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Deep Dive: Financial Repression Reconsidered

Marc To Market's picture




 

In response to the end of the credit cycle, policy makers and central bankers in the high income countries have exponentially increased their presence in the capital markets.   Debt issued by governments has soared and central banks are pursuing unorthodox policies--the purpose of which varies from country to country.  

The purpose of quantitative easing in the US, especially the latest reiteration, is to accelerate employment growth.  The ECB’s Outright Market Transactions is to ensure a proper transmission of its monetary policy to countries that agree to EU/IMF conditionality and have access to the capital markets. Japan’s asset purchase program, through which it buys not only government bonds, but also ETFs, REITS and corporate bonds, is to fight deflation. 

Initially, the Swiss National Bank bought foreign bonds as a way to arrest the franc’s appreciation that was fueling deflationary forces in Switzerland.  When this failed, it moved to formally cap the franc.  The SNB now buys sufficient foreign currencies to defend it.  The Bank of England’s gilt purchase program seemed aimed at strengthening the economy, though it is much less concerned about the labor market than is the Federal Reserve.

Some economists call this “financial repression.”  It occurs, they say, whenever a sovereign interferes with free market activity and the pricing of debt or currency. Of course, such a broad definition means that financial repression has been around forever.  For example, it is akin to shaving some precious metal from coins in ancient Rome. 

By artificially lowering the cost of debt below what would prevail in a  free market, quantitative easing has been called a "stealthy default" by PIMCO, one of the largest bond investors in the world.  It also suggests that it is a sneaky form of taxation:  “a gentlemanly way for modern countries with fiat currencies to stiff creditors while still ostensibly paying interest and principal in full.” 

II

There are two problems with this narrative despite its widespread acceptance. First, the financial repression thesis (FRT) imagines a state of nature in which the market exists, but the state does not.  This view implies that the market is natural and the state artificial.  But if this is the case, any action by the state in the financial markets falls under the expansive definition of financial repression.

The factors of production--land, labor and capital--were not always regarded as commodities that can be traded and bought in the market place.   Karl Polanyi traces this development in his classic “The Great Transformation:  The Political and Economic Origins of Our Time”.  The point is that modernity was co-created by the rise of the modern state and the market economy.  The two were inseparable.

A strong state was needed to overturn the reciprocal rights and responsibilities that limited the scope of the markets in traditional societies (think feudalism, for example).   Each of the factors of production sought to escape the omnipresent market by organizing.  Individual capitalists organized through various forms, like pools, trusts, cartels, and corporations.  Labor organized in industrial and trade unions.  Farmers organized in cooperatives, collectives, and political parties. 

The kind of capitalism that Charles Dickens chronicled, and Fredrich Engels documented, required the visible hand of the state to ameliorate some of the harsher consequences of the market.  None less than Bismark, Churchill, Theodore Roosevelt (heading up the Republican wing of the family, a generation before FDR) recognized this. 

III

The second problem with the FRT grows out of the first, but is considerably less abstract.  FRT misconstrues the conflict that is at the center of its narrative.  The state, it is claimed, seeks to siphon off some of the funds that in a free-market would go to investors and savers.   These funds go to the sovereign, but ultimately, FRT sees the objective of financial repression as re-distribution.

FRT emphasizes only one aspect of unconventional monetary policies: interest rates.  Yet, the conflict between savers and debtors is multifaceted.   To truly assess the state of financial repression, a broader inquiry is required. 

Let's concede, for the sake of the argument, that the Federal Reserve's long-term asset purchases did drive down US yields, depriving savers of interest income. 

There are two income streams that flow to capital and accrue to savers, interest rates and profits.  FRT holds that savers are being "repressed" by the Federal Reserve pushing interest rates lower than they would otherwise be.  But savers are not only coupon clippers.  They are investors too.  They were rewarded by holding bonds that increased in price.  

Moreover, riskier assets like stocks have done better under these policies, hence rewarding savers who invest in these asset classes as well.   Indeed, since the Fed's long term asset purchases began shortly after the demise of Lehman, the S&P 500 has risen by almost 75%.  

In addition, the US reduced the tax on capital gains and dividend income.  This clearly favors the owners of capital, which, of course, are savers by definition.  Many savers are also home owners.  The government and Federal Reserve's "encroachment" into the markets have directly and indirectly supported the real estate market and home prices.  This tends not to be part of discussions of financial repression, but it ought to be.

IV

FRT accuses the government of "repressing" the owners of capital.  Yet, wealth and income have become increasingly more concentrated in the US since the late 1960s or early 1970s.  It has trended through Republican and Democrat Administrations and has continued unabated through the booms and busts of business and credit cycles.    

