Sugar High or Growth from Sustainable Economic Policy?

By Edward Harrison

Yves asked me to cross-post once more because she is in transit today. So I wanted to continue where I left off yesterday with a post from just a few days ago. I believe this upturn has more legs than many believed (and still believe) possible. However, that doesn’t mean the recovery to growth is sustainable.To quote from the last part of yesterday’s post:

If the developed economies use this cyclical upturn wisely to reduce household debt levels, to increase private sector savings, to clean up the balance sheets of weak banks, and to cautiously normalize fiscal and monetary policy, we will be in a much better position to counteract economic weakness when the next downturn hits. Will policy makers do so? I have my doubts.

Now, last week, I caught some very good commentary by a number of well-known financial industry experts. I wanted to share my own thoughts with you on their commentary, especially in light of my posts at Credit Writedowns on Eisenhower’s Farewell Address and The New Monetary Consensus. I had featured two of the commentaries at CW, from Roach and Faber. I will add a bit from Gross and Grantham and try to unify them into a single theme regarding corporatism and the sustainability of this upturn.

Let’s start with Stephen Roach. He opined in an interview with CNBC last week that the Federal Reserve was a serial bubble blower which is creating the pre-conditions for yet another bubble right now. He believes that the Fed’s dual mandate of considering employment and price stability in monetary policy must be strengthened to include considerations of financial market excess. He thinks the Fed needs three mandates in order to be fully effective. I would prefer the Fed be stripped of its existing mandates and concentrate only on its role as lender of last resort. See my post, Stephen Roach on CNBC and the included video clip for more of Roach’s view.

Marc Faber takes a similarly sceptical view of the Fed and its bubble blowing. His view is that the Fed created a credit bubble through artificially low interest rates, much as Roach has said. But he also sees government as a whole implicated in similar policies to boost consumption artificially, ultimately leading to low quality growth. In his view, these policies will eventually destroy the dollar, which he already views as an invalid unit of account. See Marc Faber, what are you worrying about? for more on that score.

Now, Faber made his comments at the Barron’s Annual Roundtable with a bunch of other market followers like Fred Hickey, Meryl Witmer, Abby Joseph Cohen, and Felix Zulauf. Bill Gross has also recently joined the Roundtable group as its resident bond expert.  He too had some uncharitable words to say about government’s stimulative policies. But he also introduces the government capture issue aka crony capitalism. Get a subscription and see Attention, Stockpickers from Barron’s. Here’s an excerpt from early in the text:

Gross: Corporations are probably at the peak of their domination. They dominate versus labor in terms of their ability to export jobs and production overseas. They dominate now in terms of Washington, given the Republican electoral victory and the Obama administration’s moving toward the center.

They even dominate with regard to the Supreme Court, as evidenced by the recent ruling removing limits on corporate donations to election campaigns. This is all good for the market, but not for Main Street in the long run.

Gross is speaking my language here. Just after the Faber commentary I quoted on Saturday, Gross then says:

Gross: I agree with Marc on many things, though not everything. I don’t know if the U.S. has reached a desperate point, but it is employing instruments and vehicles and policies that smack of desperation. We are not looking at a default here, but at years of accelerating inflation, which basically robs investors and labor of their real wages and earnings. We are looking at a currency that almost certainly will depreciate relative to other, stronger currencies in developing countries that have lower levels of debt and higher growth potential. And, on the short end of the yield curve, we are looking at creditors receiving negative real interest rates for a long, long time. That, in effect, is a default. Ultimately creditors and investors are at the behest of a central bank and policymakers that will rob them of their money.

