The news that the Bank of England is preparing to release the minutes of their emergency Credit Crunch deliberations, (suitably censored of course), is a confirmation that 2014 was a time of consolidation and the consequences of five years of Credit Crunch shenanigans coming to the fore. It was a time of tying up loose ends and setting the stage for the next round of change.
With this in mind I would like to briefly review two of the most important events of 2014: The tapering of the Federal Reserve bond buying programme and the Brisbane G20 meeting in which the rules for the ongoing management of ‘systemically important’ banks were broadly finalised.
The Tale Of The Tapering
It has been an article of faith on the radical side of economics that there would be no substantial winding down of the Federal Reserves QE programme, yet the Tapering duly appeared in the latter half of the year when the Fed stopped its ongoing purchases of privately issued money in the form of ‘bonds’.
In response to this development insurgent pundits chose to focus on the fact that QE as a global phenomenon was still ongoing. They observed that Japan was engaged on a new round of QE; the infamous ‘Abenomics’, and Europe is supposed to get in on the act later in the year with a big fat euro-helping of bond purchases (at least according to Mario Draghi and the ECB..)
So is tapering on or not?
Is QE still on or not?
Tapering for the USA is on, for Japan it is not and for Europe it will probably never begin. This is because unsurprisingly, conditions are different in America, Japan and Europe.
O.K. then, this leads us to the question: What is different between America and Europe and Japan?
America and England- the main Saxon economies, have experienced some sort of economic ‘growth’ although this is hardly traditional (certainly not export and manufacturing led), and it is mainly credit based. They have managed to do this because they have partially at least, restructured both their societies and economies. Which leads to the question: What is the nature of this restructuring?
- Both America and Britain are some way along the road to establishing a Permanent Credit Economy. This means: Increased deregulation and a shrunken state.
- Discontinuation of the work and social rights and safeguards that have been a feature of developed economies since the end of WWII and most importantly of all:
- An end to the consumer society, by which I mean an end of freely disposable income.
Remember! Saving is free disposal of income the same as spending is; this freedom is the essence of the ‘consumer society’. Prohibiting saving is a deliberate infringement of this freedom.
In contrast to America and Britain, Japan and Europe have so far significantly failed to restructure both society and economy.
Despite two decades of a kamikaze war on saving, Japan is still a ‘bank it’ society. Why is this?
Japan never established a welfare state in the way that it would be understood in Europe or even America. Instead it created a full employment model, which in theory made welfarism mostly unnecessary. In essence, saving was a necessary part of preparing for retirement since the state was only going to offer minimal protection. This worked until the labour market was deregulated in the post 1980’s Big Bang. Once the Japanese ‘job for life’ went away , a culture of saving and insurance became even more important. This is why Abenomics is insane. In essence it is like trying to frighten people out of buying insurance!
Remember! Saving is free disposal of income the same as spending is; the essence of the ‘consumer society’. Prohibiting saving is a deliberate infringement of this freedom
(As I write I hear on ‘Max Keiser’ that the Japanese savings rate has gone negative for the first time since the 1950’s and wages are falling rapidly too..but the next big question will be where has this money gone?)
Europe, especially Southern Europe, is markedly different form the Anglo Saxon and Northern German economies. Here the problem is that the post WWII state never managed to establish the depth of control necessary to implement something like the QE economic restructuring programme. Spain, Italy, Greece and Portugal, (did I hear someone mention Eire?), are all characterised by the fact that they have found it impossible to create a stable geographical and political boundary, never mind such a thing as a stable North European civil society. Fundamental structural weaknesses are increasingly being brought to the surface by national elites trying to implement austerity on behalf of German led Europe. One effect of this is the appearance of Cultural Constituencies (see previous post).
So what is going to happen next?
America will raise interest rates towards 21/2 % (as per my earlier forecast) which will mean that fully half the worlds economy is serviced by privately issued democratised money.
‘Hang on a minute!’ , I hear you say,
‘That’s impossible! There is no way that the Anglo Saxon elite will rise interest rates with the economy in the fragile condition it is in.’
But your analysis assumes that this is an economic decision and it is not. It is a political decision. It is the next step in the normalisation of privately issued democratised money. It is exactly the same in this respect as the dynamics controlling what happens in Europe. And China. And Eurasia.
And what will happen when American interest rates rise?
Intellectually we will come face to face with the lurking horror, the heart of darkness that has threatened to emerge from its cave since this all began in the 1970’s.
The Devil and the Law: Bankrupt Bankruptcy
The year end season finale of the democratised money project was the announcement of new rules for the resolution of banks in trouble at the Brisbane round of the G20, usually known as the ‘Bail In’ rules.
Proposed by the Financial Stability Board and titled the ‘Adequacy of Loss-Absorbing Capacity of Global Systemically Important Banks in Resolution” this G20 endorsed plan was created to establish a stable ongoing banking framework to support democratised money.