In recent decades, the productivity gains generated by both labor and capital have gone disproportionately to the owners of capital.  Wages in the US have not kept pace with gains in productivity.  The share of national income accounted for by profits has continued to grow, even during the post-Lehman period, when FRT gained greater currency.  

Actions by the government and the Federal Reserve may moderate the pace of accumulation in one area or another from time to time, but also accelerate it in other areas.

In fact, the very success of the owners of capital in securing the elephant's share productivity gains and ensuring low effective taxes,  lies at the very heart of the credit crisis.  

Briefly, even if crudely, the decoupling of men's wages from productivity made both possible and necessary wider participation of women in the work force.  This too proved insufficient to procure the American Dream (i.e., auto, home and education). 

Transfer payments also proved insufficient.   Credit filled the gap and bought social peace, which meant no fighting over distribution of the social pie.  The end of the credit cycle threatened this arrangement.   The extraordinary government action in response to the crisis was largely intended to restart this circuit of capital.  The large and persistent gap between deposits and loans at large financial institutions indicates that the transmission mechanism is still broken.   

V

At those rare times when the system that favors the owners of capital is at risk, officials can moderate the pace at which capital is accumulated.   This is why it is important to recognize that the growth of the state is, historically speaking, as much, if not more, a conservative project as it is a progressive one.

FRT has a close relative: the Central Bank Independence Thesis (CBIT).   It focuses on the action of central banks rather than governments.  The main argument is that the unconventional policies of central banks carry significant political repercussions, so it should not be a job for independent technocrats.   Because there are "winners" and "losers" from the unconventional monetary policies, governments will increasingly have little choice but to encroach upon the independence of central banks to shape the outcomes.

Central bank independence was never what it was cracked up to be.   During "normal" times, central banks protected the interests of the owners of capital.  Paul Volcker is often cited as the epitome of the independent central banker, but surely his tight monetary policy, justified in terms of some technocratic money supply target created winners and losers.  The owners of capital were among the winners, while those who did not own capital were losers (through such things as higher unemployment and downward pressure on real wages).

Moreover, most central banks have only one goal:  price stability.  Some central banks are given an inflation target, like the Bank of England, which incidentally only recently was granted what many would call independence.  Other central banks are given a goal of price stability, but chose how precisely to define it. 

The definition of price stability is itself not a value-free technocratic decision.  Some central banks focus on core inflation and others on headline inflation.  If, for example, the ECB focused on core inflation rather than headline inflation, it arguably would not have hiked rates in July 2008 as the euro area economy was already contracting.

In addition, many central banks have defined price stability as around 2% annual inflation.  Yet there is no material difference between 2% inflation and 2.5% inflation or even 3% inflation.

This argument can be pushed further.  The fact that most central banks have price stability as their sole mandate is a reflection of a certain set of values and, dare one say, an ideological bias.  Only the US Federal Reserve (and perhaps soon the Bank of Japan), has a full employment goal.  While inflation hurts the owners of capital, it eases the burden on those who don't own capital.   From a purely technocratic and neutral point of view, it is not clear why monetary policy should not target nominal GDP or asset prices.

The setting of monetary policy was never simply a technocratic exercise as the CBIT pretends.  There were always those interests that benefited and those who did less well.  Few cried of a loss of central bank independence, for example, when the Bundesbank would threaten tighter monetary policy in reaction to unions seeking a sharp increase in wages.

It is apparently acceptable for the Federal Reserve to use monetary policy to aid the government's war efforts against foreign enemies, but not against the scourge  of high unemployment or other domestic policy goals. 

The US Treasury Secretary was a member of the Federal Reserve Open Market Committee (FOMC) from FDR's re-organization of the Fed until the early-1950s.  Even before the new Abe government in Japan, it was not unusual for an official from the Finance Ministry to sit in on Bank of Japan meetings.

CBIT makes a fetish out of independence.  In modern parliamentary democracies, there is no room for such a concentration of power that is not part of a system of checks and balances.  From whom should the central banks be independent?  Usually the answer is from short-sighted politicians who may be tempted to pump the economy for some electoral gain.  Yet these are the same politicians we trust with national security and the power of the purse (i.e., tax and spend) and the very politicians that appoint the central bank boards anyway. 

It is not simply in the inflation target where the ideological and political bias of the central bank is laid bare.  The mere act of treating the central bank like no other institution in a representative democracy is itself laden with political values that favor some over others.

VI

The Financial Repression Thesis and the related Central Bank Independence Thesis recognize the conflictual nature of society.  The interests of the owners of capital differ from the interests of those who do not own capital.  An important role of the government and the central banks is to preserve and sustain that conflict.

The purported neutrality of governments and central banks is in fact a self-serving myth.   They both seek to preserve a privileged place for the owners of capital (i.e., as a group and this may mean sacrificing the interests of any single owner of capital). The lower rate of interest that may be accruing to the owners of capital is not repressive.  The loss of interest income is offset by the rise of corporate profits, equity (and other financial asset prices), and real estate prices.

