it is entirely possible to build a comprehensive picture of the world as it is developing in the 21st C. But that uphilll struggle is going to be harder than even I thought. The very idea that a coherent world view is even possible has become part of the battle.

 

Since it is easy to show that none of the professed excuses stand up as a reason for increasing interest rates now, if you are at all interested in maintaining some semblance of logical thought, it is clearly time to explore the one reason that has been avoided by mainstream economists.

 

Despite the wholesale destruction and chaos they have caused, derivatives have been successfully protected from any serious attempt to control and restrict their ever expanding use over the past seven years.

 

Derivatives (privately issued money), are once again barely discussed in the media. This is a measure of the Monetarist central banks success. And now that derivatives are once again safe and sound and secret, the Monetarist Federal reserve feels free to move on to the next stage of its programme..the division of the world economy into roughly 50-60% government issued currency and 40-50% privately issued currency (derivatives).

 

That is why interest rates have been raised at this time.

 

NB: My very best wishes to those who have read and followed the United States of Everywhere through 2015.

 

Particular thanks to Dave Harrison for his very helpful ‘nudges’ in the right direction..

 

 

 

 

Meet The ‘New Deal’, Same As The…. Or She Is Mocking Us,, Not Samson Or Smile Caroline, There’s Justice In The World…Or Crazy Like A Fox

rare25

 One King for Another……

 

 

In the first two parts of this series I argued that the pyramid model which lies at the heart of ‘left’ and ‘right’ conceptions of society is limited and ultimately a barrier to understanding what happened in the lead up to the credit crunch and its aftermath.

 

I argued that a dynamic vector model of society is a better reflection of reality because it captures fluidity or movement within the economic system. The original dynamic vector model I suggested was made up of a ‘Feudal’ or integrating vector and later an added ‘Capitalist’ or disintegrating vector.

 

An economic vector is precisely a means of concentrating or distributing wealth and power. All societies are concerned fundamentally with this; collecting and concentrating social power and wealth and then re-distributing it to those who are ‘worthy’. All politics and economics are derived from this central process.

 

A dynamic vector model offers insight into specific episodes in history, (the American Continental War was one such example I used), and into the very idea of history and progress as we receive it from established sources. More fundamentally, dynamic vector history offers the observation that establishment history can no longer claim some supposed essential difference between feudal and capitalist elite often characterised as the ‘Enlightenment’.

 

On the contrary, the vector model shows that it was entirely possible for the feudal and emerging capitalist systems to exist side by side at the ‘top’ of society. Rather than capitalism being a supposedly unstoppable revolutionary force, it was feudalists recognising continuing inexorable disempowerment at the hands of the capitalist vector that brought about ‘revolutionary’ civil conflicts. This is nowhere truer than in the case of King Charles and the Puritans in England.

 

In fact, rather than capitalism (as the Anglo Saxon Establishment would have you believe), being implacably opposed to feudalism, throughout its development the capitalist vector has systematically relied on a feudalist vector for its protection and survival. The rhetoric is of undying hostility (in the Protestant world at least), but the reality is one of pragmatic accommodation.

 

To understand the relationship between feudalism and capitalism, the capitalist recognition of the necessity of feudalism, is to begin to perceive a key difference between Germanic and Anglo Saxon (Protestant) ideology and continental (Catholic), ideology in Western Europe.

 

The creation of a capitalist vector allows a section of society to potentially permanently dis-integrate itself from society as a whole. But the capitalist vector needs to re-create a version of the feudal vector if it is to disengage from actively managing society and concentrate on making itself as separately wealthy and powerful as possible.

 

The more advanced and sophisticated a capitalist elite, the more it relies upon a ‘socialist’ feudalist vector to manage and integrate the remainder of society. The ability to manage feudalistic redistribution of wealth is usually taken as the key determinant of capitalist development; the successful (or unsuccessful), evolution of every advanced capitalist nation can be described in terms of a relationship with feudalism.