Now, let’s round this out with Jeremy Grantham’s most recent newsletter. You can sign up to read it at GMO. Grantham also touches on the Eisenhower speech that I wrote about earlier today in a piece called "I Like Ike:  A Powerful Warning Ignored, January 17, 1961". He writes:

Historians may well look back on this period, say, from 1960 on, as the “Selfish Era” – a time when individualism and materialism steadily took precedence over social responsibility.  (To be fair, in the period from 1960 to 1980, the deterioration was slow, and the social contract dating back to the mid-1930s was more or less intact.)  Personal debt grew slowly at first but steadily accelerated, even though it can be easily demonstrated that consumers collectively are better off saving to buy and that the only beneficiary of a heavy debt society is the financial industry, whose growth throughout this period was massive, multiplying its share of a growing pie by a remarkable 2.2 times…

The financial industry, with its incestuous relationships with government agencies, runs a close second to the energy industry.  In the last 10 years or so, their machine, led by the famously failed economic consultant Alan Greenspan – one of the few businessmen ever to be laughed out of business – seemed perhaps the most effective.  It lacks, though, the multi-decadal attitude-changing propaganda of the oil industry.  Still, in finance they had the “regulators,” deregulating up a storm, to the enormous profit of their industry.  Even with the biggest-ever financial fiasco, entirely brought on by the collective incompetence they produced (“they” being the financial regulators and the financial industry leaders working together in some strange, would-be symbiotic relationship), reform is still difficult.  Even with everyone hating them, the financial industry comes out smelling like a rose with less competition, profits higher than ever, and not just too big to fail, but bigger still.

Other industries, to be sure, are in there swinging: insurance and health care come to mind, but they seem like pikers in comparison.  No, it’s energy and finance in coequal first place, military-related companies an honorable third, and the rest of the field not even in contention.   And now, adding the icing to the corporate cake, we have the Supreme Court.  Formerly the jewel in the American Crown, they have managed to find five Justices capable of making Eisenhower’s worst nightmare come true.  They have put the seal of approval on corporate domination of politics, and done so in a way that can be kept secret.  The swing-vote Senator can now be sand-bagged by a vicious advertising program on television, financed by unknown parties, and approved by no stockholders at all!

All in all it appears that Eisenhower’s worst fears have been realized and his remarkable and unique warnings given for naught.  From now on, we should tread more carefully.  Honoring President Eisenhower’s unique warnings, we should perhaps not take this 50-year slide lying down.  Squawking loudly seems preferable. 

We have reviewed the last 50 years and compared 1960 with 2010 in every way we considered interesting, and present the results in Table 1.

[see table in original CW post]

What are the unifying themes about the America of Today?

  1. The Financial Services sector is too large relative to the size of the economy. This is a de facto admission that the US economy is unbalanced, favouring a financial elite at the expense of the rest of American society.
  2. Government is a large part of the problem. In fact, it is the government’s desire to counteract cyclical downturns which not only has allowed debt to accumulate but has also taught industry to insinuate itself into Washington to benefit from these actions. Industries implicated are Big Oil, Big Bank, the military industrial complex, Big Pharma, and the Insurance Lobby.
  3. Deregulation as practiced now favours incumbent organizations at the expense of entrants, large companies at the expense of smaller companies and corporations at the expense of individuals.
  4. The Federal Reserve is part of the problem or even the main trouble maker through its asymmetric easy money policy geared to goosing aggregate demand after financial bubbles.
  5. US Economic policy is short-sighted and has no discernible longer-term objectives that can boost long-term economic growth.

I think that’s about as far as I can go in unifying these comments. Let me say a few things as well. First, the comment by Tim Geithner I keep coming back to repeatedly is very much the problem. Just before Christmas 2009, when it looked as if the Obama Administration had beaten the first wave of the financial crisis, Geithner told Slate the following:

I spent most of my professional life in this building. Watching the politics of the things we did in the past financial crises in Mexico and Asia had a powerful effect on me. The surveys were 9-to-1 against almost everything that helped contain the damage. And I watched exceptionally capable people just get killed in the court of public opinion as they defended those policies on the Hill. This is a necessary part of the office, certainly in financial crises. I think this really says something important about the president, not about me. The test is whether you have people willing to do the things that are deeply unpopular, deeply hard to understand, knowing that they’re necessary to do and better than the alternatives. We’ll be judged on how we dealt with the things that were broken in the country. We broke the back of the worst financial panic in three generations, more effectively and at a much lower cost than I think anybody thought was possible.

