Thursday, 30 June 2011

On The Greek Question

If we wished to give one outstanding example of the "contra-dictions" that lie at the heart of capitalist industry and then society and then, between societies, the society of nations, it would be the contradiction that no bourgeois commentator (and there are many well-meaning ones here from Jeffrey Sachs down to Martin Wolf) would ever wish to confront with the courage - intellectual and moral - that this "crisis" demands.
The contradiction is easy to articulate: how can a political "union" (even if not Obama's "more perfect union", but just a "European" union) be even contemplated, if the members of that "union" are all focussed on one thing and one thing only - namely, "competitive self-interest"? (I note that Martin Wolf has a story in the FT today on how to make UK universities more... "competitive"!)

I wish to pose one question and one question only to everyone: name me "one" country, "one" federation, "one" economic area that does NOT have disparities, inequalities, divisions - no! Name me "one" city or even a suburb - or a household (!!!) that does NOT have "disparities", "imbalances", in short, "problems"!

But that is the entire point to a "Union"!! The whole point is that the bourgeoisies of Europe (German, French and British leading the pack) know all too well that "without" a European "union" capable of preserving the "military" (above all) and then juridical and then political and, last, "economic" integrity of their.... (wait for it) "territory" (!!) - without such a "union" they will be consigned to the dustbin of history and pretty soon they will be washing dishes in New York or in Beijing!

So the point is not "whether" Greece is going to be "rescued" - that was "never" the point at all! The point is "how". Because even if these big bourgeois decide to cut the string and let Greece sink, they know that next in line will be the other "peripheral" countries - in an endless spiral that will end up with the Russian re-occupation of Berlin! (I hope I am making the point clear.)

But our lousy "bourgeois", including the less lousy and "well-meaning" ones - from the height of their "analytical" noses - know equally well that it is impossible "to justify" the rescue of any "uncompetitive" economy or country or suburb or family - for the simple reason that..... (wait for it, again)... they are not "competitive"!! This is the law of the jungle, remember? Your death is my life! (Mors tua vita mea.) The motto that the banner of the bourgeoisie will always have inscribed upon it and that now comes back to haunt them: - because if they wish "to rescue" Greece it will have to be against every comma of "economic rationality" that they preach every day (not least on the pages of the FT)!

A fine time these people will have to invoke some kind of economic "convergence" or "optimal currency areas" - because these are figments of the bourgeois imagination intent on justifying and promoting the capitalist law of the jungle! The problem now, dear friends, is that we are reaching the end of this "ideo-logical" process.... and the Greek barricades are well in view. And then the Spanish, and the Portuguese and the Italian. See you there!







Gillian Tett on "The Crisis-State"

Finally!!! Gillian Tett at the FT has picked up on what I have been screaming out for the past two years!! That US finance is run almost entirely by.... "The State" (or "the Crisis-State"). Ms. Tett must be reading my commentary because this is not the first time she "pilfers" my ideas - the last time it was the notion of a "fracture" (she used the same word!) in US politics - something I had been "banging on" about for more than a year in the FT! Here is the piece, friends. See for yourselves! http://www.ft.com/intl/cms/s/0/638185f8-a303-11e0-a9a4-00144feabdc0.html#axzz1Qjk6naoJ

I will post my FT posts on "The Crisis-State" shortly in the "theoretical" sections of this website. Thank you all for the great response. Soon we hope to open up comments. Ciao.

Incidentally, Chinese PMI has just come out - and once again I am proved right - the Chinese economy is in "contraction" mode. Happy anniversary to the murderers in the Politburo!

Si le Grain ne meurt (If the grain does not perish - Andre' Gide) - Corn Prices, Inflation, QE3 and ... Bill Gross


I notice that that “twit”, Bill Gross, has been twitting furiously this morning about the rise in US bond yields – like a churlish child who knows that he has made a disastrous bet and clasps at straws just to get even! But the fact of the matter is that this is a reaction to the end of QE2 and a “relief rally” due to the latest “successful Greek rescue” (which merely postpones the inevitable) as well as jitters about inflation in the US. I have argued at the Gavyn Davies Blog (FT) that mild inflation in the US is due to the J-curve effect with a lower dollar and higher commodity prices caused by cheap money-funded speculation. But speculation will get its come-uppance once the Chinese economy starts to implode, and so does Germany’s, under the weight of the massive amounts of greenbacks that are pushing interest rates and inflation to impossible levels in China, Brazil, India, Indonesia and everywhere else.