I cannot emphasise enough the importance of this document, because it specifically lays out the boundaries governing the survival of individual banks and the growth of democratised money.
One of the fundamental mistakes made by the insurgent economic opposition is to argue that it is financial institutions that are being protected by the Monetarist state. This is wrong. It is not specific institutions, but democratised money that is being shielded and protected by the international legislative framework that is being put in place.
In fact, hard core Monetarists would be quite keen to see one or two small to mid sized banks go to ‘resolution’ to refute the charge of crony capitalism. When this happens the insurgents will be dumbfounded; they will not be able to understand that the failure of these one or two banks guarantees the survival of democratised money because it legitimises the system as being ‘fair’.
To this end the resolution document specifically states that the derivatives held by financial institutions will be given unchallenged precedence over all other creditors. In other words, they will not be paid a proportion of what they are owed on a pro rata basis like other creditors, they will be paid in full, off the top.
The international law says that derivatives cannot be written down like private debts. They are above private debts and sacrosanct. They are sacrosanct because they are money- democratised money with the full weight of national governments behind them. And this is now international law.
This is the significance of the bail in. Not that it will affect ordinary small scale bank customers, but that it places state money deposits at the mercy of democratised money. And ordinary people are not going to stand up for the rights of large scale investors, are they?
Again to reiterate:
It is not Banks being given precedence over individuals. It is Democratised Money in the form of derivatives being precedence over State Money in the form of deposits.
Even more shockingly, this document effectively proposes an end of bankruptcy for banks, to be replaced by the process of ‘resolution’ I referred to above.
As I observed in ‘Crackernomics’, bankruptcy is a Capitalist Sacrament; the equivalent of the Last Rites of the Catholic Liturgy. It is the means and justification by which a dying Corporation passes on to the afterlife. It is supposed to be the fair and equitable legal basis for the entire concept of limited liability. For it to be effectively abandoned is astounding.
In Crackernomics I examined the bankruptcy procedure and what it means, (used to mean). I also argued that the legal changes created by the democratisation of money would be as significant and far reaching as those of the end of Soviet Russia. This vindicates that view.
One of the fundamental principles of Capitalism itself has been quietly dispensed with.
As if these two developments were not astounding enough there is another philosophical change, more subtle and perhaps more pernicious for that.The difference between ‘failed’ and ‘failing’. Because banks aren’t going to fail anymore. Instead they are going to be ‘failing’ and they could be failing without actually having failed for a long time- maybe forever. Which means there might never be an ending that is understandable to the majority of their creditors and shareholders.
That is what ‘resolution’ really means.
‘Its Not Me, Its You’ , Or Irreconcilable Differences
In recent correspondence Dave Harrison from ‘Trade With Dave’ made the following very pertinent observations:
A). Zero interest rate policy means no more time value to money.
B) Mervyn King’s “divorced currency” model could also mean politics divorced from economics.
What binds politics and economics together is the law. Law is the formal expression of will of the society that creates it. Law as applied to the material conditions of a society creates an economy.
When Dave Harrison points to Kings ‘divorced currency’ model as the future he is really pointing towards a system that has chosen to seek to circumvent its own foundational principles. And the means by which it is doing this can best be expressed as an end of accounting.
Just as elites abandoned ‘mark to market’, (which means saying what any given stock or bond is actually worth here and now) so zero or limited interest rates means abandoning any idea of what state money is worth here and now. And that is very important, because if people ever got a real idea of what State Money is worth here and now they might start asking some awkward questions.
In the same way the derivatives that infest the books of ever major financial institution can never actually be brought to the book and reconciled. Because if they were, then their value relationship to state money would have to be examined and that would lead to some awkward questions etc.
The Devil and The Law Or ‘If She Be a Witch’…
Henry the Eighth famously divorced himself from the Catholic Church in pursuit of a divorce from Catherine of Aragon. He then married Anne Boleyn. And when he did not want Anne Boleyn anymore he famously got Cromwell to argue that the marriage to Anne was just as invalid as his wedding to Catherine!
And who could argue the point? They had gone along with the first crime, how could they stand against the second?
They were damned if they did and damned if they didn’t.
Once the state has interfered in the markets, rigged and controlled them, how can it ever claim that there are ‘free markets’ again? If you argue for the state to get out of the economy, then you negate everything that has happened since 2008. But this is madness, what is done is done, it cannot be undone. Free markets are over whether you like it or not.
You cannot become a virgin again, no matter how much you regret your first night! You can only live in a fantasy world of regret or face reality. No- one except a madman will ever dare argue in favour of ‘free markets’ again.
If you abandon your first principles you make yourself a liar from then on no matter what you do to try to fix it. This is what is meant by the devil turning on you.