The financial crisis grew out of the very success of the owners of capital in securing productivity gains and extracting profits at levels well beyond which can be used for future profitable investment.  This not only created the conditions for unstable and unsustainable debt-financed-consumption, but also required an elaborate and expensive financial super-structure and complex products to absorb the surpluses.

Governments and central banks have overseen an incredible concentration of wealth and income over the last few decades.  Cries of financial repression are heard only when they seek to moderate part of the pace of capital accumulation.   There was no outcry from Wall Street when governments broke labor unions (Thatcher and the miners and Reagan and the air traffic controllers).

The concentration of wealth and income has become so great that it threatens social stability.  A more balanced distribution of productivity gains can serve to minimize the chance of financial crises.   This is the proper aim of a democratic and representative government.  A stable society requires that the levers of policy—security, fiscal and monetary--be accountable to the people.  It is the absence of that accountability, not low interest rates, that is the true repression.  

 

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Thu, 01/17/2013 - 12:08 | 3162479 ableman28
ableman28's picture

I don't put much weight into the Fed's public explanation of its various QE actions.  I think there is a simpler explanation and one common to nearly all western economies.

Large scale purchase by central banks of their own governments debt depresses market pricing for the debt.  All western governments are running significant deficits at this point.  If these governments had to sell debt into a typically priced market the interest rates would be much higher than they are now.  Relative to paper issued at 1% if rates rose to 4% the effect would be a 400% increase in total cost required to service the debt.  

Central Banks are always cooperative with their domestic ruling class and neither can survive or function without the direct cooperation of the other.  Governments everywhere bailed out their financial system 4-5 years ago.  Now the financial system is returning the favor and giving governments everywhere some breathing space while deficit spending is common place and the practical ability to reduce spending let alone the underlying debt isn't there.

Also, every central bank has to create money to buy their governments debt.  There isn't enough private sector money to buy every western countries government debt, on the open market, at anything like reasonable rates.  If western governments were now trying to sell debt into typical markets the result would be a game of musical chairs. Progressively some western governments, the weakest, would find no takes, default and their economies collapse.  In the lead up their would be a near total break down in cooperation between western governments as each sought to survive even at the expense of others.

So everyone is playing the same game.  And, they'll keep playing the same game until significant economic growth resumes and government tax receipts increase, or, in the very unlikely event governments cut spending significantly. Since the spectre of large scale civil unrest (Greece, Spain) doesn't appeal to governments anywhere the likelihood of government spending reductions on a large scale is nil.

So we are all waiting for a financial godot.  Something that reignites economic growth in western countries.  The longer we wait the more that central banks figure out creative new ways to buy their governments debt. The situation is stable for now the question is for how long.

Thu, 01/17/2013 - 12:15 | 3162513 Orly
Orly's picture

You get the blue ribbon from me, able!

Protecting what they have built, even though they know they're backed into the corner with very few ways out.

You're only 28?  Jeesch, I wish I knew this stuff when I were 28.

:D

Thu, 01/17/2013 - 11:49 | 3162395 No Euros please...
No Euros please we're British's picture

This is what you get when you overanalyze or maybe don't really understand a situation. The purpose of financial repression (artificially low interest rates and high inflation) is exactly as postulated by our friend, fijisailor. There is no higher thought process required.

Thu, 01/17/2013 - 15:26 | 3162609 Marc To Market
Marc To Market's picture

Thanks for the education, but we do not have high inflation.  That little fact is significant.  Moreover, if you read what I wrote, I say that even if it pushed rates down that the returns to the owners of capital have not diminished.  I understand but do not accept and specifically argued against the idea that markets are natural and what the state does is artificial.      Postulating and providing evidence are two different things.  I say the purpose of government action is what they say it is.   You want to postulate a different purpose.  I am open to it, but where is the little thing us guilty of over analyzing call call evidence? 

Fri, 01/18/2013 - 23:28 | 3168324 mkhs
mkhs's picture

You are clearly using the governments modified and  adjusted definition of inflation.  I believe shadowstats has a truer, classical value in double digit range.

Thu, 01/17/2013 - 11:43 | 3162365 Marc To Market
Marc To Market's picture

For the purpose of the article I provided the reasons that officials used to justify their unorthodox policies.  Some readers want to attribute other motivations, but these are simply claims and assertions, which are profoundly different than an argument, which seems to me to require evidence.    To claim that I am statist is a profound misreading of my writing to the point that one sees only what they want to.  I reject the neo-liberal and positivist view that they are in opposition.   I am saying that the owners of capital are not being hurt when looking at the relationship to those who do not own capital.  I am saying the the government and  central bank are on the side of those that own capital.  I also argue that the growth of the state comes from the Right just as much as the Left. 