This FT story on the collapse of corn prices overnight says it all (the worst plunge in 15 years! – which tells you how much speculative money there is out there!): http://www.ft.com/intl/cms/s/3/02ec62b4-9db6-11e0-b30c-00144feabdc0.html#axzz1Qjk6naoJ



The fact of the matter – something Gross and Co. had better drill into their heads – is that bondholders no longer run the show because the US Administration and the Fed cannot destroy the US economy by abandoning it to the vagaries of “the private sector”, which is not invest and will not invest because there is no “demand” on which to invest and – as you can see – the minute there is even the “sniff” of demand… inflation shoots up! The “margin” of capitalist action (capital’s “profitability”) is extremely low – which means that nominal wages remain high, deficits are stubborn, and unemployment cannot recede until the so-called “surplus countries” – from China to Germany and Japan – start behaving like “civilised” governments and expand domestic demand, instead of engaging in “wage suppression and demand repression and export subsidisation”!



The upshot? If this continues and US employment does not recover there will be renewed deflationary pressures – which will induce Bernanke toward QE3… and Bill Gross to sell his shirt.

The China Question - A Comment on Philip Stephens FT Column


The China Question – A Comment on Philip Stephens’ FT Column today here http://www.ft.com/intl/cms/s/0/33c093e4-a363-11e0-8990-00144feabdc0.html#axzz1Qjk6naoJ



A fairly pedestrian effort from Stephens – the kind of thing that you jot down on your daily commute to London by train. Stephens fails to understand that when assessing “what governments want” it is far more important to know first “what they can achieve”. And this is where the limitations on the Chinese dictatorship literally leap to one’s eyes. To consider these one has to look at the “strategic” role that the Chinese economy plays in what remains the “capitalist” global market (in trade and finance) and at the internal politico-economic dynamics of the Chinese polity.



If we look first at the internal dynamics, we see that the Chinese polity is in a calamitous state – one that is a legacy of Mao’s Cultural Revolution during which many millions of Chinese were murdered by the present regime. When Machiavelli wrote “questo popolo non ha religgione” (he used two g’s in his Renaissance Italian) what he meant was not that “this people have no religion” or “are not religious”. Rather, he meant that what holds a polity together is a lot more than producing cheap goods for export! The incalculable damage that the Cultural Revolution wreaked on the Chinese population is that it virtually wiped the slate cleas – it destroyed any semblance of social and cultural cohesion that the vast Chinese country had and replaced it instead with the cult of Mao.



Since Mao’s death, his cult has been replaced with the cult (a mere and pathetic ideology) of self-advancement and economic growth. But in reality the subservient role of the Chinese economy in the global capitalist economy (it has been the linchpin of “globalisation”) has meant that hundreds of millions of Chinese workers have been exploited in unprecedented ways in order to enrich an “elite” made up of Princelings and their State-Owned Enterprises that have access to unlimited amounts of cheap capital extracted from the forced “savings” of poor Chinese workers (there is nowhere to save in China – real interest rates are negative and the Shanghai market is in free fall, and the yuan is not being revaluated even while inflation climbs parabolically).



Meanwhile, Chinese people in the countryside have been expropriated to enrich real estate developers and elite investors in infrastructure projects that normal Chinese will never be able to use because they do not earn enough money – so that these projects are bound to be the “bridges to nowhere” that we saw in Japan. The environment – social and ecological – has been utterly destroyed and laid to waste. All these developments have induced Professor Pettis (at www.mpettis.com ) to conclude that actual Chinese GDP could be as low as one quarter of what it is calculated conventionally.



