Archive for October, 2011

October 10, 2011

Ponzi Economics – Steve Keen

I stumbled out into the autumn sunshine, figures ricocheting around my head, still trying to absorb what I had heard. I felt as if I had just attended a funeral: a funeral at which all of us got buried. I cannot claim to have understood everything in the lecture: Sonnenschein-Mantel-Debreu theory and the 41-line differential equation were approximately 15.8 metres over my head. But the points I grasped were clear enough. We’re stuffed: stuffed to a degree that scarcely anyone yet appreciates.

Professor Steve Keen was one of the few economists to predict the financial crisis. While the OECD and the US Federal Reserve foresaw a “great moderation”, unprecedented stability and steadily rising wealth, he warned that a crash was bound to happen. Now he warns that the same factors that caused the crash show that what we’ve heard so far is merely the first rumble of the storm. Without a radical change of policy, another Great Depression is all but inevitable.

The problem is spelt out at greater length in the new edition of his bookDebunking Economics. Like his lecture, it is marred by some unattractive boasting and jostling. But the graphs and figures it contains provide a more persuasive account of the causes of the crash and of its likely evolution than anything that has yet emerged from Constitution Avenueor Threadneedle Street. This is complicated, but it’s in your interests to understand it. So please bear with me while I do my best to explain.

The official view, as articulated by Ben Bernanke, chairman of the Federal Reserve, is that both the first Great Depression and the current crisis were caused by a lack of base money. Base money, or M0, is money that the central bank creates. It forms the reserves held by private banks, on the strength of which they issue loans to their clients. This practice is called fractional reserve banking: by issuing amounts of debt several times greater than their reserves, the private banks create money that didn’t exist before. Conventional economic theory predicts that when the central bank raises M0, this triggers a “money multiplier”: private banks generate more credit money (M1, M2 and M3), boosting economic growth and employment.

Bernanke, echoing claims by Milton Friedman, believed that the first Great Depression in the US was propelled by a fall in the supply of M0, which, he said, “reinforced … declines in the money multiplier”. But, Keen shows, there is a weak association between M0 supply and depression. There were six occasions after the second world war when M0 supply fell faster than it did in 1928 and 1929. On five of these occasions there was a recession, but nothing resembling the scale of what happened at the end of the 1920s. In some cases unemployment rose when the rate of M0 growth was high and fell when it was low: results that defy Bernanke’s explanation. Professor Keen argues that it’s not changes in M0 that drive unemployment, but unemployment that triggers changes in M0: governments issue more cash when the economy runs into trouble.

He proposes an entirely different explanation for the Great Depression and the current crisis. Both events, he says, were triggered by a collapse in debt-financed demand. Aggregate demand in an economy like ours is composed of GDP plus the change in the level of debt. It is the sudden and extreme change in debt levels that makes demand so volatile and triggers recessions. The higher the level of private debt, relative to GDP, the more unstable the system becomes. And the more of this debt that takes the form of Ponzi finance – borrowing money to fund financial speculation – the worse the impact will be.

Keen shows how, from the late 1960s onwards, private sector debt in the US began to exceed GDP. It built up to wildly unstable levels from the late 1990s, peaking in 2008. The inevitable collapse in this rate of lending pulled down aggregate demand by 14%, triggering recession.

This should be easy enough to see with the benefit of hindsight, but what lends weight to Keen’s analysis is that he saw it with the benefit of foresight. In December 2005, while drafting an expert witness report for a court case, he looked up the ratio of private debt to GDP in his native Australia, to see how it had changed since the 1960s. He was astonished to discover that it had risen exponentially. He then did the same for the United States, with similar results. He immediately raised the alarm: here, he warned, were the conditions for an economic crisis far greater than those of the mid-1970s and early 1990s. A massive speculative bubble was close to bursting point. Needless to say, he was ignored by policymakers.

Now, he tells us, a failure to address these problems will ensure that this crisis will run and run. The “debt-deflationary forces” unleashed today “are far larger than those that caused the Great Depression”. In the 1920s, private debt rose by 50%. Between 1999 and 2009, it rose by 140%. The debt-to-GDP ratio in the US is still much higher than it was when the Great Depression began.

If Keen is right, the crippling sums spent on both sides of the Atlantic on refinancing the banks are a complete waste of money. They have not and they will not kickstart the economy, because M0 money supply is not the determining factor.