Here’s what he is saying: I know Washington. I have been here for a long time and what I have seen tells me that the public often doesn’t have a clue. Sometimes, in the midst of crisis, I have seen people who actually do have a clue get pilloried by this public which doesn’t have a clue. Now, mind you, the people elect government so we have to put our ideas forward like this and take the beating. But, in the end, a real leader has to be willing to override the will of the people and have people around them who are also willing to resist the will of the people. This will be deeply unpopular, deeply hard to understand for people at the time. But when people realize that the policy making elite had it right and they had it wrong, we will be greeted as liberators from this awful mess.

What Tim Geithner is saying is that it is OK to bail out huge corporations with taxpayer money because, in the end, we shall all see this was the right solution, the least cost solution. I don’t know about you, but I find this statement very undemocratic and, indeed, deeply hard to understand. Of course, what Geithner is implying is that the US is a republic, which is really a representative democracy, and, as such, it affords policy makers wide latitude to govern as they see fit; that’s why they were elected. And if people don’t like it, vote them out. Fair enough.

But, again, we are living in a world of asymmetries and privatised gain and socialised loss of an incestuous and intermingled corporate and inside the beltway culture. The very reason people like Faber, Gross, Roach and Grantham are all saying this is wrong is because of the very attitude Geithner displays. When you have executives from mega corporations like Citigroup advising the President-elect while captured regulators are bailing out that same mega corporation, only to have top White House officials depart for that same organization for a multiple of their government salary, how can one not see the whole thing as deeply unpopular, deeply hard to understand?

Second, what’s striking for me is how both Grantham and Gross mention the Citizens United case when talking about crony capitalism. You might already know that out-of-state money flooded into districts like Gabrielle Giffords’ after it was targeted as a pivotal electoral swing district. This is a direct result of Citizens United. You can expect it to get much worse going forward. But, top US courts have made other very pro-corporate eminent domain verdicts that trample on property rights but are supported by government officials.

The United States is an out of control corporatocracy. On this score, things are no different under Barack Obama than under George W. Bush or Bill Clinton. This is why real wages have not increased in 40 years. This is why the male labour participation rate is at post-WWII all-time lows. This is why so many jobs are being outsourced. Yet corporate profits are now again at records despite the 16% U-6 rate of unemployment and record foreclosures.

I am cautiously optimistic about the outcome for 2011. Apparently, so is every single one of the financial experts mentioned in this article. But, given the foregoing, there is little reason to think that this GDP growth will either be long-lasting or particularly advantageous for the middle classes in the United States. I hope I am wrong and that the U.S. turns toward policies which foster long-term economic growth. But, clearly there is a reason Grantham, Gross, Faber and Roach are all saying the same thing.

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. Jim Haygood

    ‘We are not looking at a default here, but at years of accelerating inflation, which basically robs investors and labor of their real wages and earnings. We are looking at a currency that almost certainly will depreciate relative to other, stronger currencies in developing countries that have lower levels of debt and higher growth potential. And, on the short end of the yield curve, we are looking at creditors receiving negative real interest rates for a long, long time. That, in effect, is a default.’ — Bill Gross

    That’s an interesting way to look at negative real rates on the short end — as a quasi-default. As a bond fund manager, Gross obviously hates this situation. It continues because the Federal Reserve cartel is imposing its standard steep yield curve remedy to recapitalize its cartel members.

    Zero percent short rates aren’t doing much for economic growth, since interest rates aren’t the main constraint on credit expansion. But they are starving savers for safe income, forcing them into riskier investments and creating the next serial bubble (as Steve Roach says).

    The Fed’s actions are scandalous, fraudulent, and contrary to the public interest.

    ‘I am cautiously optimistic about the outcome for 2011. But, given the foregoing, there is little reason to think that this GDP growth will either be long-lasting or particularly advantageous for the middle classes in the United States.’ — Ed Harrison

    With the fiscal accelerator mashed to the floor (10% of GDP deficits) and monetary policy the loosest ever (zero percent policy rate plus QE2 outright monetization), it would be shocking if the economy didn’t respond. After all, massive amounts of future purchasing power are being time-shifted to the present to purchase this recovery, at enormous cost. That’s why I share your outlook that a continuing, halting recovery is the most probable outcome.

