Friday, 8 February 2019

End of The Great Moderation

“Money is a bridge between present and future.”  - Keynes in The General Theory.

The bourgeoisie is “at home” with the reality of capitalism. It does not experience its “alienation” the way the workers experience it (Marx, Paris Manuscripts). Because of this, the bourgeoisie is not particularly interested in “the nature and causes” of its “wealth”, the accumulation of capital, for fear of what it may find if it dares to stare into the abyss. It is interested only in the superficial expression of its political command over living labour – profit – and therefore in the effectual material measure of profit – money. But the bourgeoisie, because it does not understand the true social essence of money, can observe only its numerical accounting form – hence profitability is explained away as simply “making money”.

True to form, Keynes’s entire understanding of the essence of capitalism is entirely epigrammatic - superficial, metaphorical, anecdotal and ramshackle. Keynes never scratches below the surface of capitalist reality to understand the essence of the wage relation and therefore of money capital. This is not to say, however, that he did not detect some of the important adventitious epiphenomenal manifestations of capitalist industry and enterprise – above all in the financial sphere regarding the running of monetary and fiscal policy and in the political sphere concerning the role of state institutions and policies in the management of the profoundly divisive and destabilising effect of capitalism on human society taken as a whole.

If money is a “bridge” between present and future, this is because money-as-capital is not a “thing” but a social relation of production linking living labour (money as a violent political claim on the living activity of workers) and objectified labour (money as a claim to already produced goods to be used either as wages or as means of production). Thus, money is a measure of the present command of the capitalist over living labour and means of production in relation to the future production by workers of objectified labour in the form of wage goods and means of production. Profit represents the expanded ability of the capitalist to command more living labour measured in wage goods and means of production (objectified labour) as a result of the present investment on these two components of production.

In effect, there is no absolute guarantee that the present investment of money capital will yield a profit because this will depend on the political relations between the capitalist and the worker through the process of production (valorisation) and the eventual realisation of the value created by living labour in the process of production through the sale of the living labour objectified in the fresh wage goods and means of production produced in the present cycle of production. In this schism, this hiatus (hence, “bridge”) between present investment as valorisation in the process of production and future realisation of the new value created by workers lies the essential anguish of the capitalist: on one hand, the money invested by the capitalist-as -financier or lender is seen by him as necessarily “fructiferous” or “profit- or interest-yielding”), and on the other hand the capitalist as producer or borrower knows only too well that there is no guarantee that the present investment will turn into future profit!

In other words, the schismatic – almost schizophrenic – essence of capital as “value-in-constant-motion” is reflected in the necessary functional separation of the capitalist as “financier” or “lender” in the present and as “borrower” or entrepreneur for the future. That is the real political reason why not “money” but rather “money-as-capital” is, as Keynes only intuited but could not comprehend, “a bridge between the present and the future”. It is this schism at the heart of the social reality of capital that determines, first, the possibility of credit (the separation between lender and borrower) and, consequently, the possibility of “crisis”, that is, the collapse of credit, the inability of borrowers to repay lenders.

So, the next question is: what determines the ability of borrowers to repay lenders? And given the premises that we have outlined above in terms of the real essence of capital and profit, the answer should be almost obvious. What determines the ability of borrowers to repay lenders depends on the ability of capital investments to remain “profitable”. Now, profitability is ultimately the ability of the capitalist, as the owner of dead labour and the potential purchaser of living labour, to command this living labour. In other words, this ability depends on the ability of the capitalist to be able to command ever more workers with each unit of capital. But then, this ability depends on (a) the presence of a reserve army of living labour, of workers; and then, (b) on the political ability of capitalists to impose on workers a certain rate of exchange between dead and living labour.

As we have often argued on these pages, the catastrophic “financial instability” that Hyman Minsky identified at the beginning of the 1970s was a direct result of the inability of Western capital to expand the reserve army of the unemployed – the supply of living labour – in the face of a cataclysmic reduction in the populations of Western nations. And this is where Western capitalism was finally rescued by the Chinese Dictatorship after Nixon met Mao in the early 1970s. Almost overnight, the available workforce available to capital almost doubled! Not only! The new deal struck with the Chinese Dictatorship by Western capitalist meant that half of the global labour force was now ruled by a ruthless dictatorship of truculent murderers and bandits who could expropriate Chinese people and drive them in droves into factories to be exploited ruthlessly!

