Wednesday, 31 January 2018

China’s GDP of Bridges to Nowhere

This is a lengthened version of a previous post in which we argue that "market" capitalism has a huge advantage over "command" capitalist economies such as the one run by the Chinese Dictatorship in China - and that advantage is the necessity of capitalism to have what the Classical Economists called "formally free labour". The essentiality of this notion to the very existence of capitalism was stressed vehemently especially by Karl Marx and Max Weber.

In this blog, we have repeatedly explored the reasons behind the difference between “productive” and “unproductive” investment - which formed the basis for the essential distinction in Classical Political Economy between productive and unproductive labour. The aim of the Classical Political Economists was to determine what determined whether an investment in a capitalist economy was truly “profitable” in that it expanded the “wealth” of a national economy or else “unprofitable” and therefore “unproductive” in the sense that it was rather a wasteful use of resources. Of course, ultimately, what is deemed to be “productive” or “unproductive” in terms of “wealth” is a subjective judgement depending on the ultimate aims of a society. Yet in capitalist terms, in terms of the maximisation of profit over the long run, the answer to this question may and must be narrowed down and be given a more objective politico-economic answer.

This question is all the more important at the present moment in large part because of the challenge that the Chinese Dictatorship poses to Western capitalism in terms of whether its “command capitalism” is indeed superior to the “liberal market system” of the capitalist West. Does the Chinese Dictatorship offer indeed a superior and more productive version of capitalist enterprise or is it rather involved in what Prof. Michael Pettis calls “the GDP of bridges to nowhere”? In other words, is Chinese capitalism a true and valid challenge to Western liberal capitalism or is it all bound to come crashing down to earth as many are predicting? This is a question of fundamental importance because what the Chinese Dictatorship seeks to obtain by spruiking its “China Dream” is to impose a totalitarian hegemony over the world to supplant the relatively democratic Pax Americana that has dominated geopolitics since the end of World War Two.

The upshot of our politico-economic studies is that the difference between productive and unproductive economic growth is based on the ability or less of an economic system to gauge the level of social conflict in a given society. Given that capitalism is the generation of political control over living labour on the part of employers through the apparent “exchange” of dead or objectified labour for living labour - that is to say, through the payment of living labour in terms of its own past production (what are called wages), - given this “exchange”, a capitalist system of production of social needs must rely on the existence of a “formally free” labour force able to bargain on the minimum level of wages as well as on the goods produced for consumption. It is evident that only a system that allows this formal freedom can operate over time as a capitalist system, and only such a system can therefore be said to be “productive” in a capitalist sense. The implication of this conclusion is that a functioning capitalist system must be politico-economically superior to a command economy such as the Chinese Dictatorship’s for the simple reason that the former is much more democratically aligned with the material needs of its labour force than the latter could ever be.

This follows from the fact that under capitalism the labour force is formally free in the twin sense that (a) it decides how and how intensely to work and (b) it chooses relatively freely the kind of goods that are produced by its own living labour. In a capitalist economy, the capitalist has sufficient political power to force workers to sell their living activity in exchange for money wages. But the capitalist does this in competition with other capitalists, which means that workers have a significant choice over what is produced and how it is produced through the exercise of purchasing power choice given to them through the wage system. Wages constitute the degree of freedom that capitalists must grant workers to ensure the politico-economic reproduction of the capitalist system of production. Without a formally free labour force, that is, without the payment of wages in exchange for living labour, no genuine capitalist system of production is possible. This formal freedom of the labour force is what gives capitalism its superior degree of socio-political cohesion and legitimacy over other systems of production by ensuring that social resources are devoted to the most efficient production of social needs.

Our studies establish that this is the fundamental conclusion behind the analyses of capitalism that go from Ricardo through to Marx and Weber, all the way to Keynes, Schumpeter, and of course....Hyman Minsky himself! The insight behind the Minsky Moment is all here! It is possible for a capitalist regime to mask the social antagonism implicit in the wage relation either through inflation in wages or asset prices, or else through more direct intervention and interference with industrial and financial markets. A Minsky Moment occurs when it becomes apparent to economic operators that the monetary values (prices) on assets no longer represent real purchasing power (value) in the economic system because credit expansion is no longer based on the real ability of the holders of financial credits to realise these into valid claims over productive ability.

Both forms of repression - inflation and dirigible - are aimed at restricting the formal political and legal freedom of the labour force. Because of this repressive element, both inflation and direct intervention (dirigisme or command economy) will result in profound distortions of the “productivity” or “growth” of a capitalist economy. What happens in a command economy such as China’s is that the element of free social conflict that market capitalism contains is absolutely missing - and that therefore the Chinese economy must collapse sooner than a market capitalist economy under the strain and burden of “unproductive” investment. (Of course, this is also a key tenet of the Austrian School with its notion of “malinvestment” or misallocation of capital.)