    Should the economy slide back into recession despite massive stimulus, economists will be like physicians who have exhausted the full panoply of antibiotics, but can’t stop the flesh-eating bacteria from devouring the patient. Then the grim options that remain change to amputation and such.

    But it’s axiomatic that borrowing purchasing power from the future spells ongoing secular decline. The ‘out of control corporatocracy’ you describe responds to short-term and often perverse incentives. It has no objective other than to keep the economic engine of this fading empire screaming on financial rocket fuel until it throws a piston with an almighty bang and the lights go out. Countries, cultures, corporations, all have life cycles. We’re on the downhill side of ours. All we can really do is take some notes, so future civilizations won’t have to repeat our fatal mistakes.

    1. gordon

      “Should the economy slide back into recession despite massive stimulus, economists will be like physicians who have exhausted the full panoply of antibiotics, but can’t stop the flesh-eating bacteria from devouring the patient”.

      The full panoply? Surely not. The Very Serious Economists who are calling the shots are in fact limiting themselves to a very narrow range of interventions. Nobody “serious” is suggesting public employment or an expansion of the public sector. The consequences of thirty years of deregulation and privatisation are not to be disturbed.

      The absolute refusal of the US Govt. to consider bank nationalisation or the creation of a Govt. bank back at the end of 2008/ early 2009 is a good example. Nationalisation in particular was extensively discussed and supported on this and other econoblogs, but was dismissed out of hand in Washington.

      There are a lot of possible remedies that aren’t being tried because, I suppose, they’re politically unacceptable. To continue your analogy, the economists who are making the decisions are like physicians who limit themselves to only one drug, and when the patient doesn’t immediately respond they just keep on prescribing bigger and bigger doses.

      1. Jim Haygood

        For all practical purposes (despite minority-interest stub stocks still outstanding), wouldn’t you agree that Fannie Mae and Freddie Mac have been nationalized, at a cost of hundreds of billions to date?

  2. Lee

    .”….take notes, so future generations won’t have to repeat our fatal mistakes.” Reminds me of Thucydedes and his account of the Peloponnesian war.

  3. Joseppi

    The US has gone far beyond a monetary sugar high and has developed over years of negligence and prolonged abuse a severe chronic case of financial diabetes that has manifested into a national diabetic coma at a critical time when clarity of thought is necessary for survival.

    1. Hayduke

      Both should be tried. Then we can determine, after several trials, which is the most effective. Doesn’t make much difference to me, as long it’s done.

  4. par4

    The real question is should we use the gallows or the guillotine? I prefer the gallows it seems more American. So, the next question is should we stretch/slow choke the Fascist bastards or show some mercy and employ trapdoor hanging?

    1. Michael H

      par4 said: “The real question is should we use the gallows or the guillotine? and… should we stretch/slow choke the Fascist bastards or show some mercy and employ trapdoor hanging?”

      Whichever is the most effective method, as Hayduke suggests, and while this is being determined, let them sweat it out in one of three prisons: Guantanamo, Bagram or Colorado’s ADX.

  5. J-Bentham

    Final demand grew at 0.9% in Q3. Inventories grew at 1.6%, clearly an unsustainable level. Housing is double-dipping. Government spending is contracting at the State level and likely at the Federal Level with the Republicans in charge of the house and with the power to defund laws. Therefore, it is fair to conclude that equities are running on a “sugar high” from QE2. The Fed has just been trying to push people out of bonds and into equities to get people to spend from the wealth effect and to increase optimism generally. The level of the stock market now is not justified by the fundamentals. We are experiencing a huge bear market rally. The 20%+ correction will come. A major slowdown in growth will start it, and then problems in Europe will exacerbate.

  6. Thomas Barton, JD

    Today it was reported on Bloomberg that one individual withdrew her entire one billion dollar in the European MAN Fund. Apparently her view of cautious optimism is simple : Get out of Dodge while the gittins good.

