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?
- 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.
- 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.
- 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.
- 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.
- 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.
- Stop the Beach Renourishment v. Florida Dep’t of Environmental Protection
- Kelo v. City of New London
- Atlantic Yards public opinion
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.