But let us proceed with order to understand the full implications of what s being argued here.

The Value of Value

The first question that Classical Political Economists posed themselves was what determined prices. They all agreed that market prices could not be determined by supply and demand because begged the question - “supply and demand” of what? Smith, Ricardo and Marx agreed that prices are determined by “the amount of labour” contained in commodities. But Marx went further than his British counterparts by analysing the notion of profit. The most ostensible characteristic of capitalism is that it is “production for profit”. But what is profit? If indeed market prices are determined by “the amount of labour” contained in commodities, it is clear that, given that capitalists “purchase” the commodity labour at market prices, then it is impossible for them ever to realise a profit from production! Thus, Marx determined that there must be a “double character” (Doppelcharakter) to the commodity “labour”. On one hand, labour is purchased by the capitalist through payment by means of existing objectified labour, which is reflected in the purchasing power of the money wages that workers receive. But then, at the same time, what the capitalist buys with wages is not a fixed quantity of existing objectified labour - a mere quid pro quo, a simple exchange of one object product with another. Rather, what the capitalist buys in return for wages or dead labour is the living activity of the worker! Therefore, the exchange of wages paid by the capitalist for the “living labour” of the worker is no longer “equal” for the simple reason that the capitalist buys the present living activity of the worker in exchange for the past objectified labour of the worker! It is immediately obvious that this is no “equal exchange” at all! Hence, the real source of profit for the capitalist must be in the fact that what the capitalist pays workers is their “labour power” - their ability to reproduce themselves -, but what the capitalist receives from the worker is the ability to pro-duce (bring forth, create) new products (commodities) that the capitalist can sell in order to control more living labour in future! This difference between dead objectified labour or labour power on one hand and living labour on the other gives us the true meaning of “value”; and this is what makes possible capitalist “profit” and the accumulation of capital!

Formally Free Labour

The capitalist purchases the living activity of workers in exchange for their dead objectified labour, that is, in apparent exchange - because no such “exchange” is possible as “equal exchange” given that the two realities are incommensurables - for the workers’ past labour. This impossible exchange leads to three fundamental politico-economic conclusions about what constitutes the essence of capitalism: the first is that the “exchange” between living labour (from workers) and dead labour (products owned by capitalists) is an impossible exchange that can never be “equal” or “free and fair”, so that quite evidently capitalist industry and enterprise are based on violence and conflict - the antagonism of the wage and the exploitation of workers implicit in the profitable accumulation of capital (value). The second conclusion is that the notion of profit or surplus value refers to the ability of capitalists to be able to command living labour in the future through the “exchange” of wages or dead objectified labour for living labour. This conclusion implies the necessity of “relative overpopulation” for capitalism to survive.

The third paramount conclusion, however, is that, despite the social violence unequivocally involved in the capitalist purchase of living labour by means of past or dead objectified labour - in spite of this, the capitalist must still “purchase” the living activity of workers, and he must do so in competition with other capitalists!

Thursday, 21 December 2017

The Chinese Dictatorship Foments Global Conflict

As we have argued repeatedly here, the Chinese Dictatorship has embarked on an irreversible path of internal repression and external menace and oppression. As if to confirm word for word what we have prosecuted on these pages, here is a magnificent piece by Angus Grigg of The Australian Financial Review, which seems to have been written with the express intent to bolster everything we have advanced here.



The end of clear-eyed optimism

In his book, Age of AmbitionThe New Yorker journalist Evan Osnos wrote of a time when anything seemed possible in China.
It was a period when fortunes were made, cities built seemingly overnight and when people expected tomorrow would be better than yesterday.
A protester displays a Chinese flag as during a rally outside the Legislative Council chamber in Hong Kong,
A protester displays a Chinese flag as during a rally outside the Legislative Council chamber in Hong Kong, JEROME FAVRE
Everywhere you looked there was change and it was happening in the blink of an eye. There were, of course, plenty of dark elements, but equal amounts of hope.
By the time I arrived in the spring of 2012, however, the dominant narrative had moved on. Change and ambition were still prevalent, but these were increasingly over-shadowed by anxiety.
In searching for a tipping point, one reference would be the second quarter of 2012.
That's when growth in China's economy dipped below 8 per cent. The two-decade long "economic miracle" was over.