  7. Charlie

    Every last dime is being squeezed out of Americas economy through printing money, tax breaks for the rich, bailouts, pushing down wages, importing illegals, offshoring jobs, offshoring manufacturing, war profiteering, socializing the cost, debt, loss, risk and privatizing the profit, massive corporate welfare, undermining or destroying the social safety net, borrowing trillions from foriegn lenders and leaving the debt. The vast majority of this redistribution of wealth is then invested outside America to increase the profit of the conservative ruling elite. America is being bled to death by the conservative ruling power elite, if we do not reverse this offshoring of wealth and investment, America as we know it will not survive.

  8. Taylor Wray

    Can we all agree once and for all that there are, in practice only two attitudes for economists: cautious optimism and crisis mode? Everyone is always cautiously optimistic until the next huge shitstorm hits, and then the switches flip over to crisis mode and the doomsaying begins.

    My real question is, with the astounding and comprehensive downward trajectory of this nation that you just thoroughly laid out, why are you cautiously optimistic and not in crisis mode?

  9. Walter Westcot

    Corporatism should be illegal. Reading some of the quotes from early legislators – I’m surprised to see how many of them thought that form of business was predatory and anathema to what the country was founded on and for.

    But this kind of change will occur ONLY after ‘events’ – that means violence against more government types.

    I read yesterday where somebody said they always root for the bank robbers and that it’s only a small leap to root for assassins.

    I hear ya and second that.

    Violence works. And although most of us blogging here at our businesses and jobs have too much to lose to rattle their chains, some guy who loses his home and business is going to alter the Loughner model for action against the MAN.

    Corporate America must die. I don’t care how.

    1. psychohistorian

      Damn, its not that corporations need to die, they just need to be redirected.

      The problem is that the folks that own the corporations and banks world wide need to be removed from making social, political and economic policy and law.

  10. john

    The view of American citizens as an extractive resource, successfully promulgated by the economic right, has successfully convinced most half of those citizens that any sympathy for another human is communism.

    That markets can be free while people are enslaved is fact of history until the enlightenment when humanism finally opened our eyes to each other and both power and wealth began to to be increasingly regulated. It is only when workers begin to be paid, rather than enslaved, that they begin to spend money and the magic of markets is unleashed for popular purpose and to popular benefit. It is only when free individuals are free to spend money they earn from work into an economy that that market becomes meaningfully free for most people.

    Corporatism will ultimately destroy that meaningful freedom, is doing so now: one in 7 Americans now get their food with food stamps rather than with dollar income from paid work. Consanguinity of economic an political power, as it always does, has corrupted both beyond utility. Profits forecasts are beginning to fall for American corporations. They have won the political battle but will loose the economic war because they have consumed their own demand.

    Until we begin to call “political donations” by their proper name, bribery, we will not get past this problem.

    1. Paul Tioxon

      The analysis is based on simple economic variables with little understanding of social science in any comprehensive or up to date sense. Our military is stationed primarily outside of our national boundaries, our currency is the reserve currency of the world for trade, our language is spoken by all educated politicians, business leaders and intellectuals around the world, and our culture from higher learning to popular arts has influenced the entire world, yet we discuss what goes on in our own nation as strictly a domestic, isolated anomaly, untouched by little more than money and power in NYC or Washington DC and a few other power centers.

      The scale of analysis is inadequate to the task of explaining what we all observe going on everyday.

