Ian Welsh

The horizon is not so far as we can see, but as far as we can imagine

Category: Financial Crisis Page 4 of 12

Let’s Talk Turkey About Greece

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On January 16, 2015

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In light of the upcoming Greek elections and the possibility of a Euro exist, this article from 2012 is worth revisiting.

1) Greece is very likely to exit the Euro.

2) When Greece exits the Euro it will be punished severely by the monetary authorities.  They intend to let Greeks starve.  They will cut off food supplies, and Greeks will not be able to afford food.  Oil is also going to be a problem.  Greeks will probably not be able to flee to other countries.

3) The reason they will punish the Greeks is because they can.  They couldn’t punish the Argentinians (well, they’re working on it) or the Icelanders, because both those countries can feed themselves.  They can punish the Greeks.  They need to make an example, because they are worried about Spain, Portugal, Ireland and other countries.  (Heck, even the Dutch are having problems.  The Dutch!  If the Dutch can’t make it in the Euro, no one can.)  This isn’t, contra Lagarde about “bad Greeks”, while it is true that Greece should never have been let in to the Euro, well, everyone knew that.  Including the countries that let Greece in.

4) Greece is going to have get hardcore and creative about creating a new economy.  Since the monetary authorities intend to starve them and deprive them of oil, they must retaliate hard.  Greece has a number of options, and this is what Greece should do You don’t play nice with people who are trying to cause a famine in your country.

  • Greece has a large fleet.  Use it to strip mine the Mediterranean of all resources possible.  Yes, the Med is a fragile ecosystem.  If the other Euros don’t like it, they can not punish Greece, otherwise Greece will have to feed itself.  The Euros could send fleets, but as the British-Iceland fishing war proved, that’s prohibitively expensive.
  • Start gun-running and other black market activities up.  European gun-running currently goes through Albania.  Greece has much better ports.  If the Euros don’t like it, they can militarize Greece’s borders at a cost much higher than feeding the Greeks.
  • Become a full on black-hole for banking.  If anyone wants to store money in Greece, they can.  No questions asked, no forms needed.
  • Make deals with other “pariah” and semi-pariah nations.  Start with Iran and Russia for oil (Iran will be happy to give oil in exchange for black market help).  Make a deal with various 2nd world nations for food, start with Argentina, they have no reason to love the IMF or the European Union, which promised to “punish” them for nationalizing oil in Argentina.  In exchange Greece can offer use of their fleet, for cheap, and port rights for the Russian navy.  They’ve wanted a true warm water port for some time.  Offer them a nice island in the Med with a 30 year lease.
  • Hold on for a couple years.  Odds are that soon enough Ireland, Spain, Portugal and maybe others will leave the Euro.  They won’t be in any mood to screw Greece for their ex-Euro masters.  Heck, odds are 50/50 that there won’t be a Euro zone at all in 3 years, since Germany wants to screw everyone, including France.
  • Nationalize basically every industry.  It’s unfortunate, but it’s going to be necessary.  Hundreds of billions of dollars have fled Greece in the past 3 years, in fact that was one of the main reasons for dragging out the “bailouts” (really, bailouts of German banks), to let the money flee.  All Greek assets are going to be frozen overseas, so the Greeks will need to work with what they have.
  • No more money goes out of the country.  Slap on currency controls, to make sure what money is there doesn’t leave (this is aimed at Greece’s rich).  If any banker or anyone else circumvents them, throw them in jail, the sentence should be life, generous, since they are committing treason.
  • Seriously change the tax system, and insist on really taxing the rich.  Go to heavily progressive taxation, reduce the burden on the poor (a large number of people now), this will buy support.
  • A food rationing system, with cards and delivery to every person in the country will be necessary.  It won’t be fun, but combined with the above, you can make sure that no one starves.

Greece has been under siege for years now, and traitors within its own country (its politicians) have betrayed it.  This means Greeks are in serious danger of suffering a famine.  The response to that, by Greeks, will have to be pragmatic and severe.  If non-Greeks don’t like it, that’s too bad.  When millions of people are in danger of starving, a country does what it has to.

