Friday, February 22, 2008
THE ROAD TO HYPERINFLATION, Part 3 - Inflation targeting, by Henry C K Liu
A lot of economic analysis in the major media is limited to the question of whether the Fed should cut rates or not - as if the most a government (through the central bank) can do to influence an economy is to raise or lower interest rates. This article on the current economic crisis is much more interesting. It argues that the best central banks can do by cutting rates is merely to temporarily delay the inevitable sharp intensification of the crisis, while causing hyperinflation. Or, with rate hikes, a central bank could keep inflation under control but at the cost of wrecking the economy and sharply raising unemployment.
But the article is actually optimistic, because the system it argues is headed for an acute crisis and possible collapse is not at all desirable. It ends with:
"The current crisis presents an opportunity for a catharsis to reform the greed-infected global economy away from senseless and wasteful competition, toward cooperative enterprise to rebuild a new world community based on human values, to achieve equality without conformity, with compassion for the less fortunate and respect for diversity. The wind of change is sweeping the world. "
Here are some choice excerpts:
"... in the popular press, Friedman was known also for his advocacy of a deregulated free market as the best option for sustaining economic growth, which raises the question of the need for central banking intervention to replace specie money of constant value with fiat currency of flexible elasticity. A free money market under a central banking regime is an oxymoron. Betting on Fed interest moves is the biggest speculative force in the market. Friedman apparently did not extend his love for free trade to the money market. The Friedman compromise was to manage the structural contradiction with a proposed steady expansion of the money supply at around 2%.
Still, Friedman’s love of free markets does not change that fact that totally free markets always lead to market failure. Free markets need regulation to remain free. Free market capitalism, the faith-based mantra of Larry Kudlow notwithstanding, is not the best path to prosperity; it is the shortest path to market failure.
Unregulated markets in goods have a structural tendency towards monopolistic market power to reduce price competition and to inch towards rising inflation. On the other side of the coin, unregulated money markets can lead to liquidity crises that cause deflation. The fundamental contradiction about central banking is that the central bank is both a market regulator and a market participant. It sets the rules of the money market game while it pretends to help the market to remain free by distorting the very same rules through the use of its monopolistic market power as a market participant not driven by profit motive.
The Fed is a believer of free markets who at the same time does not trust free markets. The response by ingenious market participants to the Fed’s schizophrenia is to set up a parallel game in the arena of structured finance in which the Fed is increasingly reduced to the role of a mere passive spectator. " It is the immensity of this parallel arena of structured finance that makes central bank rate cuts a useless tool to use in an attempt to restore health to the economy. Furthermore, the fact that what has been considered a healthy economy at least since the 80s is an enormously lopsided scheme in which only those at the very top of the pyramid do well forces the question: do we really want to restore this kind of "health" to the economy, or is it time for a radical re-thinking of how we want our economy to work?
And my favorite bit, on the television personalities and mainstream pundits who claim that stocks are now actually underpriced due to irrational, panicked selling:
"How many times can public figures be shown wrong by subsequent unfolding events before losing total credibility? The overused truism is now flooding the media: that credibility is like virginity - much easier to lose than to get it back. Like the resourceful pimp who promotes the virgin-like freshness of his prostitute by claiming that it is only her second sexual encounter, the "good fundamentals" of the economy is touted over and over again by influential public figures in the face of deepening systemic collapse and dwindling confidence. Gratuitous advice that the market was temporarily oversold and that every decline session presents a 'buying opportunity' continues to be standard pronouncement by those who are in the position to know better.
The faith-based Larry Kudlow & Company program on CNBC, where participants are asked to declare with solemn piety: 'I believe free market capitalism is the best route to prosperity' as an article of faith, is increasingly attracting viewers for its entertainment value rather than for the quality of its analysis, particularly when the host continues to repeat with a straight face his tiresome mantra that the Goldilocks economy is alive and well in the face of serious systemic financial disaster.
Back in the real world, Goldman Sachs analysts estimate that the total final loss on US subprime mortgages would exceed 80% of its March 2007 face value of $1.3 trillion, even if the meltdown does not spread throughout the $20 trillion total residential mortgage outstanding and beyond the housing sector into commercial real estate and corporate finance.