It is easy to see why the next thirty years brought about what Ben Bernanke called, with great acumen, “the Great Moderation”, meaning thereby the onset of rapid global capitalist growth and profitability with virtually insignificant rates of inflation – quite the contrary of the “stagflation” (stagnation plus inflation) that Western capitalism had experienced in the 1960s and 1970s.

It’s A Hard Rain That’s Gonna Fall

In our upcoming piece on Keynes and Minsky we will argue that the two economists understood how capitalism induces the creation of credit pyramids that must eventually collapse, but they did not explain or understand why this financial instability occurs in a capitalist economy. Too much capital chasing too few profitable investments is a start, as is suggested in this perspicacious piece just in:

Washington | Well, that was useful, while it lasted. The global monetary policy reset looks to have done its dash.
Central bankers around the world appear to be flat out shelving plans for rate hikes or reverse quantitative easing – from the big boys at the US Fed to minnows like Iceland.
It's happened seemingly in the blink of an eye, despite the fact they're nowhere near where they thought they'd like to be at this point in the economic cycle.
Mark Carney issued the Bank of England's blackest outlook since 2009 for the British economy, which he said is suffering tensions caused by the "fog of Brexit" - surely the world's most stupefying self-inflicted crisis. Chris Ratcliffe
The next downturn will be a doozy if you're a central banker; robbed of the traditional "bazookas" of big interest rate cuts that were used after the global financial crisis to reset the global economy.
Most like the Fed and Reserve Bank of Australia would have given a spare kidney to lift rates a few more times – "normalising" policy to a level where it can be deployed in a pinch.
But stubbornly low inflation, defective fiscal policy and systemic disruption in all its forms looks like it lulled them into a mistaken belief that they had more time.
The last few weeks are reinforcing the sense that the window is closing fast. Financial markets have gone from pricing in hikes to cuts.
What's remarkable is just how fast it happened.

Jarring pivot

Setting the global tone was the jarring pivot a little over a week ago by US Federal Reserve chairman Jerome Powell, who has transitioned in a little over five weeks from foreshadowing rate hikes this year to throwing them into question entirely.
Federal Reserve chairman Jerome Powell has transitioned in a little over five weeks from foreshadowing rate hikes this year to throwing them into question entirely. AL DRAGO
He blamed global economic "cross-currents" that could be "with us for a while".
But it's also worth noting that the retreat followed months of increasingly strident attacks by President Donald Trump, who has made no secret of his distain for the chairman's previously hawkish stance.
A day later, the US government revealed the economy added 304,000 jobs in January – raising questions about whether Powell has been premature in flagging a long pause in rate increases.
Either way, it appears the US President has forgiven his chairman. The two dined at the White House on Monday – their first meeting since Powell became the Fed boss a year ago.
Since then, the rest of the world has given the impression of playing catchup, with each central bank pointing to its own set of specific concerns.
Reserve Bank governor Philip Lowe, who hasn't moved the overnight cash rate since August 2016, when his predecessor Glenn Stevens cut it to 1.5 per cent, on Wednesday dropped his long-running guidance that the next move was likely to be up.
Some are predicting its next moves will be to cut the cash rate to 1 per cent, while the more bullish forecasters say it won't touch rates now until the middle of next year.
The Bank of England was next, leaving its bank rate at 0.75 per cent.
But not before governor Mark Carney issued the bank's blackest outlook since 2009 for the British economy, which he said is suffering tensions caused by the "fog of Brexit" – surely the world's most stupefying self-inflicted crisis.
Just hours earlier, the Reserve Bank of India's new governor Shaktikanta Das not only shifted his official policy stance down to "neutral" from "calibrated tightening", he unexpectedly cut his policy rate by 25 basis points to 6.25 per cent.
Others sounding more tentative notes in the last 36 hours because of a deteriorating global outlook included the Brazilian, Ugandan, Romanian and Czech central banks, with others set to entrench the trend before the week is out.
Driving it all has been a deterioration in the global picture, led by Europe.
A flurry of weak indicators are overshadowing 2019, with the European Union now warning of "substantial" risks, including an Italian economy at risk of stalling and weaker momentum in Germany. Not to mention a hard Brexit.
Fresh signs out of the White House that a meeting between Trump and China's President Xi Jinping is looking unlikely ahead of the March 1 tariff deadline are yet another reminder that the trade war lurks over everything.