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Japanification and the end of the American Dream

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On August 14, 2014

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Stirling Newberry and I have been writing about Japanafication for years—on blogs, at least since 2004.

Those of us who are old enough remember when Japan was THE miracle economy.  Technologically advanced, vibrant and rich.  It was eating America’s lunch, and most other countries.  For peak alarmism at this fact in a fictional form, read Michael Chrichton’s Rising Sun.

Tokyo real estate was worth more than the entire world’s real estate combined.

Then the bubble crashed.  Japanese policy was to protect the banks, and to bury the bad loans on the books.  They undertook literally decades of stimulative policy, mostly pouring useless concrete (exactly the wrong thing to do unless your country really lacks that sort of infrastructure, which Japan did not.)

To put in terms familiar to my readers, they extended and pretended.

Japan went into semi-permanent stagnation.

We have, now, the news of a quarter drop in GDP of 6.8% annualized for the last quarter.  (This is blamed on increased sales taxes, but it was coming anyway.)

The long stagnation is over (it’s been over for a bit).  Japan is actually in decline.

This is important because Japanification was always the plan for the US after the bubbles: extend and pretend, stagnate wages and employment.  Pretend.

But there were significant differences between the two countries.  Japan started with massive savings and a huge trade surplus.  It is now in trade deficit and savings compared to debt are way down.  Economic equality was relatively high, as well, spreading demand.

America came out of the financial crisis with a trade deficit, a pathetic savings rate and massive inequality.  This is why I predicted that Japanification would not work in the US.  It could not, because there was no saved fat to be used to create the long bright depression the Japanese had.

This brings us to stimulus and development (not just for developing countries).  The money must be used not for pork projects with no follow on, but to create new industries or to bring money off the sides into the economy.  Pouring concrete (and not even bothering to shore up nuclear reactors in areas which were not electorally viable) was pointless in Japan.  Buying bonds is pointless and even harmful.

Likewise you cannot have real open trade flows and expect to keep whatever you are building.  You build it, you make it work and once an industry is systemized, it can be moved to a low cost domiciale. It takes deliberate government policy to prevent that.

Monetary policy in Japan could never work, because the money went to the wrong things, and much of it immediately decamped overseas in the so-called carry trade—borrow low in Japan, buy securities somewhere else where they had a higher return.

All of this should be obvious and uncontroversial. It is not, it flies directly in the face of modern neo-liberal theory and it is that theory, in the face of decades of failure, that the Japanese followed.

The human capacity for ideologically driven stupidity and atrocity is endless. (Those who do not believed me are invited to study Church history and its effect on society from 1000 AD to 1900 AD or so.)  People will ignore the evidence in front of their eyes, years of failure and continue doing the “safe”, “orthodox” thing no matter what the results.  This is true even for well-meaning people.

Of course, in the US, Japanification has a US twist: it massively increases the wealth of the already wealthy, through unconventional monetary policy.  American leaders are far too greedy to make Japanification work: any surplus, or room to lend, or room to print money, must be given away to rich people as quickly as possible.

I point out, finally, that the first sin in Japanification was buying the bad loans.  This was a huge mistake in the US too, bailing out the banks and not forcing them and their share and bondholders to take their losses was the main mistake of the financial crisis.  Yes, things might have been worse if the US had done so (though steps mitigating the hit on the regular economy would have been easy enough to take with the 4 TRILLION dollars used bailing out rich people), but even so, the US would have recovered better afterwards.

Instead the US has an economy in which 90% of the population has seen an actual decrease in income and wealth, while 10% has seen an increase: with the 1% and the .1% and the .01% benefiting most of all.

Japanification was the plan for America. It isn’t working, it could never work, but the policies in place are nonetheless doing what is most important to their architects: they are making the rich richer, and everyone else poorer and doing it quickly.

The Bush years were the long suck.  This is the deep dive, and remember, the US isn’t in recession yet (though it is in depression).  The pain when it happens (and absent nuclear war, there is always another recession), will be unbelievable.