From famine to feast

According to official figures, China's economy still grew by more than the entire economic output of Saudi Arabia that year, but the "animal spirits" that dictate sentiment had changed. Where shortage once existed there was now excess.
China's leaders called this "over-capacity" and everywhere you looked there was too much of something. By mid-2015, the mining industry had expanded so quickly that a tonne of coal was worth less than the equivalent amount of water. Steel had become cheaper than cabbage and, rather than blackouts, China wasted 18 per cent of all the wind power it generated in 2016, as thousands of turbines had been built before grid connection was available.
In just a few short years, China's much-heralded model of state-planned capitalism, the so-called "Beijing Consensus", had delivered the country from shortage to saturation.
Peak China had been reached and it had come more than a decade before most economists and, it seemed, state planners had predicted.
The result was more mobile phones than people and an estimated 10 million vacant apartments on the outskirts of regional cities and provincial towns across the country.
These were not so much "ghost towns", as monuments to the folly of easy credit and over-exuberant developers.

Massive credit stimulus

Such excess capacity had been partially alleviated by mid-2017 through the forced shutdown of mines and outdated factories, but in seeking to reflate the economy Beijing was forced to embark on a credit stimulus larger than that undertaken during the 2008 global financial crisis.
That delayed worries around a hard economic landing, but seemingly only heightened Beijing's anxiety. For, while official figures show China remains the world's fastest-growing major economy, this is not enough.
Growth of 6.9 per cent in the first three quarters of 2017 may have seemed miraculous for an economy worth $US11.2 trillion ($14.65 trillion), but it didn't provide enough well-paid, white-collar jobs for China's eight million university graduates, who could expect to earn less than $900 a month.
Nor did it help those graduates buy an apartment in Beijing or Shanghai, which by 2017 were considered the world's two most unaffordable cities, when incomes were compared to property prices.
And, despite Premier Li Keqiang declaring a "war on pollution" in March 2013, air-quality readings across the country were often still 20 times above what the World Health Organisation considered safe.
It made for an anxious ruling party and an agitated population.

And back to authoritarian mode

In response the party fell back on the old habits of authoritarianism. Rather than finding an accommodation with dissenting groups, or looking for ways to bring them into the discussion, from late 2012 the party, under the leadership of General Secretary Xi Jinping, took the opposite route.
It got tough.
Anyone who diverted from the official narrative was a target. Bloggers, human rights lawyers, woman's rights activists, journalists and those who spoke in favour of better treatment for ethnic minorities were either jailed, detained or silenced.
The gradual relaxation of free speech which had played out under former leader Hu Jintao was abruptly reversed.
Social media platform Weibo (China's version of Twitter) went from a lively and often-brutal forum for outing corrupt government officials and parodying the party to a place where people posted food reviews and photos of their pets.
At our lane house in Shanghai, such anxiety meant the installation of an additional CCTV camera. Under threat from a slowing economy, the party was leaving nothing to chance. No problem was seemingly too small to ignore, even the movements of two journalists from a relatively small Australian newspaper.
For us this extra set of eyes became apparent in late 2014, soon after an environmental activist visited us at home. Soon after we noticed a CCTV camera had been installed on the adjacent house and trained on our front steps.

On camera, without pretence

While there had long been cameras at the entrance and rear of our lane, it was difficult not to view this additional installation as a less-than-subtle reminder that the operating environment had changed.
And, just in case the presence of these cameras went unnoticed, a sign in Chinese at the lane's entrance read: "This area is being monitored and the tape is linked with the police station."
Like in western capitals, safety was always the stated objective for installing ever more cameras, but in China there was never any pretence that one's privacy was an issue.
The power of these cameras and how effectively they could be deployed was revealed to me in March 2014, when I was in Beijing to attend the National People's Congress, the annual sitting of China's parliament.
Known as the "two sessions", the event is a series of choreographed meetings, where ethnic minorities in colourful costumes are paraded before the TV cameras while entering the Great Hall of the People, which sits adjacent to Tiananmen Square.
But more than anything the "two sessions" is a platform to demonstrate a unified party and therefore even the slightest dissent is not tolerated.
In Tiananmen Square fire fighters in orange overalls stood guard against self-immolations, armoured personnel carriers provided the security presence and plain-clothed police were stationed at intervals of 100 metres along major roads.