But the Chinese dictatorship knows that its days are numbered. It is desperately lashing out in all directions (with Pakistan, in Sudan, but above all in the South China Sea) to protect its shrinking economic power (which it acquired on the back of cheap exports to the West, mainly the US in the Great Moderation) and turn its fast-declining economic might into a nationalist campaign for military prowess that will unite the divided, lacerated, impoverished “polity” that we mentioned above!



So this is where Machiavelli’s “religgione” comes back to the foreground – something Stephens, whose politico-economic formation is too limited to allow, fails to consider – and what is the biggest “gap” in this piece. The upshot is that the Chinese dictatorship is isolated and “encircled”: by Japan and Korea and Taiwan and Vietnam and the Philippines and Indonesia in the South China Sea; by Russia to the north; by India in the Indian Ocean – and by the ubiquitous presence of the US Navy and military – a power far too great for the virtually insignificant forces of the PLA! Small wonder the Politburo is trying to revive Mao! Pretty soon, once its economy and GDP collapse (and that time according to everyone from Pettis to Roubini – and myself - will come soon), ideology and the memory of Mao will be all that is left!



What the capitalist West has to do now is: stop talking to the dictatorship and start talking to its people! Which is the opposite of what Stephens suggests here. Cheers to all.

The Output Gap - Capital As A Barrier To Capital

Reportjoseph belbruno | May 9 5:33am | | Options"As we document in this paper, the close relationship between output growth as measured
by real GDP and employment generation that characterized the U.S. economy over the
two decades after World War II has been weakening since the mid 1980s."
I open the Basu-Foley paper linked above by Davies, and I find this "revelation" (what in reality ought to be an "open secret") right in the Introduction. In the conflict between two "laws" (that are not "laws" in any physical sense, but only observable statistical regularities in the capitalist economy), we witness a "loosening" of Okun's Law, particularly the "gap" between decline in employment and "potential output", whilst we see a greater "seizure" or "biting" of the Verdoorn-Kaldor Law tracking the stochastic link between productivity and output.

I say that this ought to be an "open secret" because what we are experiencing, in a nutshell, is consistent both with a "jobless recovery" and a "creditless recovery" - due to the fact that since the mid-1980s, under the massive weight of "globalisation", multinational corporations have been able to increase productivity and shed workers at a proportionately higher rate than small-to-medium enterprises (SMEs), whilst increasing their "degree of monopoly" in Western economies through self-financed mergers and acquisitions as soon as share prices showed signs of recovery from cyclical recessions.
So while unemployment remains stubbornly high in Western capitalist economies, profitability recovers much more rapidly. But here lies the problem or problems. First, the proportion of "transfer payments" in the US has "doubled" (!) since the 1970s. Worse still, that "profitability" is earned from production and sales that rely increasingly on "emerging markets" - that is, far from the capitalist "metropolitan centres" - and, within the "metropoles", with growing "tensions" between the "local" bourgeoisies, namely the US on one side and Germany and Japan on the other.

Here I wish to highlight (cryptically) two sources of "tension" for the wage relation (on which capitalism is founded): First, the "link" between what can be termed "productive" and "unproductive" labour and "profitability" is "slipping" or "loosening" because the "political" bond of the wage relation is also slipping. Second, this process is "exasperating" the very process of "globalisation", and particularly the ability of "multinationals" to protect and preserve the political stability of the wage relation in "emerging countries" that grow worryingly more "distant" in all senses from the "metropole"! (Cf this Ft story on multinational banks: http://www.ft.com/cms/s/0/d2253c82-7a60-11e0-af64-00144feabdc0.html#axzz1LO5gFBdI ).         

I will seek to expand on this as we go. A rapid perusal of my posts on this Blog and at Economists' Forum and, earlier, at Martin Wolf's Forum will show that this has been a "pet" project of mine for some time.
Incidentally, Basu and Foley quite appropriately include the "Marxian" narrative in their study (replete with citations of Bob Rowthorn, my erstwhile supervisor). But it is these "categories" that we have in our sights....