 It’s in all our interests to understand how to stop another Great Depression | George Monbiot | Comment is free | The Guardian

President Obama justified the bank bailout on the grounds that “a dollar of capital in a bank can actually result in eight or 10 dollars of loans to families and businesses. So that’s a multiplier effect.” But the money multiplier didn’t happen. The $1.3 trillion that Bernanke injected scarcely raised the amount of money in circulation: the 110% increase in M0 money led not to the 800% or 1,000% increase in M1 money that Obama predicted, but a rise of just 20%. The bail-outs failed because M0 was not the cause of the crisis. The money would have achieved far more had it simply been given to the public. But, as Angela Merkel and Nicolas Sarkozy demonstrated over the weekend, governments have learnt nothing from this failure, and seek only to repeat it.

Instead, Keen says, the key to averting or curtailing a second Great Depression is to reduce the levels of private debt, through a unilateral write-off, or jubilee. The irresponsible loans the banks made should not be honoured. This will mean taking many banks into receivership. Otherwise private debt will sort itself out by traditional means: mass bankruptcy, which will generate an even greater crisis.

These are short-term measures. I would like to see them leading to a radical reappraisal of our economic aims and moves to develop asteady-state economy, of the kind proposed by Herman Daly and Tim Jackson. Governments and central bankers now have an unprecedented opportunity to learn from the catastrophic mistakes they’ve made. It is an opportunity they seem determined not to take.

Advertisements
October 10, 2011

Links

What once was a mercantile world has become a global playpen for moving hot money to squeeze out the highest return on investment. Replacing nation states with international capital is now sport. Undermining the sovereignty of countries by an elite club of financial manipulators is the purpose for the grand game. Illustrating this fact, David Callaway writes in Market Watch. “The sale of the New York Stock Exchange to Deutsche Boerse this week underscores the lack of historical antipathy for Germany, the world wars not withstanding, but also something more significant. The deal officially slammed the door on the surge of protectionist overreaction that sprang from the global financial crisis”. The conquest of the NYSE by German economic dominance is ironic, since so much of the financial funding of the Third Reich came out of Wall and Broad Street.

Money is the ultimate leveler. The dilemma is that capital is not democratic. If you have money, you have options. If you do not, you are at the mercy of the transnational system of financial bondage. All too often people equate capitalism with free enterprise. Nothing could be further from the truth. Crony Capitalism destroys genuine free market competition. Wealth creation is the nature of authentic commerce. Command and control is the objective of cabal moguls. Entrepreneurship is the business plan for prosperity, while systemic usury is the formula used bybanksters to enrich favored cohorts in crime.

wallstreet.jpg

The current article in Rolling Stone by Matt Taibbi asks a key question, Why Isn’t Wall Street in Jail?“Nobody goes to jail. This is the mantra of the financial-crisis era, one that saw virtually every major bank and financial company on Wall Street embroiled in obscene criminal scandals that impoverished millions and collectively destroyed hundreds of billions, in fact, trillions of dollars of the world’s wealth — and nobody went to jail. Nobody, that is, except Bernie Madoff, a flamboyant and pathological celebrity con artist, whose victims happened to be other rich and famous people”.

Sensible citizens want an answer. Justice demands accountability. Yet, few people fully comprehend that the supra-capitalists of the imperial cult of the money-world, ignore the rules of nation states. Above the fray, theseIlluminati live in a sublime existence of self-established privileged. The reason that they can get away with murder is simple. They are the rulers and the designers of the laws. Countries adopt policies, follow instructions and shield the controllers of counterfeit money creation. Jails are for renegades, not for capital deities. Influence routinely bought, prepares the way for more mergers of Wall Street exchanges. The protected few are not subject to the same standards that destroy any ordinary transgressor.

A true hypocrite socialist, who masquerades as a prophetic filmmaker; Michael Moore, brings this lesson home. His latest project, Capitalism: A Love Story is available for viewing. He depicts Wall Street as financial whores effectively. However, his alternative for a paradise on earth reveals the lunacy of this buffoon in all his psycho glory. Two reviews of the movie offer substantial criticism.Capitalism: A Love Story by Michael Moore Movie Review and Michael Moore Mistake in “Capitalism: A Love Story” on FDR’s Second Bill of Rights?

From the Mises Daily, Michael W. Covel in Michael Moore Kills Capitalism with Kool-Aid provides insight and the text for the brave new world of Democratic Socialism.

“What is his solution? Tugging on your idealistic heartstrings of course! Moore ends his film with recently uncovered video of FDR talking to America on January 11, 1944. Looking into the camera, a weary FDR proposed what he called a second Bill of Rights — an economic Bill of Rights for all — regardless of station, race, or creed — that included”.

the right to a useful and remunerative job in the industries or shops or farms or mines of the nation;

the right to earn enough to provide adequate food and clothing and recreation;

the right of every farmer to raise and sell his products at a return which will give him and his family a decent living;

the right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies at home or abroad;

the right of every family to a decent home;

the right to adequate medical care and the opportunity to achieve and enjoy good health;

the right to adequate protection from the economic fears of old age, sickness, accident, and unemployment;

and the right to a good education.