A breathtakingly efficient surveillance machine

But the real work, as I discovered, was done by the CCTV cameras.
After leaving the Great Hall that March, following Premier Li Keqiang's "work report", I was waiting for a public bus back to the hotel.
Preoccupied with my rapidly-approaching deadline to file my report, I was contemplating what angle to take on the Premier's speech when a protester ran into the centre of Chang'an Avenue and unfurled a banner.
His one-man demonstration was over almost before it had begun.
Previously unsighted security officers materialised in seconds, as did an unmarked van, into which the protester was bundled.
No one spoke to me or even acknowledged my presence at the scene.
But 90 minutes later, back at my hotel, the phone rang.
It was the Public Security Bureau.
They had "noted" my presence at the bus stop and wanted to know if I planned to report on the protester and his treatment.
I was deliberately vague, even though there was little to report as the only facts were that a single protester, with an unknown grievance, had been detained by authorities near Tiananmen Square.
That was not going to threaten the front page, or any page for that matter, on a day when the Premier had set the year's economic growth target, declared his "war on pollution" and vowed to transform China into a "maritime power".

Most watched city

But as is often the case in China, the real story was not what we'd seen, rather how the authorities had reacted. In this case, the much-discussed point after deadline was how quickly I'd been identified for having witnessed this act of dissent.
Playing back the scene in my head, the only way I could have been identified was by one of Beijing's CCTV cameras, which numbered about 470,000 by 2015, according to the party's official newspaper, The People's Daily. That made Beijing the most watched city in the world, closely followed by London with its estimated 420,000 cameras.
The People's Daily boasted that "every corner" of Beijing was covered by the CCTV camera network and on that March morning it had performed.
I initially thought my official accreditation was the way I'd been identified, but it was then pointed out that this was under my jacket and scarf on that frigid spring morning.
That meant facial recognition software had most likely "made" me and from there it was just a matter of getting my number, which is registered with the Public Security Bureau, and making a call.
And it all happened in just 90 minutes. More impressive was the resources they were able to throw at such a seemingly minor incident, which only served to reinforce my theory on the arrival of China's Age of Anxiety and how the foreign press corps was the focus for some of this.

Foreign devils

Reading between the lines of the regular criticism made against the foreign media in China's official press, it was clear we were either viewed as state actors, under the influence of our respective foreign governments or, worse, anti-communist ideologues determined to foment democracy and unrest in China.
The idea that we were merely journalists, chasing stories and looking to generate clicks seemed implausible to our Chinese minders and it made for an inordinate amount of unwanted scrutiny. That's because in China all the media is either state-owned or controlled by the state, which is to say the Communist Party.
To this end all Chinese journalists must receive a press card from the Propaganda Department and from 2014 were required to pass an additional exam that tested their understanding of Communist Party ideology. The exam was based on a 700-page manual, which defined the relationship between the party and the news media as one of the "leader and the led".
Leaked commands from propaganda authorities to the state media, which are frequently catalogued on the blog site, Directives from the Ministry of Truth, tell how strictly China's news media is policed and how Xi's demand that news "must speak for the party" was actually implemented.
"Delete all content related to the Panama Papers," editors at state-run news outfits were told in April 2016 after leaked documents showed secret offshore companies were held by some of China's most prominent families, including relatives of Xi.
"Delete reports on calls to ease internet control," read another directive in March 2017 after a delegate at that year's People's Congress in Beijing argued internet censorship was hurting China's economic and scientific development.

Anxiety and action

Such directives made easy reporting fodder for the foreign press.
But at the same time they reinforced a view in Beijing and among pro-China think tanks abroad and some in the foreign business community that "the media" never wrote any of the good stories about China.
We were relentlessly negative, so the argument went, focused on the minutiae, while never bothering to look over our shoulders and acknowledge how far China had come.
At times this was a fair criticism.
China's journey from a ruined country with GDP per capita of $US165 when Mao Zedong died in 1976, to income per head 50 times that level today is without doubt the biggest development story in history.
It is often described as an "economic miracle", responsible for lifting 500 million people out of poverty and spawning a middle class of 300 million people which has been the dominant driver of the world economy for the last decade.
This is the China of big numbers, which has delivered some of the most impressive figures statisticians have ever compiled.
In Shanghai, like most parts of China, the numbers were on a scale that could not be replicated. The city's statisticians note Shanghai has gone from not having a single kilometre of subway line in 1993 to more than any other city in the world today. It boasts two of the world's 10 tallest buildings, an elevated road network criss-crossing the city and the world's biggest container port.
This, however, is only half the story.

Big numbers, but...

The scale of China, with its population of 1.4 billion people, means it should be the world's biggest in most areas. But when viewed through a lens which discounts for sheer size China appears far less impressive.
On a per capita income-basis, China remains the 82nd poorest country, according to the International Monetary Fund, and its economy is ranked 78 out of 190 countries by the World Bank for the ease of doing business.
It has produced just one nobel laureate in the three science disciplines and has one of the highest levels of income inequality in the world. The richest 1 per cent of households own a third of the country's wealth.
These are the type of statistics that are rarely aired but paint a more realistic picture of China and help explain why, despite the two decade-long "economic miracle", the party remains anxious.
This anxiety is often verbalised by leaders expressing their desire to avoid the "middle-income trap" and become what the party defines as a "moderately prosperous society" by 2020.
To achieve this China will need to double the size of its economy in the 10 years to 2020, but it can't do this using the easy drivers of growth it employed over the first three decades of its opening up.