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You will never, again, have a good economy for ordinary people so long as this continues

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On March 18, 2014

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Reuters on Ben Bernanke’s post-Fed career:

Bernanke was paid at least $250,000 for his first public speaking engagement, in Abu Dhabi, since stepping down in January, according to sources familiar with the matter. That compares to his 2013 paycheck of $199,700, and the appearance was only the first of three around the world this week.’ (two weeks ago)

Ben Bernanke bailed out investors to the tune of trillions of dollars.  Now they are making sure he, personally, will be rich, so that no Federal Reserve Chairman ever thinks of not putting them first, second and last.

You cannot, and will not, have a good egalitarian economy while this sort of thing goes on.  It is not possible.  Those who have been in such positions should be given a very nice pension (say 5x median income) and not allowed to keep any additional earnings for the rest of their lives.

I can hear fools squealing already “gold plated pensions” and “paying them not to work” and “not fair”.

It would be far cheaper than the status quo.  Far, far cheaper.  Right now people like Ben Bernanke and Bill Clinton (worth 100 million after repealing Glass-Stegall and pushing through NAFTA) don’t work for you, they work for the people who will make them rich after they leave office.  That costs you far far more than a generous pension for the rest of their lives.

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What is an economy?

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On November 7, 2013

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Perhaps the greatest difficulty I have talking about the economy is that most people don’t understand what an economy is.

An economy is what people produce and the relations that make that production possible.

An economy is not money.  Printing more money does not automatically increase the size of the economy as various episodes of hyperinflation clearly indicate, but also as the giant printing of money in the last five years should have shown to people.

Money is created by printing in a fiat economy, whether it is physically printed or not.  When a bank creates a loan it simply adds numbers to various accounts, and it does not have to “have money to loan”.  The same is true of brokerages offering loans for stock purchases and so on.  There is no direct organic relation between the amount of money in the economy and the amount of economic activity.

Moreover it is quite possible to increase the amount of money in the economy while decreasing activity.  When a huge loan is taken out to buy a company, and then the company has employees slashed and plants closed, real economic activity decreases, even as the amount of money increases.  When you insist on 15% profits and obtain them by refusing to do needed maintainance, firing employees, doing stock buy-backs and so on, real economy activity decreases.

If you measure the output of an economy in money you get a very distorted picture of what is actually going on.  There is less employment in the US in percentage terms than there was at peak, and absolute numbers are only now about getting even, yet people have been blathering on about a “recovery”.

It is quite possible for people to be doing things that are, on net, negative.  Every dollar earned by the financial industry in the 2000s was lost and then more in the financial collapse: real damage to real productive capacity was done.  We were earning more money, GDP was increasing, and (at least) houses were getting built, but the cost was offshoring and outsourcing of jobs and decreased actual wellbeing (it is in the 2000s that American height, for example, began to decrease.)

Money is not the economy, and increases in money do not necessarily mean the economy is getting better or even bigger, let alone actually increasing the welfare of the population.

Now increases in money SHOULD reflect increases in the welfare of the people, or at least in the size of the economy.  Money should have an organic relationship to the economy.  But for it to do so we must want it to.

Take the classic post-war economy (pre 70s.)  You can borrow money if you have a house or a business.  The house is valuable not so much because you can live in it, but because living in it means you are close to a job.  It is the job that allows you to afford the house, and if you lose the job, the house still has value because there are other jobs nearby for someone else.  If you do not believe this, I invite you to look at what happened to housing prices in Detroit when the auto industry left that city.

The house is secondary, though, the jobs come first.  A farm has value because you can grow food and sell it, a business has value because it makes money.  All of these things, presumably, produce goods or services that people want or need, and if you no longer want to run your farm or business, someone else can.  A loan just allows you to take some of the future value of what you own, and use it today.

Economic financialization seems like an extension of this system.  If you have a money flow of any type, why not borrow against it?  Why not borrow against its appreciation? Why not then sell those money flows for money today?  There are three problems: the first is pyramiding. You borrow against a money flow, then you use leverage and buy other money flows and then you leverage on them, and soon the underlying asset is a tiny fraction of the money you have. (No leverage on loaned money is thus the first principle of avoiding problems, loaned money is already leverage.)