The bulk of this loss will ultimately be borne by pension funds whence the average worker around the world expects to receive money to fund his/her retirement needs. Market forces can resolve the financial crisis with a sharp and quick price correction from bubble levels but the politically sensitive Fed and Treasury are trying to engineering a 'soft landing' by extending the debt bubble, the penalty for which would be a decade or more of stagflation. Pathetically, supply-side market fundamentalists are clamoring for more government bail out of the market, with 'damn the economy' frenzy. It is the equivalent of the God-fearing faithful asking the Devil for help in easing the ordeal of faith. "
Thursday, February 21, 2008
Interesting for its historical examination of 'states of exception', where laws are suspended for the government to better deal with an emergency - an emergency which, conveniently, the government itself gets to define.
But when Agamben gets into the metaphysics of states of exception - are they within the law, outside of it, or the subsumption of the law's own negation? - I started feeling like I was slogging through the same cum-stained terrain of other intellectual masturbators - like Foucault.
BTW, yes, Agamben compares the US to fascist countries - and then compares them both with the Romans, among others. To clear things up though, there is nothing whatsoever objectionable to making comparisons, even between things or events that are held (even with great sanctimoniousness) to be incommensurable and utterly unique. What people really mean when they, with great indignation, object to a "comparison" between two things or events, is that they would object to the two things or events being equated. OK, so remember kids, comparisons are always OK, but relatively few things can be fairly equated. When your rightist friend nearly chokes on her own tongue in righteous anger when she hears someone making a comparison between fascist Germany and today's U.S., please politely remind her to conserve her indignation for the time when someone equates fascist Germany with today's U.S.
Nietzsche wrote an aphorism to warn prospective politicians about the modern Unitedstatesian political system: "He who fights with monsters might take care lest he thereby become a monster. And if you gaze for long into an abyss, the abyss gazes also into you." What Nietzsche was trying to say was that the United States has been ruled for so long by such evil people - slaveowners, genocidal conquerors, robber barons, monopolists, industrialists, war profiteers, etc. - that you could call them monsters. And if you would want to fight these monsters in the arena of politics, you may have to become a monster yourself to stand a chance of winning. For instance, if you are Obama and want a chance to be elected, you will have to show that your views are inoffensive to the kind of monsters who have been ruling the country since its inception. Anyone who would take on problems like the military-industrial complex or the structural inequalities and injustices inherent in capitalism simply has no chance against the monsters of the political abyss. He or she would get eaten alive.
So is there hope in Obama? Listen to Bill Hicks (just change Clinton to Obama, and "Love Connection" with "American Idol" or something): (and George Carlin on the American Dream is appropriate as well)
Then again, while there is little hope in Obama himself, there is hope in the people who may elect him. People forget that the New Deal was not singlehandedly invented and implemented by FDR. Every advance for working people during FDR's presidency had to be pushed for by the organized left; it did not matter that public opinion was firmly behind him, a disorganized public is easily routed. Without the organized left, FDR would have been unable to accomplish anything in the face of the resistance put up by well-organized and fat-pocketed business interests. Take the example of the National Recovery Act, FDR's first major piece of legislation in office. From A People's History of the United States: "From the first, the NRA was dominated by big business and served their interests. As Bernard Bellush says (The Failure of the N.R.A) it's Title I 'turned much of the nation's power over to highly organized, well-financed trade associations and industrial combines. The unorganized public, otherwise known as the consumer, along with the members of the fledgling trade-union movement, had virtually nothing to say about the initial organization of the National Recovery Administration, or the formulation of basic policy.'  Where organized labor was strong, Roosevelt moved to make some concessions to working people. But: 'Where organized labor was weak, Roosevelt was unprepared to withstand the pressures of industrial spokesmen to control the . . . NRA codes.'" I believe it was FDR who once told a left-wing supporter, "you must force me to do what you want me to do." No president, no matter how charismatic, can single-handedly defeat business and financial interests that are organized and united around a common objective. Unless, that is, popular interests unite and organize as well.
The movement now forming around Obama, if it gets organized and demonstrates staying power, may be the source of real hope. It could provide the organized counterweight to big business's legions of lobbyists, think tanks and the mass media. Time will tell. And although Obama's airy rhetoric and centrist positions make one leery, now is probably not the time to rail against him from the left, thereby making oneself more leftist than the Communist Party USA.
After all, he has got to be better than McCain:
Honorable mention: John McCain No, You Can't