I just wished to highlight a few themes or "threads" that ought to be woven together. The first is the relationship of Okun's Law and the Verdoorn-Kaldor Law that I commented upon (with appropriate links) in the previous Davies Blog. Very broadly, if we combine the two "laws" (in reality they are only stochastic regularities or relationships), we will see that whilst the relationship between employment and growth has "loosened" in the sense that more growth does not mean more employment ("jobless recovery"), also the increased "productivity" in certain sectors (manufacturing, selected services) has maintained profitability for enterprises overall while, at the same time, the swelling of the finance sector has compounded the skewed distribution of income and, at the same time, distorted the definition of "output" - meaning that capitalist firms have been paying themselves out of normally "unproductive labour" in financial services.

The upshot is that relatively lower employment levels have sustained higher profits and the skewed distribution of income toward multinational firms that have shed more workers "in the metropole" whilst benefiting from the financial crisis and the "creditless recovery" to expand their "degree of monopoly" - hence the references to the "kinked demand curve" of Hall & Hitch and Sweezy. It ought to be considered that the aim of capitalist enterprise was never "to maximise profits". Given that "profit" can be realised if and only if its monetary expression has any "political meaning" in terms of the wage relation, it is obvious that capitalist firms will seek "to control" or "captivate" the so-called "market", rather than pursue an abstract "maximisation of profit". When firms invest, "profit" is only one consideration: the "viability" in the long term of that "profit" is a far more important determinant. In other words, the question firms ask is: - what "degree of control or 'monopoly'" will a given pricing strategy give us in and over a certain "market" (remember that this notion of "market" is a fable worthy of Aesop - that of "competition" is more complex because there are definitely inter-capitalist rivalries that have to be considered within the overall need to maintain the wage relation).

There are then several important "developments" that arise from these studies over the growing "thin-ness" or "brittle-ness" of capitalist enterprise in Western nation-states. One is the progressive "distancing" of multinationals from their "metropoles" as they venture further afield into "emerging markets" that grow more dangerous each passing day both politically and financially. I mentioned this point in the previous Davies Blog and (would you believe?) the next day this article appeared in the FT discussing my very point http://www.ft.com/cms/s/0/d2253c82-7a60-11e0-af64-00144feabdc0.html#axzz1LO5gFBdI

Next, there is the whole matter of "financial repression", something on which I have been insisting even on this Blog for a while (capitalists have "nowhere to go") - another problem afflicting multinationals in terms of where they can park liquidity (even if banks do it for them). Gillian Tett comments in today's FT on this theme and links a fresh study by Carmen Reinhart (prolific this lady!) on "The Liquidation of Government Debt" here http://www.imf.org/external/np/seminars/eng/2011/res2/pdf/crbs.pdfIf ever there was a contra-diction, it is Reinhart arguing (with Rogoff) that "this time is NOT different", and then doing a study showing exactly how governments get out of the bind! Finally, (is this lightening speed or what?) there is the entire impact on global capitalism of how finance has got out of hand and now poses an evident threat to the "manageability" of the entire system (more work for Bernanke there). Here is the all-important paper discussing the issue by Schularik and Taylor http://www.econ.ucdavis.edu/faculty/amtaylor/papers/w15512.pdfThese are all matters that will occupy the last chapter or two of my work. Kindest regards to all.

Why Bill Gross and PIMCO should stick with Treasuries

This is the advice I gave Bill Gross in March this year. He did not listen, and lost millions in the process. But that is not our problem: the "analysis" behind the ironic "advice" is what matters.

Report joseph belbruno | March 10 8:38am | Permalink

@ aufsteiger and others - Of all the matters discussed in connection with Euroland, and they are many as you can see from the comments below, the role of the "bond market" is fast becoming the most controversial. It had to do so, because the biggest outcome of the Great Financial Crisis was - and this is why I stressed this crucial sentence in Wolf's article right at the start of this thread - "when private lenders tighten the noose, notionally private debt tends to turn into public debt, as governments try to rescue imploding financial systems and sustain activity in collapsing economies". What does this mean, "notionally private debt"? Why the "notionally"?

Nowhere as in the study of "economics", except perhaps in philology (been reading too much Gadamer lately), is the use of "words" more deceiving (earlier I referred to Wittgenstein's "notion" that "ideas are like spectacles"). Especial care should be taken when we use words like "competition", "market", "money", even "credit" that is made up of bonds and other debt instruments. We need to go beyond the terminology - and its "legal" mystifications ("creditor", "debtor" - just as Kant smuggled in judges and accused in his ethics) - and peer into the heart of the realities involved.