The second problem is printing money with no underlying asset at all.  When the Fed is creating 82 billion out of midair every month, half of which is spent on treasuries, there is no organic relation to the underlying economy.

The third is that some people get to borrow money for much less than other people.  Banks get prime (or less).  Large investors get close to prime, ordinary people get Prime ++, if they can get less than 20% on a credit card.  This is justified by “risk”, but the risk is mostly that the person doesn’t have access to essentially free (prime rate) money.  It also distorts the economy, because it favors financial companies since the interest rate is the cost of money, and the cost of money is a cost of business, which means financial operations are cheap even before you get to the fact that financial operations also have access to the highest amounts of leverage.

The problem here is that finance creates NOTHING of worth itself.  It exists (or should exist rather) only to facilitate creating goods and services with actual value: food, housing, entertainment, medicine, art, philosophy and so on.  Those goods and services, or rather the people, equipment and relationships that produced them, are the economy.  Finance’s purpose is only to help allocate money between those activities, and it is only one mechanism of allocation.  The market will not allocate money properly to many goods because it undervalues the future (so, for example, education, especially in the humanities and basic science), cannot account for externalities not embedded in the valuation system (that you are getting sick from my pollution is not the market’s problem), and cannot value anything that is not denominated in cold hard cash (like love, or friendship or a sunny day free of smog or the health of someone who doesn’t make money.)

Any society which makes all or most of its decisions about how to allocate money through the market mechanism will be hell on earth and will devalue those things most important to human happiness and meaning.  It is not an accident that the depression rate in the US has increased by an order of magnitude in the last hundred years.

If you give outsize money returns to finance then, it drives out actual productive investment in the real economy.  If you make the market your primary method of allocating funds, it doesn’t allocate resources to the future or to intangibles and ignores externalities which are key both to long term growth and avoiding negative outcomes (like your kid having cancer, or your spouse dying of cancer, or your sibling having a debilitating case of depression.)

But the problem is worse than this.  Money, as my friend Stirling Newberry has noted, is permission: it is the right to decide what other people do with their time.  Money lets you buy up people who spend all day lobbying government, it lets you create political movements, it lets you buy up think tanks and universities, it lets you create your own mercenary army.  If you are throwing off more money than other industries, it lets you take over those industries. It lets you buy government, and thus control the rules.

If some group, in an economy, has a consistently higher rate of return than other groups over a long period of time, they WILL become dominant in that society absent a reaction by violent men.  Period.  Because they can use that money to decide what other people do.  This is true not just of finance, it is true of any group of people controlling a bottleneck resource (see: oil, among others).

You can solve this one of two ways: you can make sure no one gets these consistent outsize returns in the first place (remember, basic economics, if an industry is making more than average profits, they are not in a competitive market, there is an inefficiency).  Or you can just take their excess profits away from them.

IF you choose not to do so, because they have bought the system and created an ideology that says it is unfair to take money away from people who are given a systemic advantage by being allowed to create money from thin air and/or borrow it at prime when no one else can; or that the people allowed to control oil production should be allowed to keep all its benefits because they created the oil, or some such, then those people WILL come to control your society and they will create it in their image.

I will discuss at a later day happiness and meaning (and even eudomania), which should be the sane goal of any political economy. I will discuss how to design an economy which works for everyone.  But the first thing to realize is that you must want that, and you must believe it is Just that your society be run that way.

If you do not believe that it is moral and right and just to tax people who have a structural advantage in your economy (and that structural advantage can and will exist if you remove the State entirely), if you do not believe you are allowed to redistribute, if you do not understand what the economy is for (creating the good life), if you do not believe in not allowing concentrations of private power based on position, then you will not keep whatever prosperity and good life you have, because those who win the game (and someone always will) will buy up the game and change the rules to ensure their continued wealth and power.  They will do so in a way that will cost you your liberty, your health and your prosperity.