A week to forget

"It has been a week that the global economy arguably would like to forget," said Westpac economists Elliot Clark and Simon Murray.
"Not because of financial market price action but rather owing to the policy and political tensions that have come to light."
Banished for now, it would seem, is much talk of low unemployment leading to a wages breakout that spurs inflation.
"We're not seeing strong inflationary pressures, if any, emerge," former Fed chair Janet Yellen told CNBC this week.
Inevitably the global monetary policy pause will reignite debate about whether we now live in a world of secular stagnation – or as University of NSW economist Richard Holden puts it, the problem of too much savings chasing too few profitable investment opportunities.
In such a world, easy money tends to stoke asset prices rather than productive investment.
So where does this all lead?

Another downturn or worse

For one thing, if there's another downturn or worse – a full-blown crisis – central banks like the Reserve Bank will be joining the QE club, building up vast sums in financial assets from financial institutions to push down yields.
And once a central bank starts it becomes a near-impossible habit to kick if the experience of Japan, ECB and more recently the Fed and Swiss National Bank are any guide.
Albert Edwards at Societe General thinks the next recession will see core inflation indices turn negative in the US and Eurozone, leading to central bank "helicopter money".
And perhaps even wilder, a negative US Funds rate. Edwards points out that the San Francisco Fed recently floated this idea, suggesting that had it gone below zero after 2009 the current normalisation would have been quicker.

Tuesday, 5 February 2019


In anticipation of our piece on Minsky, here is a gem from Ambrose-Pritchard.

