UBS' George Magnus On Marxist Existential Crises And The "Convulsions Of A Political Economy"
Well over two months ago we first reminded the Marxists of the world that something big may be coming over the horizon in "Attention Marxists: Labor's Share Of National Income Drops To Lowest In History" a theme, whose violent reprisals in the real world we have been observing since before the Arab Spring began (courtesy of the Fed of course). Lo and behold, suddenly the coolest thing among the post-sophist punditry is to bring up the name of Marx for this and for that, because, guess what - he was right all along or something. Where were these same pundits when Marxist postulates were becoming apparent not only across the past year, but past century, we wonder. That said, one analysis that does merit mention is that by UBS George Magnus, who several days ago does the most comprehensive summary of the modern world through the lens of Marxism. His conclusion is spot on: "We have had a gathering crisis of political economy this year, which is partly about economic growth and jobs, but also and importantly, about a malaise in politics and policymaking, in which governments are seen as unwilling, unable, divided or ineffective when it comes to economic management and stability. It’s this resistance or backlash against the political order that runs through the propagation of the political economy convulsions around the world, including, in extremis, the uprisings through North Africa and the Middle East." Granted this is not at all surprising, nor is it odd considering that all that central planning under the modern monetary system has done is to perpetually push off disasters, with each increasingly frequent subsequent one hitting with greater severity until not all the money printing in the world can save the modern broken socio-political (and economic) framework. But everything in due course. And yes, expect many more references to Marx by hollow econo-historians who bring nothing new to the table and merely stampede in where the herd has already boldly gone before.
As for Magnusen, while we recommend a close reading of the full note, the following selection is of particular note as it provides yet another set of policy recommendations for how to fix the unfixable: namely our existing situation.
First, to lighten the household debt load, we have to think about debt restructuring, possibly even debt forgiveness in certain circumstances, so that eligible mortgage holders receive relief in respect of current debt obligations, for example, in exchange for future home price appreciation gains accruing to lenders. To lighten the sovereign debt load, lower interest rates and longer debt maturities, as recently proposed for Greece, will almost certainly become the norm as afflicted debtor countries reach the limits of forced austerity.
Second, to sustain aggregate demand, governments must seek to promote employment in the short-term, as well as through education and supply side reforms in the longer-term. Cutting income taxes and VAT, for example, might have short-term political advantages but they won’t necessarily get people to spend more. Better to cut employer payroll taxes, or offer companies tax holidays contingent on employment criteria. Better still for the government to embrace some national investment or national infrastructure strategy. It could even capitalise a bank to make investment loans to small and medium-sized companies, which are the real employment-creating part of the company sector.
Third, to build defences against falling into a debt trap, we should use monetary policy in a more radical way than even asset purchases. In other words, while fiscal and debt management policies operate over time on the numerator of the debt ratio, monetary policy should work to bolster the denominator, that is, GDP, income, cash-flow and so on. Most of you will have to hold on now, because this would involve a significant change in monetary policy, in which, for a while at least, central banks would actively target higher inflation, suspending their commitments to 2% inflation or whatever, and to interest rate targeting.
The theoretical underpinning for this derives from the work of the 19th century Swedish economist, Knut Wicksell, who asserted that in addition to the very visible nominal interest rate, there’s also an invisible natural, real rate of interest that balances the supply and demand of loan capital in the real economy. In an economy where the natural rate lies below the nominal rate, there’s excess supply, high unemployment, and a dearth of credit. Sound familiar? I remember having a ‘Wicksellian’ discussion with a very senior member of the Bank of Japan in 1996 at his instigation, shortly before the BoJ adopted QE (for a while), and that’s as far as I’m going to go with this complex theory here. But in order to ‘fix’ this disequilibrium between the now zero nominal and the natural rate of interest, central banks would have to allow the money supply to expand until such time as they achieve, for a while, a higher rate of inflation, a lower real nominal rate, or, say, steady 4-5% growth in nominal GDP. Would it work? We don’t know, but if aggregate demand looks like buckling again, it’s probably worth a stab. That said, the political climate for this is currently very frosty.
Hmmm, so not just more of the same, but much more of the same (and in a way that gold would hit $10k not in a year but a day). Granted, anyone working at UBS (for however much longer) will surely like to provide recommendations that entail them preserving their employment in the "post-fix" world, even if such a transition is really impossible absent a global revolutionary reset due to status quo interests embedded so deep that the Red Button will be pushed long before the worthless equity tranche of the global financial system is marked to market (i.e. zero).
Full Magnus note.