Thu, 01/17/2013 - 12:03 | 3162447 Lucius Corneliu...
Lucius Cornelius Sulla's picture

"I am saying the the government and  central bank are on the side of those that own capital."

I would qualify this argument.  Not all owners of capital are well connected to Wall Street and Washington.  But, in general I agree that the growth of the state does indeed come to a certain degree from both political spectrums.

Thu, 01/17/2013 - 13:17 | 3162762 Marc To Market
Marc To Market's picture

I am not sure what connected to Wall Street or Washington means.   I am offering a class  analysis.  The owners of capital vs others.  In particular, I am looking not at the retired people who have saved and now are drawing down their savings, but those in the accumulation phase.      I am not, in this piece, concerned about the different sectors or divisions among the owners of capital, though of course they exist. The state (govt and central bank) are not neutral bystanders in the conflict of interests between the owners of capital and others.   Some of the comments want to maintain that the state against the owners of capital and reiterate the repression arguments without addressing the criticisms that I offter.  

Fri, 01/18/2013 - 01:51 | 3165308 Lucius Corneliu...
Lucius Cornelius Sulla's picture

What I mean by "connected to Wall Street or Washington" is the majority of the economy such as FIRE, Healthcare, Pharma, Higher Ed, MIIC, Farmers and anyone else who is plugged into the receiving end of the extortion racket (aka Uncle Sam).  There are some sectors that actually produce goods and services without government subsidies such as high tech, retail, food services, transportation and most of manufacturing.  I think your prose is thought provoking, but it is telling of your views so I stand by my claim that you are a statist because only a statist would claim that government has a role in income redistribution.  When has that ever worked?  History is replete with examples of failure along these lines.  If the past 10 years has proven one thing, it is that government is completely self-serving.  Furthermore, your minimizing the negative effects of financial repression by stating that investors made out with higher stock and bond prices is postulated on what has happened over the past 4 years.  Taking on more risk is dangerous (especially making granny buy junk bonds so she can eat) in an environmment where markets are totally dependent on stimulus.  It is an unsustainable situation that is likely to end badly for all.

Fri, 01/18/2013 - 07:50 | 3165591 Marc To Market
Marc To Market's picture

Thanks Lucius, but I think you miss my point.  I am saying that the state has been actively help distriubte the gains of productivity from labor to capital.  I am specifically saying that the state has been successful in redistribution and in one direction. My "statist" view is simply seeing the state as persuing the interests of the owners of capital.   My claim is not that the government ought to have a role in redistribution.  I say it does in fact.   I think you under-estimate the power of the owners of capital.  My evidence that the lower interest rates are too narrow of a measure of repression is not just that stock and bond prices rose, which is part of it, but also because profits are at record levels, divdend and capital gains taxes were cut and real estate prices are higher. 

Fri, 01/18/2013 - 09:41 | 3165737 Lucius Corneliu...
Lucius Cornelius Sulla's picture

Thanks for the response Marc.  I agree that government has been captured and no longer serves the interest of the public good (if it ever did).  When ex-Goldman CEO and then secretary of the Treasury Hank Paulson went in front of Congress, threatening the Nation with doom and obsconding with billions and virtual dictatorial powers to use it to bail out risk takers I knew how wholly and completely corrupt the Federal Government had become.  Virtually all of the Federal Agencies are run at the top by lawyers or executives from the industries they ostensibly police.  So yes, capital is served by government but I would not call this system capitalism; it is more like a quasi feudalism or corporate oligarchy.  I mention differenct sectors of the economy because some that fall outside of the sphere of heavy government regulation have profit margins that are self-regulated by competition.  I think it is an important contrast.

Thu, 01/17/2013 - 11:51 | 3162393 Orly
Orly's picture

For those willing to learn and entertain differing ideas, the article was excellent.

Thanks.

:D

__________

By the way, looks that Cable has bounced from the top in that Weekly wedge and is headed back to the bottom.  ~1.56.

:)

Thu, 01/17/2013 - 11:08 | 3162199 fijisailor
fijisailor's picture

"The purpose of quantitative easing in the US, especially the latest reiteration, is to accelerate employment growth."

 

Wrong.  The purpose is to make the crappy loans worthless with inflation and sneak the inflation on the public.

Thu, 01/17/2013 - 11:01 | 3162177 Bastiat
Bastiat's picture

The purpose of QE is to monetize the debt, to create artificial demand for a supply which has gone  geometric and to retard the Treasury's compounding interest death spiral.  The employment goal is a very recent bit of Fed propaganda.