When the US Federal Reserve suddenly abandons monetary tightening so late into the economic cycle, a recession usually follows within three to six months. The damage below the waterline is by then already irreversible.
Jerome Powell's abrupt shift has bought the crumbling world economy some time.
Jerome Powell's abrupt shift has bought the crumbling world economy some time.CREDIT:AP
There are crucial exceptions to this post-war rule of thumb. It did not hold after the Fed retreat during the East Asian crisis of 1998 or the pause after the Chinese currency scare in 2016.
Pre-emptive action came soon enough to keep the cycle alive, and to fuel another blistering rally on global asset markets. In both cases low inflation gave the Fed latitude.
It is a fair bet that last week's double-barrelled capitulation by the Fed on rate rises and quantitative tightening (QT) will again rescue the crumbling world economy. It should avert a bloodbath that was starting to look all too likely late last year.
"The Fed may have just pushed back the next recession," said Tim Duy from Fed Watch. Future rate rises have been taken off the table. Markets are already pricing in rate cuts later this year.
Jay Powell has rowed back drastically on QT. The Fed will never fully unwind the bloated balance sheet -accumulated over three rounds of -post-Lehman bond purchases. Krishna Guha, from Evercore ISI, expects its holdings of securities to stabilise at $US3.5-$US3.7 trillion ($4.8-$5.1 trillion), much higher than previously suggested.
World finance no longer has to face the slow torture of Fed bond sales running at $US50 billion a month all this year and into the early 2020s. Mr Powell may start tapering in the second quarter. This is a powerful tonic for a dollarised international system that has never been so sensitive to Fed actions, or so leveraged to US borrowing rates.
Michael Darda, from MKM, says the Fed has read the writing on the wall and chosen not to play Russian roulette with the business cycle. "The current set-up is for a nearly perfect soft landing," he said.
It has been a close run thing for the global economy over the last two months. A 17 per cent collapse in Chinese non-commodity imports in December - with a nosedive in electronics and semiconductor trade across Asia - has been graduating from ominous to potentially dangerous.
Mark Williams, chief Asia economist at Capital Economics, said "alarm bells" have been ringing. His proxy measure of Chinese GDP growth has dropped to 4 per cent. This is an economic slump for China and it has pulled Korea, Japan and parts of Europe into a contractionary vortex.
"On some measures, industrial production in the eurozone is now deteriorating at its fastest pace since 2009," said Capital Economics. Fresh Chinese stimulus is in the pipeline. Beijing's central economic work conference before Christmas amounted to policy capitulation by Beijing as well.
"Signs of stability are emerging for those who squint hard enough," says John Normand from JP Morgan. The bank's global manufacturing survey shows that new orders are ticking up again. But nothing is yet bankable. Like it or not, Mr Powell has been forced to err on the side of easy money, keeping open the spigot of dollar liquidity for a global system that has racked up $US12 trillion of offshore dollar liabilities. World debt is 30 percentage points of GDP higher than the pre-Lehman peak. Nobody dares put this precarious edifice through a stress test.
"We have got to be very careful. There must not be unforced errors," said the International Monetary Fund's top firefighter, David Lipton.
Mr Lipton said in Davos that the Fed may not be able to repeat the emergency actions that saved the world's financial system on October 2008. Specifically, it might be constrained from extending "swap lines" worth up to $US1 trillion to fellow central banks. This is the vital defence needed stop a chain-reaction turning into a global conflagration.
China;s economy remains a primary concern.
China;s economy remains a primary concern.CREDIT:BLOOMBERG
European and Asian banks borrow on the offshore capital markets at maturities as low as three months for worldwide lending in dollars. This source of funding can seize up suddenly. Only the Fed has ability to print limitless dollars to plug the gap in such a crisis.
Mr Lipton said swaps require a "fiscal backstop" and therefore the acquiescence of Donald Trump and US Congress. Would Washington agree to an instant bailout of foreign banks in the current climate? "I wonder whether they will be so willing to extend the swap lines," he said.
Former Fed chief Ben Bernanke says the Dodd-Frank Act and other measures since 2008 have stripped the Fed and US regulators of powers to halt fire-sale liquidation in a crisis.
They can no longer rescue individual companies (there must be at least five, and they must be solvent), or lend to non-banks, or offer blanket guarantees of bank debt and money market funds. It took lightning-fast action and $US1.5 trillion of emergency loans to stop the meltdown in 2008. Could the Fed again shore up the markets for commercial paper and asset-backed securities?
Olivier Blanchard, from the Peterson Institute, said it required over 850 basis points of rate cuts in the US to fight the Great Recession - directly or synthetically through quantitative easing. Any such response today is impossible. The lesser risk therefore for the Fed is to "run the economy hot" to build up a buffer.
"We have no ability to turn the economy around," says Martin Feldstein, president of the US National Bureau of Economic Research.
"When the next recession comes, we don't have any strategy to deal with it. Fiscal deficits are heading for $US1 trillion dollars and the debt ratio is already twice as high as a decade ago," he said.
Jay Powell's hawkish rhetoric in December - above all his insistence that QT would continue on "autopilot" - was clearly a mistake.
David Lipton, the First Deputy Managing Director of the IMF.
David Lipton, the First Deputy Managing Director of the IMF.CREDIT:BLOOMBERG
The question for investors is whether the Fed's December error is reversible. The Fed's shift on QT is a circuit-breaker. It lifts the future growth rate of the broad M3 money supply through standard "quantity theory of money" mechanisms, something that the New Keynesian "creditists" at the Fed have persistently refused to acknowledge.
Fed staff have had a strange blind spot over the flow effects of bond sales. They justified QE in the first place as a way to lift asset prices, yet implausibly denied that reversing it might have the opposite effect.
They ignored warnings from traders that QT was shrinking the reserve balances of US banks and making it harder for them to provide dollar liquidity to offshore funding markets. They did not adapt the pace of QT when these bond sales collided with massive note issuance by the US Treasury to fund Mr Trump's fiscal deficits - despite warnings from the governor of India's reserve bank that this was crucifying emerging markets.
Yet Mr Powell is not an ivory tower ideologue wedded to the theories of some defunct economist. He is a gentleman practitioner with an alert ear to markets.
For whatever reason he has now ditched Fed orthodoxy on the balance sheet. His instincts may just have bought the world economy another year.
Telegraph, London