  11. Japan

    I`ve been living in Japan for a long time and am originally from New Zealand, a country generally considered by most Americans as “socialist”.
    When I first came to Japan many many years ago I was at turns frustrated, incredulous or dismissive of the inefficiencies of business here. Massive over staffing, endless red tape and people whose jobs just seemed utterly unnecessary. You literally have to take a number, wait in line and fill out a form to get 1000 yen changed into coins at a bank for example.
    After seeing the American dream run riot on itself and the rest of the world however, I now tell people Japan is the most successful communist country in the world. The twenty extra bank staff shuffling papers, the old old guys wearing uniforms and waving people into carparks, the university students who stand by the front door of restaurants…, none of these jobs are “necessary” but they do mean that one less person is unemployed, is a tax paying member of society who gets up every day and goes to work.
    Japans “lost decade” (actually 2 decades now) has never gone much above 5% unemployment, doesnt have anyone on food stamps and a miniscule homeless problem. Oh, and everyone gets free healthcare. As does everyone in N.Z too btw. Free schooling too.
    Finally, what IS the reason for business? To improve people lives surely? So which is better for society in general? Having a thin veneer at the top become obscenely wealthy while a massive number go unemployed?
    Im sure a top flight U.S manager could come into most Japanese companies and cut staffing by 50% thereby boosting profits hugely. For the benefit of…..????
    A Japanese friend runs a successful business here with his father and his first stated duty, beyond anything else, is providing for his 50 employees and their families. Im sure he could be a vastly wealthy man if he laid off 20 of them (as would be his right) and kept their salaries for himself. But hes happy with just being wealthy. One wonders what most Americans would make of his business practices. Good luck over there guys.
    And having free healthcare isn`t a commie plot by the way. Its just common sense. God knows how you got yourself into that particular mess. Let me tell you, it is impossible to put a dollar value on the piece of mind you have when you know there is no chance you will lose everything (and everything your family has possibly) should you become sick. It makes parties more fun too as “health insurance” conversations are freaking dull.

    1. Paul Tioxon

      Everyday, we now stare at a Black man as the commander and chief. Our country, founded by slave owners in the south, and oligarchs, rich, white, male, protestants in the north and a civil war to settle who would rule over it all and under what terms. Nothing has changed much. Is there any other country that can claim to be modern nation state, a democratically controlled republic, founded through a deliberative written constitutional process, without the weight of standing armies to loot us, church authorities to hold us in thrall or royals claiming we are subject to their will, and not our own self determination that wrote outright enslavement into its founding laws? And we wonder if there is a direct line of evidence connecting the madness of regular assassination of politicians and the culture that drives the behavior. It is a schizophrenic society, and now, white people are going insane because of all the bullshit they believed to be eternal verities turn out to be the lies that kept them in their place. And that place is now being foreclosed.

    2. Ron

      Thanks for feedback as it brings up the importance of community life within our economic sphere. The American Amish community has similar ideas living a simple straight forward economic life with deep regard for each member of the tribe while striving for community health and vigor.
      America has had little of these sentiments ingrained on a national basis rather more of every man for himself might be our national economic character. In reading Mr.Harrison’s follow up post tonight I was struck on how complex and integrative corporate power had become in our society but given our melting pot seek your fortune in America historical past maybe our present leadership and economic course reflects our cultural bias.

    3. skippy

      Hear, Hear!

      Australia has been likened to a country of small male bonded welfare states, and I can tell you after the flood we just had, acts I have witnessed. I ‘ll throw my lot in with these folks over the American way, any day.

      Skippy…what was that Robin Williams movie where after a childhood sickness they all fell pray to a neurological milady, motor neurons excessively firing creating a seemingly static mental and physical posture.

      That is the general state of America…too me, the state of excessive.

    4. psychohistorian

      This is a conversation that those in control in America do not want the public to have and will everything in their power to insure never happens…..thanks.

  12. avgJohn

    What government policy, new technology or product(s), world shaking event, or other happening of any sort would lead me to believe that economic recovery is on the way? Green shoots? Green energy? Expected trade surplus in the near future. Rising reaL wages? Miraculous technological break through in the energy industry? What?

    I want to believe, but need someone to tell me how we fix this mess. Please don’t bother to infom me that “last friday the unemployment claims were 20,000 lower than expected” or “on tuesday, retailers reported they sold 5% more Chinese toys and junk this year than last year”, or some other irrelevant nonsensical economic statistic.

    Other than printing tons of money, What changes in government policy have been implemented that would lead me to believe the government is on top of our economic problems? The Goldman Sacks assuming control of the SEC? The Bernank standng ready with QE III? What?