Thu, 01/17/2013 - 11:23 | 3162266 TrulyStupid
TrulyStupid's picture

You are of course correct.. since government central planners began supply side stimulus in a big way under Reagan then Greenspan, now Bernanke, stimulus injected at the bottom end (food stamps, various welfare spending and housing tax breaks) has been to support consumer spending on rapidly depreciating consumer goods to support the profit growth needs of the whole ponzi.  For the Fed to meet its goals of empowering consumer spending, employment income must be supplemented by monetary inflation and ever more generous welfare spending.

In this context, it is clear that Obamacare is simply a government gaurantee of profit growth for the insurance/health care cartel and that fresh neo-con wars will be found to support the MI complex.

Thu, 01/17/2013 - 11:00 | 3162170 Sophist Economicus
Sophist Economicus's picture

Like many "intellectual" arguments, it is fun jousting around the edges and accept the current situation as some 'evolutionary correct starting point'.   However, this discussion misses the mark, IMHO, on what the damages of FR.

 

1.  The aggressiveness of governments in the last few years to intrude in the markeplace has distorted cause and effect - stifling returns of even skillful investors

 

2.  The middle class savers, who do not have the sophistication of hedge funds and bankers (and what great returns they've achieved over the last few years, ha!) are being hurt by the ARTIFICALLY low rates in their classic vehicles of savings (bank accounts) and through the stealth inflation in products and services they need to purchase -- PLEASE DON'T quote the current CPI

 

3.   Pensioners have seen their options for saving decline.   Should they be told to play the casino?   What of the stealth destruction of the currency they have saved for years?   6 hours saved in 1995, and put away in a bank account or taken from them and put into Social Security, are now worth 70% less.   Can they ever get back those productive hours?    Can they turn the clock back?     

 

The list goes on and on.    The pile that is FRT is a bowl of spagetti.   One cannot argue about one of the noodles without examining the 10 others that cling to it.    Government FR has stealthily distributed wealth to the favored sons of governemnt -- the academics, the indolent that are now a multigeneration class of servants - useful once every two years, the marginally productive workers who have discovered the new alphabet soup of nourishment (EBT, SSSI, etc), the corporate welfare class - that eats at the trough of government and, of course, the large financial class that skims off of the top and can take no risk that will ever be punished.

Those in the middle, those that create or those companies  that have watched thier capital base get erroded by the insidious manipulation of interest rates are the ones that are suffering.   

 

I say NUTS to this article.

Thu, 01/17/2013 - 10:56 | 3162157 disabledvet
disabledvet's picture

what is missing is a far more simple look at "too big to fail." in other words "why should those who fail be rewarded with our (taxpayer) capital?" there is a war going on so this is not a "zero sum argument." in other words if i give to AIG i must take from the war effort. and indeed "debt creation itself can be considered an enemy." One need only look at Andrew Jackson's Presidency to see his far more correct view on the proper place for "extension of credit interests" vis a vis the State. In short "there should be NONE." we throw so much terminology around it's really hard to find where there is rubber with which to hit the road with. To me the simple fact of "if you're wilding and you fail you pay more for your money in the future via an interest" so that RISK can be properly "judged." The Fed with its QE has "moved risk" to "equities" since in effect "it is the only reward space left." So while Jamie Dimon et al have taken all the wrong answers to heart ("wild away!") so has the Government itself ("debt is what we want not what we want to repay.") the bottom line is we have a MASSIVE shortage of disposable income "in order to create pricing." the gales of creative destruction have been unleashed "en toto"...China is its epicenter ("better, faster, cheaper") and soon "new means of production will be discovered in the West to drive down prices even further." but the bottom line is the same: "no money to pay for expensive benefit regimes." I will be watching the deployment of the Affordable Care Act with great interest. so much is done "with the voter in mind"...will the voter actually get something as a consequence?

Thu, 01/17/2013 - 10:48 | 3162105 moneybots
moneybots's picture

"Moreover, most central banks have only one goal:  price stability."

 

When has there ever been a stable price?  In a system of debt created money, prices cannot be stable.

Thu, 01/17/2013 - 11:40 | 3162363 TrulyStupid
TrulyStupid's picture

Most central banks support a measured increase in prices in order to stimulate the "animal spirits" of the supply side and the expectation of "growth"  i.e. profit growth. The supply side has also an interest in supressing labour costs.. they have been doing this first by busting unions and collective bargaining, then by reneging on pension liabilites and finally by exporting capital (and jobs) to low wage economies. The problem is that wage earners need to spend to support the supply side and must be subsidized by giving them free money... lower taxes, incentives, welfare, low interest loans etc.

Thu, 01/17/2013 - 10:51 | 3162123 Fuh Querada
Fuh Querada's picture

This whole post is a collection of quotes from "million dollar bonus"

Thu, 01/17/2013 - 11:43 | 3162378 Marc To Market
Marc To Market's picture

what does this even mean ?