New approach required

Put another way, the party can't continue to use borrowed money to build things as the game of catch-up economics becomes ever less effective with every additional dollar spent.
As the author Yu Hua put it in his book, China in Ten Words, the country's development model was to spend $US1000 in order to generate $US100 in additional GDP.
Most of that quest for additional GDP was poured into housing and infrastructure projects and was responsible for the most extraordinary statistic of all.
In his book, Making the Modern World, Vaclav Smil said China had used more concrete in the three years to 2013 than the US did during the entire 20th century. And not by a small amount. According to Smil, the US used 4.5 gigatons of cement during the last century while between 2011 and 2013 China used 6.6 gigatons.
That's nearly 50 per cent more and helps explain how, by the middle of 2017, China's debt levels had risen above 300 per cent of GDP, according to the Institute for International Finance.
It also explains why cities like Shanghai have some of the world's best infrastructure and why Chinese tourists find the London Tube dirty, the Eurostar slow and many of the roads third world.
But this impression can be misleading.
While a city like Shanghai has a Maglev train which travels at 430km/h and takes a little over seven minutes to reach the main international airport 30 kilometres away, this and other projects like it have been built at the expense of social services, particularly health care.

Vanity over social welfare

China may be the world's second-largest economy, but its per capita health spending is one-tenth of the OECD average and, according to World Bank data, it spends less in this area than the likes of South Africa and Croatia.
This has been the trade-off. Gold-plated infrastructure at the expense of a better publicly-funded health care system.
Such a funding mismatch never stops western business leaders lauding the quality of China's infrastructure and the benefits of a one-party state that can defy populism and take long-term planning decisions.
Yet these same business leaders presumably never seek treatment at one of China's public hospitals, which have half the number of doctors per capita than the OECD average and one quarter the nurses.
Not burdened by elections, China's leaders have in one sense chosen vanity over social welfare.
As well as building subway networks in 32 cities with a further 53 under construction, and having more kilometres of high-speed rail line than anywhere else in the world, China's rulers have ploughed public funds into the construction of vast government buildings and extravagant beautification campaigns.
Before his eventual downfall in 2012, the former party secretary of Chongqing, Bo Xilai, is believed to have spent $US1 billion planting Ginko trees across the city, even though the climate was too hot. In Jinan, the provincial capital of Shandong Province, the local government built what was then the world's second-largest building, behind the Pentagon.

Growth, no matter the quality

These may be isolated examples and practices which President Xi has sought to eradicate since taking office, but they are indicative of a wider phenomenon in China which has mandated growth no matter the quality.
That means 41 per cent of all China's economic activity in 2017 was generated by building things, known as fixed-asset investment.
The economic planners in Beijing know this number must come down below 30 per cent, but they can't be sure what will replace all that building.
This is the root of the party's economic anxiety – keep building and the economy continues to grow above 6 per cent or pull back and begin a long period of slower growth as the economy restructures.
The party flirted with the latter in 2014 and 2015, but ultimately did not want to see what an economy growing below 5 per cent might look like and so pushed the button on yet more stimulus.

The final straw

For economists like Jonathan Anderson, previously with the World Bank in Beijing and now an independent adviser, the 2016 credit stimulus, which soaked up much of the industrial over-capacity, was the final straw.
He went from China optimist to fully-fledged bear as Beijing pumped credit into the system faster than during the 2008 global financial crisis.
"At the current pace we would highlight 2019-2020 as crunch years when China crosses the potential crisis threshold," Anderson said in forecasting a fall in growth to between 2 per cent and 3 per cent.
"This doesn't sound like much – but for an economy that has never posted a growth number below the mid-single digits, it's almost revolutionary."
That is what the party and Xi fears most. He's even said as much. In 2012, soon after taking over the leadership, Xi told cadres the mistake made by the former Soviet Union was weakening the party's role in major institutions, like the army.
"We must stand firm," XI said.
This gives the impression of a party continually looking over its shoulder and one that will be only become more anxious in the future.


