Sustainable vs Unsustainable

Two superpowers, two charts.

From Mao Money Mao Problems:

Readers will of course draw their own conclusions.

My main conclusion is that America’s monetary system is a batshit-insane securitisation-fuelled bloated head and shoulders top, and that China’s is far more sustainable because it is driven by savings and not by speculation and securitisation.

But I think most of us already had a hunch of that.

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What is Michael Heseltine Smoking?

In surely the nuttiest news of the day week month century, former British Deputy Prime Minister (an office of “great repute“) Lord Heseltine suggests that Britain will join the Euro.

From the Grauniad:

Britain will join the euro, Conservative peer Lord Heseltine has claimed. The former deputy prime minister, a long-time supporter of the single currency, said the public had “no idea” of the potential impact its collapse would have on the UK.

But he believes Franco-German “determination” will secure the euro’s future and pave the way for Britain to sign up. Lord Heseltine, who now heads up the government’s regional growth fund, told BBC1′s Politics Show on Sunday: “I think we will join the euro.

“I think the chances are the euro will survive because the determination, particularly of the French and the Germans, is to maintain the coherence that they have created in Europe.”

The problem is that there is no coherence. Nobody is really in charge — not van Rumpuy, nor Barroso, nor Draghi, nor Merkel, nor Sarkozy. The thing is a total hodgepodge, a hyper-bureaucratic, hyper-leveraged mess. Nations were free to borrow and spend as much as they liked — without the ability to monetise debt, and without any real lender of last resort or safety net. Europe has no coherent political or decision-making structure, no single culture of work, no single language and little workforce mobility.

The idea of Britain giving up its monetary independence (and thereby — as Greece is discovering — fiscal independence) to such an incoherent, bureaucratic and anti-democratic cabal is absurd and dangerous.

I suppose there is one kind of coherence in Europe, though.

Goldman Sachs has a finger in every pie and a minister or central banker in (almost) every government. And — as Papandreou discovered, when he suggested Greece hold a referendum on austerity — if you don’t play ball with Goldman Sachs and the cult of international finance, you are quickly disposed of and replaced by a Goldman-endorsed technocrat.

From the Independent:

Fortunately for Europe (and the world) Goldman’s 21st-Century-Schizoid loot-and-pillage hyper-fragile economic model doesn’t offer any kind of long-term prosperity, and is bound to fail. Japan — and more recently, America — is ample evidence for that. Bailing out zombie financial institutions, piling on more debt, and preventing liquidation just tends to lead to the stagnation and zombification of the wider economy.

Certainly, with European sovereign debt now in a Lehmanesque downward spiral (demand collapse) there is no chance of Britain joining the Euro. But the end of the Euro in its current form does not necessarily the end of this mess.

How much productivity, industry, opportunity and wealth will be destroyed by the cult of financialism, hyper-leverage, endless centralisation and no-haircut-bailouts? No-one knows.

The real question is what long-term damage has been done to liberal capitalism as a political and economic system?

The Problem is Fragility

Mainstream opinion on economic conditions at present is a steaming shitheap of errors.

Deluge of hopium from ABC (sponsored by Citigroup, no joke):

Stocks closed higher on Thursday after European leaders agreed on a plan to avert a Greek default and the Commerce Department announced third-quarter gross domestic product grew 2.5 percent, boosted by higher consumer spending, allaying fears that the economy is slipping into another recession.

The Dow Jones industrial average increased about 2.9 percent to 12,209 and the tech-heavy Nasdaq increased about 3.3 percent to 2,784 at the end of the day. The S&P 500 had its biggest monthly rally since 1974, according to Bloomberg, increasing 3.4 percent to 1,285.

The GDP rate was in line with what economists were expecting. The 2.5 percent growth rate is almost triple the 0.9 percent pace of economic growth in the first half of this year, which has been far too slow to generate any job growth. Unemployment has remained stubbornly high at over 9 percent.

The thing is, high unemployment and low GDP growth (now — ahem — magically cured) are (and always were) secondary problems. They’re the things that hurt, sure — but they’re not the cause of the illness — they’re just symptoms The main problem is systemic fragility, and the failure to understand the economy from a systemic perspective, and understand the systemic risks. If the financial system (both global and national) is not resilient to shocks and the unexpected, the system will unravel under the slightest pressure. As I have repeatedly explained, the Western economic paradigm is a highly fragile for two reasons: over-dependence on foreign goods and resources controlled by hostile nations, and the pattern of interconnected financial debt that leaves the system open to collapse if just one significant player collapses:

Not only did the bailouts disable creative destruction (the engine of innovation and social progress), they also created so much debt that they have already damaged the ability of future generations to save, invest and innovate.