Thu, 01/17/2013 - 11:59 | 3162434 Orly
Orly's picture

MillionDollarBonus is a poster here on ZeroHedge.  He uses parody to demonstrate the idiocy of the entire financial scheme, though most people take him seriously.

He'll say things like, "The best thing that Bernanke can do right now is to give more money to the Big Banks so that they can buy Apple stock from the greatest company in the world.  I can use my iPhone9 to trade right from the beach!"

I haven't seen him in a while because he must have gotten tired of peole calling him names over his clearly asinine comments.

;/

Thu, 01/17/2013 - 13:20 | 3162786 Marc To Market
Marc To Market's picture

ah, thanks for the clarification.   Besides being a statist and bankster, now I also plagerize. 

Thu, 01/17/2013 - 10:49 | 3162091 Fuh Querada
Fuh Querada's picture

".....The purpose of quantitative easing in the US, especially the latest reiteration, is to accelerate employment growth...."

You parrot Mr. Bernanke. If that is the case, then it has been singularly unsuccessful. I thought the real intention was to reflate asset prices in general and real estate prices in particular, thus improving the value of such assets on the balance sheets of the insolvent "too big to fail" banks.

Thu, 01/17/2013 - 11:01 | 3162173 Sabibaby
Sabibaby's picture

If read the article in entirety he explains how unsuccessful QE is and the problems associated with it.

Thu, 01/17/2013 - 10:42 | 3162061 Umh
Umh's picture

If you have to change the definition of something to argue against it I will say you lose.

Thu, 01/17/2013 - 10:38 | 3162050 Bastiat
Bastiat's picture

The purpose of quantitative easing is to accelerate employment growth?????!!!!!   

Thu, 01/17/2013 - 10:47 | 3162098 Baron Robber
Baron Robber's picture

Exactly, was tempted to stop reading there but kept going. This is a total bullshit post

Thu, 01/17/2013 - 10:35 | 3162037 Bastiat
Bastiat's picture

Inflation eases the burden on those who don't own capital????  Obscene.

Thu, 01/17/2013 - 10:30 | 3162012 Orly
Orly's picture

Wow.  Wonderful analysis that really hits close to the bone as it reflects the dichotomy in economic society.

"The financial crisis grew out of the very success of the owners of capital in securing productivity gains and extracting profits at levels well beyond which can be used for future profitable investment.  This not only created the conditions for unstable and unsustainable debt-financed-consumption, but also required an elaborate and expensive financial super-structure and complex products to absorb the surpluses."

Here is where the rubber meets the road because what you are describing fits perfectly within the framework of human nature, which, as you point out, has been around forever.  The dichotomy is none other than the ancient instincts of fear and greed.

When money ages, that is, when it gets to be "old money," investments in real estate and equities, bonds and the like have paid off for the owners of capital.  Greed says that they are not going to allow someone to come along and change the rules that would be adverse to their livelihood, for fear that they would lose control of their fortunes and the power that comes along with it.  Politicians, then, are bought and paid for, given tokens and junkets to assure that rules don't change.

As Einstein said, "the most powerful force in the Universe is compound interest."  As they are assured to hold what they have, the accumulation of more naturally occurs due to the increasing scarcity by way of the planetary growth rate itself.  They are protecting their power and want assurances that their monkeyshpere will be taken care of.  This gives rise to hubirs, in essence, as later generations come to believe that they are better than everyone else and that they have been born special.  Seldom do they realise that, through a fluke of birth, they were born into a world which afforded them monetary gifts and the shoe could have just as easily been on the other foot.

As these beliefs are further entrenched, a sub-set of society comes about wherein the "elite" can thrive and those other instinctive elements of human nature of jealousy and competitiveness make a game of it all.  Greed gets fine-tuned and teeters on the border of what many would consider evil.  It is not evil, per se.  Rather it is just the dark side that lives within us all.

Thus, the elaborate and expensive financial super-structure becomes more and more "super" and subdivided until we have CDS-cubed and the like, which no one really understands in toto.  The elite then go on to live on a planet that very few people would recognise if they spent a day in their Armani suit.  As George Carlin said, "It's a tight club and you ain't in it."  (Well, maybe you are but most of us aren't.  ;) )

What they don't realise is that through their attention and focus on theirs and the continuation through generations, concentrating wealth and holding it through fear and greed breeds a widening chasm between the haves and the have-nots.  It was okay when there were people in the middle who could act as a buffer between rich and poor, with thin aspirations to get into the one-percent club.  Now, though, as you rightly point out, real wages have been declining for decades and goods and services are getting more expensive all the time.  The widening gap seems to have reached terminal velocity such that there are very few options of turning it back without tremendous pain on all sides.