Read more: http://www.afr.com/news/world/asia/how-i-almost-became-a-chinese-spy--reflections-on-chinas-age-of-anxiety-20171121-gzq6b3#ixzz51xA8ipNt 
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Friday, 8 December 2017

Chronicles of A Crisis Foretold - 4

The Great Moderation involved a “mobilisation of resources” the likes of which this world had never seen. In its pursuit of profit - in other words, in its bloodthirsty pursuit for ever greater command over living labour - the Western bourgeoisie confided in the much greater truculent ruthlessness of the Chinese Dictatorship, which was indeed facilitated by the millennia of enslavement to which the populations of China have been subjected by various Dynasties of very different ethnic origins. (The myth of One China is just that, a myth.)

Yet equally mesmerising is the pace at which the Western and now the Chinese Han bourgeoisies have exhausted this tremendous mobilisation of human and natural resources - which, of course, are vastly responsible for the mortal threat to which our planet is subject in terms of overpopulation and overconsumption, both ecologically unsustainable.

These are themes to which we have returned repeatedly here and which indeed form the core and motivation of nearly al the theoretical studies to which we have devoted ourselves here. China can truly be said to have been “the last resort” or the last frontier for global capital. The speed at which this enormous last frontier, last refuge (!), for global capital has been exhausted is utterly frightening. The Weberian “room for manoeuvre” (Ellebongsraum) for the world bourgeoisie is now very narrow and narrowing by the day. The Chinese Dictatorship is perhaps the first to have recognised the limits of its internal expansion - which is why now it is extremely busy trying the experiment that Western capital has tried before but which is destined to failure - military and financial imperialist expansionism. What the Chinese Dictatorship wishes to achieve is the export outside its geographical boundaries of all the class tensions that thirty years of unrelenting and unprecedented “growth” (mobilisation) of human and natural resources has permitted it to avoid and circumvent.

Yet this “China Dream” - to avoid a “China Nightmare” - is already turning into an incubus as the Dictatorship is caught in the deathly vice of (a) reducing mobilisation through the expansion of domestic consumption, and (b) the impossibility of achieving this within a global capitalist framework founded on profitability without (c) the absolute repression of domestic politico-economic  class conflict that factors (a) and (b) render absolutely necessary. It is this Unholy Trinity that the Chinese Dictatorship is called upon to confront, and that now it has decided can only be “resolved” by doing away with (a) and (b) by insisting on external imperialist expansion and releasing internal class tensions through the “migration” of its own capitalist class.

Quite obviously, however, Chinese Dictatorial imperialist expansionism is already hitting the Great Wall of Western bourgeois opposition which, specifically under Trump (but he is only a beginning) is bringing us, via North Korea, to a global conflagration. Make no mistake: the global bourgeoisie (Western and Chinese alike) has built its social domination over propaganda in the form of “marketing” whereby the world appears all rosy and blessed when in fact it is in a in a deathly spiralling turbine: turn on your TV set, listen to the radio, and it will appear as if everything is going according to plan. Check the daily highs on Wall Street and the explosion of bitcoin, coupled with low bond yields, and again it seems as if global capitalism had never been in greater shape.

Yet, look more closely and dispassionately at all “economic indicators”, and you will see that the global capitalist system has barely survived the last decade through, again, an unprecedented expansion of liquidity by central banks in the face of compressed profitability, despite wage repression, resulting instead in low productivity and asset-price inflation. The consequent growing disparity in wealth distribution is engendering uncontainable political tensions within nations through political polarisation and between nations through currency, trade and even military conflicts. The final straw for the system will be wage inflation combined with stagnation - in one word, stagflation. Western capitalist regimes simply cannot allow unemployment to rise. But with asset price inflation galloping, central banks will be forced to raise interest rates to avoid the bubbles that we are now witnessing the in financial and asset markets the world over. Here is where central banks are caught in a bind between either maintaining low rates and sow inequality conflict or else raise them and foment political tensions over unemployment and underemployment.

The growing politicisation of central banks is reaching explosive levels, which global bourgeoisies are seeking to defuse by relying on external markets for capital accumulation. The result is entirely predictable: financial implosion and trade and currency wars. Here is a taste of what is to come through the eyes of a former Bank of England official in the Financial Times:

Charles Bean, BoE:


The past couple of decades have witnessed a remorseless fall in the real rate of interest consistent with macroeconomic equilibrium — the “natural” rate. The causes are still a matter of debate. Some point to higher savings, others to the impact of slow productivity growth on investment. Balance-sheet repair has surely been important, too.
While central banks can set any policy rate they want in the short run, if they are to achieve their objectives over the long term it must converge to the sum of the natural rate and their target inflation rate. Criticism from politicians that central banks’ policies are penalising savers and driving up asset prices misses the point: the decline in interest rates ultimately reflects forces that central bankers are powerless to change.  ......