Worse, they did nothing to address the fundamental fragility of the system. All of that interconnected debt means the system is still fragile to a default cascade, which means that if the system is to be “saved” again, it will require more bailouts and more debt-acquisition, further eroding the ability of taxpayers to save and invest, as governments tax and inflate the currency to pay down the debt.

I expect future generations to look back on this episode as a bizarre aberration. America — surely the greatest producer and innovator in the history of human civilisation — forgot how markets work and the notion of creative destruction, forgot that an empire dependent on hostile partners (i.e. China and the Arab world) is hugely fragile, and then forgot the fact that America emerged as a superpower as a director result of its status as a great creditor and manufacturer, and that the old European empires lost their superpower status through loss of productivity and massive debt acquisition.

The beautiful thing about artificial abstract systems is that they can be remade at will, unlike ecosystems or organisms. It would be so easy — in principle — to rip up the global financial system and start again, because it’s all abstract. But there are too many vested interests — creditors want their pound of flesh, consumers and businesses want stability and fear change, and so establishment economists and thinkers will hunt ceaselessly for any kind of confirmation for the idea that the system is stabilising, that things are getting better, that things can go back to normal, that prosperity will return.

Well, prosperity may return, at least for a few short years, before the mass of interconnected leverage crumbles back into the murk from which it came. And as credit contracts (as is inevitable in a fractional reserve system) employment will slump, GDP growth will stall, and anger will rise.

The danger is that next time, the gears and wheels of productivity that hold up the abstract falsehoods of finance and consumerism will fail. I am not really a fan of Ayn Rand, but the analogy of Atlas shrugging holds true — in this case, the workshops, mines, and factories of “poorer” exporters holding upon their shoulders the parasitic mass of the consumerist Western nations. It won’t be industrialists and capitalists shrugging — it will be shipyard workers, machine operators, truck drivers, coal miners and construction workers, squeezed and dispossessed. Why should wealthy Westerners live a lavish lifestyle subsidised by the blood sweat and productivity of poorer nations? Because America has nuclear weapons? Because it invades nations that threaten to trade oil in things other than dollars? That kind of belligerence is a house of cards — it works with Third World despots, but not with an angry, politically engaged and dispossessed mob. I see it in the Occupy protests — the police can beat and brutalise protestors, but belligerence doesn’t change anything — the protestors are a hydra, cut off a head and two grow back.

The economic elite of the 20th Century learned to appease their malcontents by continuously raising the standard of living, expanding property ownership, and bringing plenty of food to tables, and new consumer goods to homes around the globe. If the economic elite of the 21st Century cannot learn to do the same I fear the malcontents will unleash hell.

 

Is Leverage the Problem (Again)?

So the European Monetary Union is (slowly failing). Nations are reaching ever-closer to default, bringing about the prospect of shockwaves and turmoil throughout the region and the world. Why can’t nations just default? Well — they can. But policy-makers fear the consequences of blowing holes in the balance sheets of too-big-to-fail megabanks. Sovereign default would lead to the same problems as in 2008 — margin calls on banks’ highly leveraged positions, fire sales, a market crash, and the deaths (and potential bailouts) of many global financial institutions.

From Lawrence Kotlikoff:

Sovereign defaults are only the proximate cause of this euro-killing nightmare. The real culprit is bank leverage. If the lenders had no debt, sovereign defaults would reduce the value of their equity, but wouldn’t shut them down, thereby destroying the financial-intermediation system.

Non-leveraged banks are, effectively, mutual funds. If appropriately regulated, mutual funds don’t make promises they can’t keep and never go bankrupt. Yet they can readily handle all manner of financial intermediation as 10,000 of them in the U.S. make abundantly clear.

Countries get into trouble, just like households and firms. Similarly, nations should be permitted to default without threatening the global economy. Forcing the banks to operate with 100 percent equity by transforming them into mutual funds – - as I have advocated in my Purple Financial Plan – is the answer to Europe’s growing sovereign-debt crisis.

In a nutshell, the ECB tells the banks: “No more borrowing to buy risky assets, including sovereign debt, and forcing taxpayers to take the hit when things go south. You’re now limited to marketing mutual funds, including ones that hold nothing but cash and will constitute our new payment system.”

Now I don’t doubt that this is a very good idea that could potentially restore meritocracy — allowing good businesses to succeed and bad ones to fail. But would it solve the problems at the heart of the Eurozone?

In a word — no. As was noted at the Eurozone’s inception, the chasm opened up between a nation’s fiscal policy (as determined by a nation’s government), and its monetary policy (as determined by the ECB) necessarily leads to crisis, because monetary policy cannot be tailored to each economy’s individual needs. Kotlikoff’s suggestion would reduce systemic risk to the banking system (largely a good thing), but would merely postpone the choice that European policy makers will have to make — integration, or fracture.