It is a track that has been tried before many, many times in human history and examples are everywhere: the Japanese Shogun system, the Western feudal system, the Romans cutting their currency and on and on.  Inevitably, these actions lead to a societal reset that is more often than not a bloody one, is drawn out for centuries and is generally the most wasteful tack of the human experience.

If everyone with money would just realise that it is okay to take a loss sometimes <cough-Jamie Dimon-cough, cough-Ben Bernanke-cough>, then a stronger, smoother and more productive planet would ensue.  But as long as the old money are protecting their greedy interests from fear of any loss whatsoever, aided by ever-more repressive laws to keep the plebes at bay, then the concentration of wealth and power will get even greater and the long road to and through serfdom will reach its nexus with not much to stop it.

______________

Thanks for a very insightful piece.  It was a pleasure to read.

:D

Thu, 01/17/2013 - 10:13 | 3161945 Lucius Corneliu...
Lucius Cornelius Sulla's picture

Truly the author is a Statist to the core as he operates on the assumption that government intervention is some kind of benevolent force.  Given the level of manipulation in US capital markets, there is no free market.  Putting the market at the mercy of politicians created the instability in the first place (via government loan and deposit guarantees) and have lead to suffering as capital imbalances adjust.  Therefore, to say that investors benefit from these policies is nonsense.  The policies breed further instability and uncertainty so investors are forced to gamble that further, unsustainable, deficit spending will keep capital markets inflated.  Eventually the burden of debt created by said policies becomes so great that the economy crashes along with the capital markets.

Truly stable capital markets only come about by the absense of central planning.  That is what capitalism is about.  One can argue about ameliorating the excesses of capitalism through anti-trust law, but to think that deficit spending and central banks create stability is a farce.  Sure, in the short term some negative effects may be averted, but the build up of debt must eventually be resolved.  The excessive build up of debt over time creates the conditions that lead to depressions instead of recessions which ultimately create ruinous extremes in financial, political and social instability.

 

Thu, 01/17/2013 - 11:08 | 3162201 JeffB
JeffB's picture

"...  But savers are not only coupon clippers.  They are investors too.  They were rewarded by holding bonds that increased in price.  

Moreover, riskier assets like stocks have done better under these policies, hence rewarding savers who invest in these asset classes as well.   Indeed, since the Fed's long term asset purchases began shortly after the demise of Lehman, the S&P 500 has risen by almost 75%... "

I think the author gives too much credit to the government for their interventions despite his criticisms of how it is currently being handled. I think he feels that the intervention itself is necessary, but they're doing it poorly now and should adjust things to modify who the "winners" and losers are.

I believe he's short sighted in looking primarily at the short term effects of government intervention, lauding the benefits of the "boom" period in the economic cycles they spawn, while ignoring the "bust" phase that inevitably results from the misallocation of the resources during the artificially induced boom.

Professor Garrison does a nice job of explaining the process in his YouTube talk on the subject:

 Austrian Theory of the Trade Cycle | Roger W. Garrison

 

Thu, 01/17/2013 - 10:29 | 3162019 Orly
Orly's picture

I think he is saying that government is just a tool of the power elite.

Thu, 01/17/2013 - 10:52 | 3162129 bank guy in Brussels
bank guy in Brussels's picture

A profound article that is well above the norm even for ZeroHedge

Beyond his saying that government is a tool of the power elite, he is (partly indirectly) pointing out that this is the great tendency of things, halfway inevitable, but it must be fought and countered

Indeed a 'statist' but he is thoughtfully approaching the core of the anti-libertarian argument ... there is no avoiding the issue of government protecting the common and working people ... otherwise the elites take control ...

The libertarian 'free market government' fantasy would quickly crash and burn as oligarch warlords quickly bought and corrupted the courts and police agencies and media ... like they have in the USA right now

Marc Chandler is on the verge of expressing the great truth advocated by Henry C K Liu, others such as Richard Koo and long ago to some degree by capitalists such as Henry Ford

Workers' wages must be kept high and decent, otherwise everything in an economy becomes diseased and sclerotic

People in the streets as the ultimate power ... and indeed a little 'socialism' ... why north-west Continental Europe, is still today, the greatest paradise in human history, with essentially no poverty among legal residents, and little fear of government or police or corrupt courts and lawyers

---

Re 'financial repression', though, I think that does have a more specific meaning than in Marc's article, even though there is a 'quantity' issue that is a matter of judgement

'Financial repression' is really the idea that 'too much' of an economy is being shoved into government debt, by various somewhat insidious means

At various moments there can perhaps be a lot of government debt for good purposes (Richard Koo - style)

But there is no doubt that often gov't debt is cancerous and needs to be curtailed. One of the perhaps better alternatives at points in a balance sheet recession, is one Marc Chandler mentions above - nominal GDP targeting in monetary policy, which Japan is about to try intentionally and big-time

But good piece by Marc and great that ZH has presented it

Thu, 01/17/2013 - 11:19 | 3162243 JeffB
JeffB's picture

I think there is a necessary role for a government to provide a fair and level playing surface for all of the economic actors concerned, but there is a definite ongoing and apparently inevitable tendency to overstep its legitimate bounds and to always seek to grow and accrue ever more power and control over the citizens and the economy.