Broadly speaking, the monetary arrangements introduced in 1997 have served us well. But two aspects are worthy of note. The distinction between monetary and fiscal policy has become increasingly blurred. And the distributional consequences of monetary policy have become increasingly contentious.
Monetary policy has fiscal consequences even in normal times, but issues are starker when large quantities of government bonds or private sector assets sit on the central bank’s balance sheet. Even small changes in the yield curve have significant consequences for the public finances. Fiscal considerations become more prominent if the central bank buys risky private credits. And purchasing equities is potentially even more contentious since it involves the acquisition of control rights.
For these reasons, the fiscal authorities need to own the fiscal consequences of the central bank’s asset purchase decisions. Happily, the BoE’s Asset Purchase Facility meets that requirement, with the Treasury holding the economic interest, even though the MPC decides the amount of assets to buy. Moreover, whenever the MPC wants to increase the stock of assets there is an exchange of letters with the chancellor.
Adding distributional concerns to the MPC’s objectives would be worrying. It is one thing for the MPC to use its “constrained discretion” to limit output volatility. It is quite another to refrain from cutting interest rates or undertaking asset purchases to protect one segment of society at the expense of another. That goes to the heart of politics; such decisions should not be delegated to technocrats.

If the government of the day is unhappy about the side effects of the monetary policies necessary to maintain macroeconomic stability, then it is better for them to take mitigating fiscal action. And, if a government is really set upon the need for a different monetary policy, it should do so directly and openly by invoking the monetary policy override clause.


But now take a look at what Alberto Gallo writes, also in the FT:



Several macro analysts have called this an environment of rational exuberance. Volatility and asset prices are justifiably low, they say, given healthy macroeconomic conditions. Instead, we believe markets may be in a period of irrational complacency. The signs are widespread. Yields on European junk bonds have fallen below US Treasuries. Emerging market countries with a history of default, such as Argentina, have issued 100-year bonds. Facebook, Amazon, Apple, Netflix and Snapchat together are worth more than the whole German Dax. Banks are again marketing CDOs. Cash-park assets including property, art, collectibles and cryptocurrencies are soaring in a parabolic fashion, like life rafts in a sea of central bank liquidity. Not only have asset prices soared, volatility is at rock bottom too: the S&P 500 index just experienced the lowest amount of swings in the last 50 years. Investment strategies betting on a stable market have grown exponentially since the start of quantitative easing in 2009. We estimate $60bn capital in bets on low volatility and as much as $2tn that indirectly relies on stable volatility for performance. The combination of high asset prices, short volatility bets and herding, confirmed by IMF data, means losses may be more concentrated in a tail scenario. While regulators have focused on strengthening banks over the past few years, the largest risks may have moved to capital markets. Price action in late November provided a small-scale preview of what an unwind of goldilocks trades would look like: EM, tech stocks and utilities moving down in tandem with long-end Treasuries and gilts. There are three ways the current goldilocks era may come to an end in 2018. One ending could materialise if central bankers turn more cautious on the financial stability risks fuelled by loose policy. The People’s Bank of China and some US Federal Reserve FOMC members have already raised red flags. As the recovery matures, new leadership at the helm of the Fed and later at the European Central Bank could mark such a change of tack towards faster monetary normalisation.

Another risk could be a return of inflation. Even though technology, demographics and globalisation are still likely to cap reflationary pressures, betting against the Phillips Curve (the link between unemployment and inflation) may become riskier as US unemployment falls below 4 per cent and oil prices rise. If inflation accelerates, the spillover from rising term premia in interest rates could disrupt several other carry trades. The real endgame, however, may come from the will of the people — politics. The current combination of monetary debasement, populism and social unrest is neither a new phenomenon nor a coincidence. The late Roman empire shaved silver coins as it disintegrated; Henry VIII replaced silver coins with copper to pay for wars against France and Scotland; the British empire allowed double-digit inflation to erode bondholders’ wealth following the War of Independence; the Weimar Republic precipitated an inflation spiral. Comparing these examples to QE may sound extreme. Yet the biggest debasement in history may be the one we are experiencing now under the form of a $20tn central bank experiment, which is de facto depreciating money by boosting the price of all assets it can buy. Monetary policy has increased inequalities between the rich and poor, the old and the young and between large cities and suburban peripheries left out of the recovery. Brexit, Trump’s plan to exit trade agreements and the calls for independence across European regions all envision a return to past glory with the use of national borders, identifying an external enemy to polarise people’s angst and pursue disruptive policies in the process. Absent redistributive policies to rebalance inequality and promote social mobility, excess spending and protectionism from populist regimes are likely to result in higher public debt, higher inflation and losses for investors. Economist Rudi Dornbusch noted that crises take a much longer time coming than you think and then they happen much faster than you would have thought. Today’s markets price in that earnings will keep rising, volatility will stay low despite rising geopolitical risks and central bankers will continue to support growth without generating inflation. The Goldilocks party may go on a little longer but we all know how it will end.