 

The secret is to tame the’ excesses’ of feudalism. This is the historical necessity of Protestantism in North Western Europe; to reform/undermine the feudal integrated society so that it can become a useful servant to the capitalist vector. Or think of it as a Catholic/Samson and a Protestant/Delilah who cut his hair while he slept and delivered him into the hands of the Philistines.

‘She is mocking us…not Samson’

This leads to the observation that the ‘socialist’ left is in reality the justification for a feudal vector. This is the service that the ‘left’ performs for capitalism. This is why establishment left parties exist; if they did not perform a useful service they would certainly not be there. If you doubt this observation, consider the history of left parties in Latin America in this context.

 

The welfare, integrating, feudal left is useful not because it offers the promise of benefits of the future, but because it offers the hope of preserving some of the protections and freedoms from the past!

 

The idea that people could have been in some ways freer in the past than they are now will be met with horror and even outrage by proponents of Germanic Capitalism and Socialism alike for this is blasphemy against the Germanic religion of Progress ( as in; ‘when we took over, that was progress’…)

 

Implacable opposition to anything that challenges the idea of a ‘Dark Ages’ is one of many similarities that Socialist Cane and Capitalist Abel (or is it the other way?), have in common but neither wishes to acknowledge.

 

This way of understanding the relationship between left and right, feudal and capitalist, is more than an intellectual curiosity. It leads us directly to a deeper understanding of the post credit crunch world.

 

One of the main reasons I began the United States of Everywhere blog was to try to understand the comprehensive and systematic failure of the left in the aftermath of the credit crunch. It doesn’t matter whether you accept or support any of the ideas, preconceptions or prejudices of the left; understanding its effective collapse over the past couple of decades is vital to building up a useful picture of why we are where we are.

 

In theory it was all over after the financial mega collapse- all the ‘left’ had to do was to pick up the marbles and declare the game won. Capitalism was now totally dependent upon the mercy of the state; ‘free market capitalism’ if it had ever really existed was completely discredited now. But that was very certainly not what happened.

 

In fact the Neo Conservative right has been consistently strengthened over the subsequent years and even more startling, the libertarian right has emerged as the only social force with anything substantially critical to say about the systematic nature of the changes we have seen.

 

In attempting to understand the failure of the left I realised that I would have to go outside the bounds of traditional economic argument. I began to describe Whiteism which links Germanic culture, history and identity to contemporary questions of economics.

 

Financialisation is intimately linked to questions of the development of the left and its relationship to feudalism and especially the development of Neo Conservatism. And this in turn leads to the relationship between Trotskyism and Neo Conservatism in the context of American history.

 

Capitalists successfully disengaged by means of creating the modern welfare state (feudal vector) in Europe beginning in the late 1940’s but it took another two decades until this process was played out in 1960’s America.

 

America’s capitalist vector had priorities that were substantially historically different to those of Western Europe but as I noted America was always willing to pragmatically embrace feudal practice if it thought it necessary (as in Washington) .

 

This brings us to the rather ironically named ‘New Deal’, (since it should be more accurately described as the ‘Old Deal’), programme instituted by Franklin Roosevelt in the 1930’s. Although it later came to be regarded with widespread acceptance, (rhetorically at least), at the time the New Deal was seen by many as a fundamental betrayal of a central tenet of American ideology; that a society could survive and thrive with only a capitalist vector. Venomous hatred of the New Deal betrayal of this ideal is a fault-line that runs right down to the bedrock of America.

 

Despite this fundamental opposition, practical necessity meant that the provisions of the New Deal survived more or less intact right up to the inauguration of the Great Society. But the New Deal was always fundamentally an ad hoc programme. Somewhere lurked the hope/belief that once America got back on the right track again it could go back to the Good Old Days of pure capitalism.

 

By the time of LBJ’s ‘Great Society’ and the Vietnam War, the American elite had little appetite for a return to the past, ( well, the old past anyway..). It became clear to the 60’s American elite that to get in line with modern western thinking it was going to be necessary to institute a version of feudal history to make up for the one that America didn’t have.

