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"Who controls the food supply controls the people; who controls the energy can control whole continents; who controls money can control the world" - Henry Kissinger

and yet...

"Sooner or later everyone sits down to a banquet of consequences" – Robert Louis Stevenson

Fiscal policy is not the magic pill - there is a bigger picture

In response to an FT article by Larry Summers on 11th September 2016, entitled ‘Building the case for greater infrastructure investment’

'However the election turns out, a major infrastructure investment programme should be adopted by the president and Congress in the spring of 2017’ - Larry Summers

It will be.  But it will not be the magic pill. There is a bigger picture:

Central Banks are conjuring $180 billion monthly in order to buy government, mortgage, and corporate debt...and now stocks.  The BOJ owns 50% of the ETF market and is a 10% stakeholder in 90% of the Nikkei. The ECB is running out of bonds to buy because yields are now below the threshold of its rules.  The policymakers responsible for these measures, Mario Draghi and Haruhiko Kuroda, have pushed interest rates into negative territory, but in neither case have their actions achieved their stated goals. Meanwhile their claims that these policies ‘work’ make them look increasingly ridiculous, and whilst they have yet to reach the pinnacle of absurdity & denial achieved by Comical Ali, they’ve definitely arrived at base camp.

This is being done in pursuit of the ‘holy grail’ of 2% inflation (they’d prefer 3%-4% but such an admission would be politically incorrect).  Putting the ‘real’ target to one side for a moment, 2% is claimed to represent ‘price stability’.  You could be forgiven for thinking ‘That doesn’t sound stable’, but you’d be wrong - the CB version of ‘stability’ isn’t applicable in the real world, so have no fear - your summer trousers will not shrink over the winter. On the downside, reluctant dieters will be disappointed that they can’t inflate their portions and expect to achieve a ‘stable’ waistline.  Food doesn’t lose its calorific value when inflated – that only applies to ‘money’ in a ‘stable’ system.

There is, however, another reason why CBs want money to lose its value, albeit one they don’t mention for fear of besmirching the noble image they seek to project…it’s because governments need last year’s debt to shrink so that that this year’s debt can grow without anyone noticing they are increasingly ‘insolvent’. Since raising taxes would require honesty, which is anathema to politicians, and since they can’t shrink debt the old fashioned way by paying it back…inflation is the chosen solution.  This ‘sleight of hand‘ is a tax that few know is being levied…‘economists’ largely overlook it, particularly those of the governmental and/or tenured variety. In the case of the media, undisturbed access and invitations to ‘insider gatherings’ incentivise the complicity.

There is however, a big flaw in the 2% inflation plan…the policies being pursued in its name are having the opposite effect - they are deflationary not inflationary. This is because people refuse to behave as they are supposed to. In the real world something distinctly human happens below zero that doesn’t happen on a spread-sheet - instead of rushing to buy more stuff they don’t need with money they haven’t got…people get worried about their future, so they save more.  Business people, most of whom have a more intimate relationship with ‘consequences’ than central planners will ever understand, realise that it is crazy to allocate long-term capital in a market that is devoid of meaningful price signals, so they invest less.

Easy money policies do not stimulate, they warp; central planning does not create, it redistributes. The central banks are in the business of picking winners and losers. The winners are the ultra rich, the speculators, and the front-runners. The losers are those remote from the monetary spigot. There are also ‘zombies’ kept afloat only because creative destruction has been temporarily neutered. This system does not remotely represent a free market, or a capitalist economy - it is oligarchy.

What next?  There will be more monetary madness, in support of aggressive fiscal policies:

1. Fiscal Policy:

QE4 will have a fiscal flavour whoever becomes President, despite the fact that it has failed miserably in Japan and it was the ‘guns and butter’ policies of every President since LBJ that helped us get here.  The old dividing lines of Republican and Democrat mean little - it’s a choice between warfare & welfare and welfare & warfare.  The two candidates this year have even swapped traditional roles - since it is clear that Trump loves building walls and Clinton loves regime change.

Whoever wins and however they channel QE4, they will find that there is a huge difference this time – no previous President has inherited a bond market with $13 trillion of sovereign debt in negative territory. To give some idea of how precarious this is, consider this – if Japanese interest rates rose to US levels, it would take their entire tax revenue just to pay the interest; and according to Goldman, if US interest rates rose 1%, it would reduce the m2m value of US assets by $2.4 trillion. The next President will not complete his/her first term without facing a global debt crisis.

2. Monetary Policy:

There will be more cries for negative rates – the Jackson Hole ‘review’ gave us a hint of that, when in an an interview with Bloomberg just days after his hawkish speech, Stanley Fischer discussed negative rates with Tom Keene:

“We're in a world where they seem to work,” Fischer said, noting that while negative rates are "difficult to deal with" for savers, they typically "go along with quite decent equity prices."

Translation: Don’t worry…buy stocks and all will be well. We’ve got your back, what could possibly go wrong?

But the ‘Crackpot of the Hole’ award should definitely go to Marvin Goodfriend, from Carnegie Mellon University.  Mr. Goodriend is clearly not a good friend of free markets or individual liberty. His speech was entitled ‘The Case for Unencumbering Interest Rate Policy at the Zero Bound’, during which he noted that the thing preventing increasingly negative rates is cash - if citizens can go to cash, that makes it difficult to impose negative rates on bank accounts.  The ‘war on cash’ has been ongoing for months, during which time luminaries such as Larry Summers, Ken Rogoff and Andy Haldane have all shone a red light on cash. The difference this time is that Mr. Goodfriend dropped any pretense that this is about drugs & crime, and revealed it for what it is – a strategy to prop up a system that is bankrupt intellectually as well as financially.  After admitting, “the public is likely to resist the abolition of paper currency”, Mr. Goodfriend went on to present an alternative:

‘A flexible market-determined deposit price of paper currency’

In brief, this means the money in your bank account and the money in your pocket would be two different kinds of currency. There would be an ‘exchange rate’ between the two, which the Fed would set.  In effect this means you go to the bank to withdraw $1,000 cash, and the bank gives you $980 because of the ‘exchange rate’.  Alternatively, you deposit $1,000 cash, and the bank credits your account with $980. In short, it’s a way to impose negative interest rates on physical cash…


No amount of tinkering or ‘can-kicking’ will solve the problems we face, but more importantly, neither will it do anything to change the abysmal quality of leadership, governance and economic theory that got us here. Either we face up to our debt problems and reform/reset the monetary system…soon…or the markets will do it for us. ‘Nobody could’ve seen it coming’ will not fool anybody next time.

Martin Wolf has a shilling for Larry Summers

Globalisation is a transmission mechanism - the disease is corporatism