It is utterly evident that the rush to secure assets that are beyond the control of governments betrays a ballooning growth in distrust of political and economic institutions in nation-states the world over. Here is John Authers also in the FT:

It would make sense if this [frenzy for illiquid assets] were part of a broader loss of confidence in fiat currencies. Central banks have continued easy monetary policy since the crisis in a bid to prop up asset prices and spark activity. Stocks look blatantly overvalued. Bonds look even more so. Art has never fetched such big prices. The bitcoin is only an absurd appendage to what is already a “bubble in everything”. Thus bitcoin might be seen as a bet against rampant asset price inflation, and an attempt to protect against a forthcoming implosion as higher interest rates finally lead the financial house of cards to collapse. But that does not explain everything. Gold is up about 10 per cent for the year. That is less than the growth in stocks, and it has been falling during the latest overdrive phase in bitcoin. Rather, bitcoin mania can be attributed to broader social conditions. Demand is greatest in the countries of the Pacific Rim, with South Korea, Taiwan, Japan and China all trying to curb extreme interest in trading the currency. Especially in China, demand reflects a distrust in governments, and not just in their currencies. This also seems to be true of demand for bitcoin in the US, where backers seem keen to go far beyond doing without banks or central banks. They seem far more interested in cutting governments out of the equation altogether. If not truly anarchist, the demand for bitcoin reflects a radical and global breakdown of trust in existing institutions.

Decentralised technology plainly permits this possibility. But it is horrifying that people find the notion appealing. Computer networks, we now know, are easily attacked. Cryptography helps, but there are weak points when people enter and leave the blockchain system. Thursday brought news of a major theft of bitcoins. In a decade or so, quantum computing may well be able to sweep aside the best current defences. Meanwhile, most governments around the world are democratic and derive their legitimacy from elections. But trust in democracy itself seems so low that putting trust in wholly unelected developers seems more appealing. The bitcoin craze can take its place with the various shocking election results of the last few years as a symptom of a breakdown in trust in western institutions — and also of frustration in Asia with the institutions that have guided growth there.


So, with bubbles in bitcoin to go with bubbles in stocks and bonds and cash, where are the “anti-bubbles” that Mr Parrilla was seeking? Given the desperation for a store of value, gold might be one of them. He also suggests that volatility and insurance against it are now far too cheap. One final possibility may be that there is an anti-bubble in government. Faith in the ability of governments to do anything that helps anyone seems to be reaching a crisis point — the rewards could be there for anyone who can demonstrate to people that their governments are working for them, and can deliver something.



Given the growing disparities and inequalities and concomitant social conflict within nation-states, it should come as no surprise that conflict between nation-states is intensifying rapidly as each national elite seeks to discharge its internal antagonism onto other nation-states and their populations, either through mercantilist or protectionist economic policies involving exchange rates and trade, or else through active interference in the political and military affairs of one another. In this regard, the Chinese Dictatorship's program of "One Road, One Belt" is nothing more than a last desperate attempt to extricate itself from the rapid decline in its ability to mobilise further its internal resources so as to maintain control over its already extensive Empire - in particular the Central Asian Muslim regions that share absolutely nothing with the Han population (least of all the language), and the more commercially successful regions around Guangzhou, Shanghai and perhaps Tianjin. Already, this particular policy of imperialist expansion is running into dire difficulties: only this week the Dictatorship was forced to sue Venezuela over missed payments of interest on loans of $13 billion US. The Dictatorship has already sunk no less than $62 billion in loans to Venezuela which that impoverished country has already defaulted on and will never be able to repay. Far from extending its power, these loans (Pakistan is next in line) are merely turning recipient countries into mortal enemies of the Dictatorship - a process that is likely to worsen over time, especially in Africa.

The blatant inability of the Chinese Dictatorship to rein in its most impoverished and neighbouring vassal State - the Kim Jong Un preserve of North Korea: indeed, the evident contempt with which that despicable dictatorship has shown toward its much more powerful Chinese counterpart, give a clear and incontrovertible hint as to the level of desperation of Xi Jing Ping and corrupt company in the face of growing intractable problems on the domestic front. Unwilling to dissolve the Communist Party to save the country, the Dictatorship is now destroying the country to save itself!