 

In fact, the Great Society was the formal acceptance that there was no longer the hope of a temporary feudal fix in the form of a New Deal. Like everywhere else in the developed world the American elite would have to come to some kind of permanent accommodation with feudalism. This would make them in a sense irrevocably ‘liberal’. This in turn directly led to the birth of Neo Conservatism and the emergence of Nixon’s Moral (Silent) Majority. If there had to be a feudal vector then henceforth Neo Conservatives would battle to cast it in the Anglo Saxon image.

 

It is no co-incidence that within a decade or so of the Great Society Monetarist Milton Friedman had effectively conceded that there would have to be permanent state management of capitalism under the justification of controlling inflation.

 

Since the market would now be permanently under the constant control of the state through the central bank, Monetarists simply could not allow any left wing alternative to exist. If a comprehensive state programme to protect the market was justified, then in theory a comprehensive state programme instead of the market could be justified. (The tattered remnants of this argument are still around the political fringe today in the form of ‘peoples QE’)

 

This meant that there could not be an American left of any kind since it was possible in theory that they could be elected, and if elected they could control the central bank and if they could control the central bank they could control the economy, and that would be game over.

 

And so just at the moment that total state control of the economy became reality- the left dream for eight decades- the political services of the left were to be dispensed with. Neo Con Monetarists would displace the left and act as the new feudal bureaucracy.

 

Let us be absolutely clear what this means: That the Germanic nation state ‘left’ project has turned out to be the biggest game of bait and switch in the history of human society!

 

The call for a state run society was made in western Europe for nearly a century only for it to be exclusively turned over to extreme right wing ideology the moment it was actually achieved!

 

Since the arrival of Monetarism we have been watching the left clearing its desk, gathering its political belongings together in a cardboard box and being escorted from the building….

The left finally gets it….

 

It was a sure thing that the Monetarists on ascending to power, would seek to shrink the state and to shrink it in a  specific way. Under Reagan talk swiftly turned to ‘welfare queens’ and so on. This was unsurprising.

 

But more interestingly that visceral hatred of the New Deal I referred to earlier made itself felt in the ongoing repeal of post Wall Street Crash banking regulation implemented by Roosevelt. And it was this legal reform that formally opened the door to financialisation.

 

And now we can close in on three central questions that have been there since the Credit Crunch but never satisfactorily answered:

 

What exactly is financialisation?

How exactly does it work?

Why did it appear exactly when it did?

 

So what exactly is financialisation?

 

It is a new vector, a new conduit for concentrating wealth and power. It operates alongside the capitalist vector and the feudal vector. This vector is actually physically constructed from the Democratisation of Money.

DMVM

Just like the capitalist vector it originally acted as a conduit for concentration and redistribution- remember the ‘Big Bang’?, Remember the ‘share owning democracy’? Remember how the sons and daughters of Ordinary Joes could get a pair of red braces and make Big Bucks down on the trading floor?

Seems a long time ago now doesn’t it? But for a while at least the financial vector really did redistribution…

 

How does it work?

 

Capitalism turns power and wealth into money. Capital is exactly power and wealth expressed as money. You do stuff to get money.

 

But Financialisation does the exact opposite of Capitalism. Financialisation turns money into power and wealth. You do money ( literally make it), to get stuff

 

In other words it is the exact antithesis of the capitalist process or vector. In other words, Financialisation is Anti capitalism!

This is the real basis for the crude ( but to some degree perceptive), slogan that Financialisation is ‘socialism for the rich’.

 

Socialism was never the opposition to capitalism. In fact there never really was an opposition to capitalism until about twenty years ago. This is what makes the present period unprecedented. But the oppostion to capitalism is not very nice is it? No, but it is proving to be effective.

 

Why did Financialisation appear when it did?

 

The Monetarist attack on New Deal bank regulation set the stage for financialisation. But the real impetus for financialisation to grow came from shrinking the size of the state. The Democratised Money shadow economy is growing into the exact size and shape of space where western post war states used to be. The consequence of yet again failing to utilise feudalism effectively. I will explain why this is in the final part… (In the meantime you could think about Japanese feudalism and if that has anything to do with why QE started there..)