There will always be winners and we don’t want to change that. Let them win, let them enjoy winning in their time, but do not allow them to buy the system, to destroy the actual productive capacity of the system, or to try and make money the sole determinant of how decisions are made.  Doing so, letting market mechanisms work until they don’t, then continuing to use them anyway: refusing to enforce competitive markets and keep markets doing what they do well and only what they do well, is why we had a financial collapse, why we’re in a depression, and why we have a catastrophic climate change episode coming our way which will kill a billion people or more.  It is why we are seeing a long term decline in happiness in market democracies, why we have soaring rates of depression and chronic disease, rising chronic unemployment, and a host of other social ills.

An economy exists to fill the needs of the people in it, material and non-material. It has no other purpose.

The Bailout Caused the Sucky “Recovery”

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On October 30, 2013

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This will be another brief post.  Bailing out banks, brokerages and so on in the way it was done had the following effects:

1) Fewer, larger financial institutions.  Too bigger to fail.

2) Rewarding people for outright fraud and insane risk taking. Remember, they kept their bonuses and salaries, they are rich, even if they belong to one of the few companies that went under.

3) A huge overhang of bad debts which has to be worked off.

4) An understanding that financial profits are still the way, you, personally get rich.

5) Making the rich, richer (yes, they are richer now)

The reason the economy has not recovered and will not recover for at least a generation is because of the overhang of bad debt, the glorification of financial “profits” (they aren’t), the failure to de-financialize the economy and the confirmed control of government by the rich.

In other words the bailout caused the sucky “recovery”, or, if we are to be honest, the current long Depression.

The standard argument is “we had to do something”.  Yes and no.

1) We could have done something else, like nationalizing the banks, making bondholders and shareholders eat their losses, taking what remains and putting it in bad banks, then breaking the banks up and re-privatizing them.

2) Actually, if we’d just let them go under per the law, with the FDIC taking them over, things would have been worse initially, but there would have been an actual, robust recovery when it occurred.  By now you’d be better off.  And the shock could have been cushioned with generous EI, letting people stay in houses and so on.

TARP, though it actually wasn’t the key bailout (those were done mostly through the Fed) is when Obama said “I am going to keep the same people who caused this mess in power in the financial system, make sure they don’t lose their money, and that’s just too bad for everyone else.”  When he confirmed that Bernanke was to stay on, he confirmed that he was, essentially, ok with what had happened.

The bailout decision did not “save the world” instead it doomed a good chunk of the world to twenty years of a shitty economy, minimum.  Forget the unemployment rate, the percentage of Americans employed hasn’t recovered, and won’t, and that’s before we talk about Europe.

This is the first of Obama’s legacies.

Shorter Federal Reserve: The Economy Breathes Sort of OK if We Keep it On Life Support

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On September 19, 2013

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That’s what the decision to continue Quantitative Easing 3 (QE3), the purchase of 85 billion dollars of treasuries and mortgage backed securities a month, is an admission of.

It is also a way of not causing Brazil and India’s currencies to crash out, which just the suggestion of a reduction of QE3 was causing.

It is worth reiterating that the purpose of Quantitative Easing is to make the rich richer, and that it has done.  US stock markets increased 150% from their lows, one of those bull markets traders dream of.  However the employment situation has not significantly improved (ignore the unemployment rate, even in absolute terms there are still fewer people employed than there were before the financial crisis.)  Median household net worth is down, median income is down, but the rich are richer.

This is not to say that QE does no good for the regular economy, it does, but it does far less good than could be done with eighty five billion dollars a month.  A program to, say, retrofit every single federal building for active and passive solar would employ more people and have more of a ripple effect.  Eighty five billion dollars a month (970 billion a year) is a LOT of money.