    Someone, please name the next economic engine(s) that will drive our economy to new heights of prosperity, create jobs and assure our childrens’ future? Provide some details about the nature of the industry(s), new jobs that will be created (on-shore) as well as the expected annual capital investment, and the spill over effect to other industries.

    Maybe someone out there knows. I wish they would share it.

  13. ChrisTiburon

    Yves has given us such a great forum.
    These comments are clarifying and educational.
    Thanks Japansays and avgjohn…

    Tax policy. It should be that the more jobs you
    create, the lower your overall tax rate, up to and including tax credits that are bankable for future
    years’ profits; i.e. earn a billion, employ one
    person, you pay a higher % than if you earn a billion and employ a thousand people.

  14. Philip Pilkington

    Some points (probably made above already – but no harm in repetition, considering this gets little mainstream attention):


    “We are not looking at a default here, but at years of accelerating inflation, which basically robs investors and labor of their real wages and earnings.”

    First of all, as I pointed out in the comments section of your last piece, inflation will, in fact, ease private debt burdens. Private debt burdens are far more prevalent than savings right now, so this is probably a good thing. Of course, there should be a balance struck between wage-growth etc. and trying to eliminate debt through inflation – and the current administration probably isn’t up to the task. But, my key point is, that inflation isn’t necessarily a bad thing – although in the minds of the rich, with their gross savings, it undoubtedly is – as a class, they’d prefer deflation and major economic stagnation.

    Secondly, we cannot talk about inflation unless we’re willing to look at inflation of food prices and energy prices. These are some of the most important inflationary pressures for ordinary, working people. Now, these – in my opinion – are being pushed up by speculators. This, in my view, is an entirely different issue to inflation as such – and we must consider, once again, where economic stimulus is currently flowing (i.e. QE2 => Wall Street)

    Now, onto some of your points:

    “Government is a large part of the problem. In fact, it is the government’s desire to counteract cyclical downturns which not only has allowed debt to accumulate but has also taught industry to insinuate itself into Washington to benefit from these actions.”

    You should be more careful here. The government AS CURRENTLY STRUCTURED is part of the problem. The government is – as Jamie Galbraith says – currently a ‘predatory state’. But if you should ever hope to escape your current dilemmas, a restructured government will be the only thing that will be able to save you.

    “The Federal Reserve is part of the problem or even the main trouble maker through its asymmetric easy money policy geared to goosing aggregate demand after financial bubbles.”

    Once again, more qualification is needed. It is likely that the only true solution to the US’s problems is fiscal stimulus. The Fed – for ideological reasons – currently focuses only on monetary stimulus; this is deeply problematic. But your article would lead on to believe that the Fed as such is a problematic institution – with all the “THE FED IS READING MYer THOUGHTS UUURRRG – GOLd stanDRAD IS THA WAY FORWARD… RON PUAL AND VAN MISSUS 4EVA LOLOLZZZZZ” that entails.

    Good articles, though – ya should do some writings on here more often, perhaps?

  15. Philip Pilkington

    One more thing – and I think this should have attention called to it, so I’m going to post it on both blogs, if you don’t mind.

    That table you ran is fascinating – I could spend hours discussing it – but one thing in particular struck me: the corporate profit rate which, according to the chart, has risen from 9.9% of GDP in 1960 to 11.1% in 2010. Now look at the financial corporation profit rate – its risen from 1.6% to 2.5% in the same period.

    These figures – in my opinion – are deeply misleading. They give a fudged impression of the real situation today – which is far more ominous. Why? Because more and more corporate profits come from… you guessed it: the financial sector.

    This graph is taken from Great Krippner’s paper on ‘Financialization’. She takes into account the overall contribution of the entire FIRE sector (finance, insurance and real estate) on the corporate profit rate:

    This, it would seem to me, is particularly important to consider today in light of what has been causing the economic problems – i.e. finance.

    For a short and fast summary of Krippner’s paper – and a link to the paper itself – have a look at my own article here (PLUG!!!):

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