I also think we'll see the economies of the countries of north-west Continental Europe crash and burn along with the rest of Europe, largely because of the growing leviathan of government.

Government intervention can look quite good during the boom periods spawned by the early phases of borrowing and money printing governmental intervention. It's not nearly as pleasant when the chickens come home to roost during the inevitable crash phase of that government induced cycle.

 

Fri, 01/18/2013 - 01:11 | 3162241 Lucius Corneliu...
Lucius Cornelius Sulla's picture

Your assertion that Northern Europe is some kind of ideal system is not supported by the facts of history.  John Law perfected the use of fiat currencies to enable the French Monarchs to fund their wars.  The resolution of the speculative debt build up was followed by another global inflation that resolved in the 1930s.  Any European would agree that it was a contributing factor to the social and political instability that led to extreme suffering.  I would speculate that Europe is far from out of the woods as the present experiment in fiat currency is likely to end in tears.  The major difference between the USA and Europe, in terms of social cohesion, is what the inflated currency bought.  In the case of the USA it was military industrial complex that benefited the most.  In Europe more of the money went to social programs. 

Fri, 01/18/2013 - 08:08 | 3165610 Ghordius
Ghordius's picture

Lucius, you write as if we europeans would have a choice. We haven't, at least not since WWII

reread history about how the Pound was forced out of the gold standard, for example

we are the continent that has to react. The Yin to the US Yang

Princess Euro is already a kind of "dangerous rebellions" - and she has to support King Dollar in his old age shenigans

your view of US weapons vs european social programs is incorrect, if you look at the latest numbers

social cohesion in europe is higher because we have endless tribes living in the same spot since ages - and the US is special in the sense that when it comes to security, the American goes "individual" while the rest of the world "groups", a legacy of US history

Fri, 01/18/2013 - 09:52 | 3165777 Lucius Corneliu...
Lucius Cornelius Sulla's picture

One thing I admired about Germany is the quality of infrastructure.  It is quite telling to drive home from the airport when returning from Europe on roads that are neglected by comparison.  Meanwhile $200M is spent on one fighter jet and untold billions policing the worlds oceans to protect the interests of multi-nationals.

Thu, 01/17/2013 - 11:19 | 3162236 Orly
Orly's picture

Right you are, bgb.

It should be obvious to all that workers' wages must be kept high- or at least as high as to afford a "liveable" wage.  As an example, I was working in New Jersey doing x-rays in the late 1980s.  I had a decent education, had a skill and went to work every day to earn my money.

Then, something very strange happened.  the price of real estate suddenly went through the roof and, while I had aspired to buy a home there, there was no way I could do it because house prices were rising 5% a month, for some unkown reason.  Speculation, probably.

Now, the "average" working person, the nurse and the fire-fighter, were priced out of the market. There was no way the butcher could afford it, as there was no way the teacher could afford it, either.  Needless to say, I left New Jersey for Texas.

Rates came down and people could squeeze their way into a mortgage as the economy boomed.  That was all well-and-good until it wasn't.  That is where the bubbles began to be blown.  Today, the Fed has lowered rates to zero and the mortgage that sits on the banks' books are really worth pennies on the dollar.

But the Fed felt it had to protect its monkeysphere- the big banks, so it did.  Now, it is giving out free money like sweets and there is no end in sight.  What began with greed then, is fear now, and if there were a true mark-to-market economy, Bank of America wouldn't even exist today.  The entire "experiment" is insidious and needs to be stopped immediately.

I hope Fed Governor Richard Fisher has his way and breaks up these behemoths that are doing nothing more than sucking the American economy dry just to save face for Jamie Dimon and Lloyd Blankfein, Dr. Bernanke's fellow macqaques.

As I stated in my earlier post, I don't think these people are evil. I think they want everything to be peachy for everyone but it is difficult for them to think outside their elitist box. They are just human and it seems now, the Fed is realising quickly that this grand experiment of throwing money on everything is not working and is indeed making the future situation much, much worse.  I believe that we are going to see bold steps out of the Fed over the next couple of years; steps that will be jaw-dropping in scope and completely unpredictable (to most...) right now.

Believe it or not, they are going to do the right thing...eventually.

:D

Thu, 01/17/2013 - 09:57 | 3161860 eddiebe
eddiebe's picture

Spot on Marc!

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