I
was asked and I
have an answer. Maybe it's just one point of view and I know it's
not a complete explanation. I have left things out, things which I
don't understand. But I'm pretty sure of this as far as I can take
it.
It
was easy money, not just in the US, and “globalization”. I used
to go on about how we, the IMF, World Bank, WTO, and other Washington
Consensus surrogates, were relentless in our efforts to tear down the
barriers to international capital flows while building fences to
protect ourselves from imported labor. It seemed incongruous. It's
not. It's a feature not a bug. Globalization, in the modern sense,
is a euphemism for financialization - the domination of finanzkapital
over individual and productive endeavors and the disregard for
individual liberties and initiative. The minions of finanzkapital
are the “big-shots”. A continually changing population of
“elites” with temporary and shifting alliances and who's only
motivation is to “stay on top”. Survivor, Wall Street.
But
there are limitations. Island limitations. Finanzkapital, like
other parasites, depends at it's root on having a food source - in
this case savings from those productive endeavors. With the
productive sector already tapped out, and everybody who depended on
it, tapped out too (the business school euphemism is “saturated
market”). What to do when the host can't support any more? Get
aboard an alien vessel and go to... someplace else. Hey, China!
They've been a basket case for 4000 years. Ready market! Well, as
it turns out, not so ready. That plan had a chink in it. No demand.
But their history makes them an easy sell and they can produce more
cheaply than the host produces. And finanzkapital can “intermediate”
the financial flows while cutting out the middle man - i.e. the host,
the productive sector itself.
With
demand saturated finishing off the host isn't as risky as it may
seem. And especially so if you have an accomplice. And
finanzkapital did. They only had to look through that revolving door
to those public institutions; the Fed, the Treasury, their
Congressional payroll. Voila. Stimulate demand. Easy money.
Greenspan did it. The Europeans did it. Japan
is a case study. China will do it. What could go wrong?
Well,
for starters, it's Ponzi like - pro cyclical. Paul Krugman called it
Roadrunner Economics. Everything seems to go along just fine until
even after things go over the cliff. Then somebody, maybe just
somebody at Bear Stearns, looks down. And the rest, as they say, is
history. Everybody must deleverage. And Europeans and Japanese were
living in even greater bubbles (more highly leveraged) than we
ourselves. Most especially problematic were the Europeans who were
borrowing in a foreign currency (euro) and cannot depreciate its
value. Interesting here too would be an historical discussion of how
low Japanese rates didn't depreciate their currency but produced a
“carry trade”. No time for that, I'm afraid.
How
we got here is now only a curiosity. More important is where we're
going. If debt isn't repayable - and the only way it can be repaid
is for the economy to grow faster than an overfed (20% of economy &
40% of profits) finanzkapital sector consumes the productive
resources that would pay for it - it won't be repaid. It must be
written down. Or monetized which is to say the same thing.
We
could write the bad debt down directly and show the losses, but
that's a non-starter. It wipes out savings which might be used to
rebuild and importantly it diminishes the influence of finanzkapital.
Demand could be stimulated by fiscal measures. Roosevelt did that
during the depression. Public demand could take up the slack caused
by private deleveraging and public demand can be easily monetized.
But, if the public sector were to grow, if we were likely to build
public institutions, there is a chance that those institutions might
“regulate” finanzkapital. Like it did at the end of the last
depression. Oh, no! Also unacceptable. Krugman wants inflation. I
don't see how that works. It also wipes out savings. Maybe it's
just me.
Anyway,
the choice we've made, and especially so in Europe, is austerity for
the productive and public sectors (sometimes called internal
devaluation); which represents a further reduction in demand. And
monetization for finanzkapital. To finanzkapital new money looks
just like savings. Incongruous? No, it's a feature not a bug.
But
the alliance has shifted. Greenspan is no longer at the Fed.
(Though Timmy is still at Treasury proving we have a way to go.)
Still, the market sector of finanzkapital no longer has exactly the
same interest as their former accomplice. They over-reached. Our
Fed mouths the words that more monetization is on the table, but more
money isn't necessary. Foreign demand is keeping US Treasury yields
at record lows. The Fed doesn't have to lift a finger. In fact,
there is really nothing at this point for the Fed to do. At the zero
bound (0% interest) demand for money is by definition saturated. All
further increase in money supply is funneled into speculation; the
markets, more money chasing the same assets, creating more bubbles.
In
my view the Fed is doing a pretty good job with its “stability
mandate”; blow enough smoke to keep the markets from going short
while hoping that by some miracle demand will pick up and not be
cannibalized by those same markets. Bernanke has been telling the
Congress this for months. But the Congress isn't going out on a
limb. Talk about risk adverse. Or ignorance.
The
struggle today is for dominance within that former finanzkapital
alliance; the markets and their former accomplices the markets
regulators which have been in their pockets for a long, long time.
Right now the ball is in the European court. It's their turn.
Germany has prevented a solution for too long. Europe will either
monetize its debt or capital will flow out to dollar denominated
assets (fungible!); which is happening as we speak - big time. Money
is leaving Spain at 50% GDP/yr. (not all to dollars). Thursday,
Mario Draghi of the ECB made an excuse to buy those sovereign bonds.
Something that has been until now verboten for the central bank.
Expect the markets to be skeptical. Nobody's going back into that
water. But either way, if he does or if he doesn't, euros will flow
to safer assets and dollar assets will get their share. Consequently
equities are going up, but yields on sovereign debt haven't changed
much. The euro zone has lost that fight. The ECB is the only buyer
left. All euro zone debt must now be monetized. Mr. Market is
happy.
The
clear and present danger is that it may already be too late. If that
were the case any further monetization may simply create the mother
of all carry-trades. The markets have less to lose in a collapse
than the rest of us. Just another day at the office. If stability
were your mandate you should be aware of that.
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