Nonetheless, given its refusal to break up the large banks; the President and Congress’s refusal to actually tax rich people (thus necessitating the Fed buying treasury bonds); and a refusal to allow the housing market to settle to its actual value while supporting underwater homeowners, the Fed is in a bind.  If you refuse to do anything that is primarily intended to help ordinary people, refuse to engage in sufficient measures to break the oil supply bottleneck (and no, Fracking isn’t cutting it); refuse to tax rich people (who have the money); and refuse to engage in any sort of industrial policy while funneling money to industries like banking, insurance, pharma and the military-industrial complex which are ultimately parasitical, why then, it can certainly seem like you have no choice but to continue throwing money at banks and rich people, and hoping some of it gets to the real economy.

Yellen won’t be any better, by the way.  Bernanke’s job was to make sure  that the financial collapse did not cause an FDR or New Deal: to make sure that the rich weren’t wiped out by the financial bubble they caused. His academic work is about this exact problem: how to make sure that a New Deal doesn’t happen: how to make sure ordinary people don’t get their share of the pie.  Yellen won’t change that, no one will be picked for the Federal Reserve who would change that.

Greek election consequences and the shape of the developed world’s future

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On June 17, 2012

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will be more years of austerity, people winding up on the street, suicides and outright starvation.  In this fertile ground, the neo-nazi right will rise.  The left will most likely not compete, because they will refuse to create an enforcer class to protect their own people.  The police in Greece voted about 50% for the Golden Dawn, they will not protect the left, either, but will enable the rise of the Golden Dawn.

Under these circumstances a coup of some variety, whether military or otherwise (remember, Hitler never won a majority) is very likely to occur.  By blocking the rise of the left so that Greece can be looted, the oligarchs have created their own doom.

In general terms, we are in a pre-revolutionary period.  The supreme court coup in Egypt, the outright refusal to obey even the letter of the law let alone the spirit in the case of Wikileaks and Assange, the reign of Obama, are teaching an entire generation that you cannot fix the system from within, through the mechanisms of the old system or through even semi-peaceful protest.  The Pacific free trade deal will enshrine even more draconian IP laws and will extend NAFTA style takings regulations which give multinational companies sovereignty over governments.

This will not stand.  There will be global war, and there will be global revolution.  We are on track for it.  The question is when and how.  I would guess in less than 20 years the world will fully convulse.  Many of the current generation of oligarchs will be dead by then and will win the death bet, but their heirs will reap the whirlwind.  As for the population, I expect a billion deaths or so over the next 25 years from famine, disease, war and environmental issues.

Both populations and the oligarchs have refused, over and over again, to do what is necessary to peacefully restructure the world economy, but instead have opted to kick the can down the road.  Each kicking of the can has led to more corrupt and sclerotic economics and politics.

In the period between now and the revolution, some nations will take control of their own destinies.  Offered a choice between austerity in the international system and nationalism, they will choose nationalism.  It will not be as comfortable as being a member of the old international order from before the financial collapse, but that is not being offered.  A few nations will be able to work wedges to stay in the system and not suffer too much (Germany, France).  But most developed world nations will continue to suffer real declines in their standard of living, driven by inequality and the resource trap which we refuse to restructure out of.  The electrical economy wants to happen, but it will not happen on a wide scale until after war and revolution.  Such is the choice both our elites and the regular population continue to make.

Next Steps for Greeks after the Austerity Bill (AKA: Hope for Greece, at last)

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On February 12, 2012

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Ok, another austerity package just passed.  That’s the bad news, but amidst the bad news there is some good news.  More than 40 MPs were expelled from the PASOK and ND parties, two from LAOS—those MPs need to form a new, explicitly anti-austerity, pro-default government.  Odds are good they will win the next election, and can form the new government.

No deals made by a sovereign are unrevocable.  Whatever this government is doing, has done and will do, can be undone by a new government.

Oh, and Greek rioters – if you’re going to riot and burn, burn down the houses of the MPs and bankers, the banks and their offices (I see some of the right places did get firebombed.)

Greece can be fixed, if the Greeks are willing to do what it takes, both in terms of electing a new government and that government doing the right things.  Those things will be unorthodox and painful, but no more painful than austerity, and unlike austerity, they will lead to a better economy, and based on experience elsewhere, probably within two or three years of doing the right thing, with some relief being felt within 6 months.

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