The context of this pious pontification of the patrician Franklin Delano Roosevelt needs to be seen for what it is, his true religion – the supremacy of the Federal Government, at the cost of the destruction of free enterprise. Moore, a modern day charlatan is an apt surrogate for the Roosevelt legacy of Totalitarian Collectivism. Wall Street is no friend of ‘Merchant Class’ business. Only the speculator and the monopolist have a love affair with the financial culling that takes place in the rigged markets.Moore’s delusory faith in a communal democracy is a paternal insult to the underclass that follows a pied piper into perpetual servitude that rests upon a one person, one vote equality myth. The film glorifies dysfunctional creatures, who behave as if they are in the formative stages of just learning to walk. Most demonstrate they are better at crawling on all fours. This kind of marginal human society will never rid the world from the scourge of international capitalism.

The inescapable result of herding illiterates into democratic camps of welfare subsistence cannot create actual wealth. The crowd that raves the Michael Moore remedy will be prime targets for extermination, when the inevitable bankruptcies of governments explode. Who or what will fill the void. One person’s white knight is often a demon to another.

davidjl006.jpg

The portrait of a triumphant Napoleon Bonaparte by Jacques-Louis David has the General Crossing the Alps at the Saint-Bernard Pass. This famous image symbolizes the historic pattern of a strong leader taking charge during a political debacle. It happens, either by a forceful takeover or by an anointed selection from the ruling class to be the next puppet. Seldom are there successful libertarian revolutions that limit the influence of the banking syndicates.The emperor attempted the enforcement of the Continental System which was a blockade aimed at denying the British any trading access to ports in Europe, theoretically destroying British trade and denying them the money they needed to fund Napoleons enemies on mainland Europe. The United States was able to acquire the Louisiana Purchase because of Napoleon’s need to finance his wars. The House of Rothschild was the major financier of the British and greatly multiplied their wealth during the Napoleonic Wars. In 1815, Napoleon Bonaparte observed,“When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes… Money has no motherland; financiers are without patriotism and without decency; their sole object is gain.”

If the full weight of the Old Guard and Napoleon’s Grande Armée was at the mercy of the banking loans, how can usury interests be tamed by a FDR second Bill of Rights? Any rational and moral person cannot believe that this kind of modern social contract can liberate inventive economic wealth creation. The Jacobin Club was the inspiration behind the implementation of the Reign of Terror during the French Revolution. The anti-cleric and aristocracy purge by the Committee of Public Safety sounds like a natural fit for the proponents of a FDR/Moore final solution.

 

200px-Sans-culotte.jpg

The Wall Street elites are the real closet Jacobins of the international capitalist plantation. Their objective is to create a permanent “Sansculottes” underclass. During the late 1790’s they were the ‘shapeless, mostly urban movement of the laboring poor, small craftsmen, shopkeepers, artisans, tiny entrepreneurs and the like’. Today the wretched dispossessed is the middle class. They are hanging on by a thread. Yet, they reject the absurdity that rights come from society and are dispensed by government.The only love affair for Wall Street plutocrats has a populist revolutionary cheer. Not off with their heads, but strip them of all their cash. The French mob, demonstrators, rioters and the constructors of barricades, demanded blood. Now, the working oppressed is in the perplexing position of engaging in a necessary revolt in order to survive.

The financial exploitation today is at such an obscene level, that saneness requires courage and action from citizen heroes. Another famous painting is of the Singer Chenard, as a Sans-Culotte. Waiting and placing your fate in the hands of a Bonaparte has its risks. Rally to the flag of an authentic, Declaration of the Rights of Man. Intrinsic natural rights, not arbitrary state authority, are the only valid standard. The banner of traditional Christian values and sound money practices is the way out of the dead zone. The global Illuminati financial House of Rothschild creates the present ongoing terror. Confiscation of their ill-gotten gains from their universal pillage is far more effective than relying on a socialistic redistribution of wealth to the masses. America needs to rebuild a crippled society. 

 

A successful Thermidorian Reaction that establishes a true accountable Republic, which strives to attain liberty, property, security, and resistance to oppression, is the proper goal for all citizens. Scriptural principles of economics and free markets are the foundation of lawful entrepreneurship, which would lead to national prosperity. Wall Street has betrayed those functions and needs a total reorganization before the peasants storming the citadel, becomes unavoidable.