As you know, the Freiburg School sought to define "the rules of competition". The problem is: if "competition" needs "rules" - why, then it is no longer "competition"! Then it is a game. Ah, but an "antagonistic" game - in other words, a "game" whose very aim is to bring "the game and its rules" to an end! Our friend Olaf below may well wish to reflect on this.

Now to "private" and "public" debt. It is inappropriate to write a chapter on these matters here (but I am for a book, and I am "smuggling" surreptitiously some "ideas" here - a little like Hegel who gave his lectures looking circumspectly around... "as if someone might understand"). But I will cut to the quick with a kind of riddle, just to imitate Bill Gross whose PIMCO fund just exited US treasuries.

I understand that there was a "golden" time when "private" money financed States. But now that States, even through the Fed in the US, have control of the money supply and - as a result of large budgets and deficits! - play such a large, nay, determinant role in "the economy", is it not rather the case that "private" debt has become "a function of" the institution that issues "public" debt - that is, the State? Which then is the dog and which is the tail? The answer ought to be obvious - for those who, like Bernanke, believe in "Rooseveltian resolve". So you might look forward to the next bout of quantitative easing. That is why "private debt" has become only "notionally private" - in reality it is as "public" as the State.

The reality remains that "bondholders" no longer call the shots - vi rerum! by force of things! And Gross may "exit" as much as he likes, but "you've got to be in it to win it!" When "private" debt exits the field, takes its ball from the pitch and refuses to play, then it has lost "the game"! Because "the rules" have changed, because "the goalposts" have been moved.  You might say, to ape Bill Clinton - "It's the State, stupid!" Regards to all.


The Birth of European Monetary Union - Tommaso Padoa-Schioppa and the Grand Strategy of Capital in the 1980s


ON PADOA-SCHIOPPA: Among economists, central bankers are those who are at the interface of economic theory and politics. It should not surprise, because they deal with money – and money is the pivotal “institution” where use value (let us call it loosely “social need”) and exchange value or capital (the “need” to ensure that only those use values that are “profitable” are pursued) – where these two opposing forces meet or collide. Money is the institution that, if well understood, will tell you unequivocally that “economics is a concentrate of politics”. Money is that “object” on which “the sovereign” is imprinted, even when it is commodity money such as gold. And central bankers “juggle” economic concepts in a curious manner: they are aware that the “concepts” they are using are not “eternal”: they are “transitory” and “specious” (a play on “species money”): - because politics is its real social substance. That substance is “value”, but I will not go into that now.

Among economists, Tommaso Padoa-Schioppa was a central banker, and of all central bankers he was one with an Italian ‘Renaissance’ education – with an insight into that period of “capitalist” history in which finance and money still ruled over industrial capital and in which the co-existence of a dozen “principalities” in Italy made money and finance very interesting indeed. So I could not help but be struck recently, upon re-reading one of his papers, by the following passage that, if you forgive the presumption, truly deserves to be quoted in full:

“Of the other factors I mentioned, I shall only recall the powerful role played by two ideas that became popular in the 1980s, one in the economic field and the other in the monetary field. In the economic field, it came to be held that public intervention in the economy should be reduced and more scope allowed to the play of market forces, which can be summed up in the expression 'minimum government'. In the monetary field, the paradigm gradually prevailed that monetary policy should be primarily concerned with price stability and central banks made independent. The two components of this paradigm are clearly related, since an independent central bank is much more acceptable if it is not entrusted with politically sensitive choices such as that between more employment and more price stability, which was how monetary policy was usually presented in the 1950s and 1960s. The two ideas of minimum government and an independent central bank oriented towards price stability were very important in facilitating the acceptance of monetary union since they tended to minimize the shift of sovereignty. If the central bank is not entrusted with politically sensitive decisions, it becomes a more technical institution, one that has to make sure a metre is always a metre long, neither more nor less, and the transfer of this function from the national to the European level is thus less politically charged; governments would be less inclined to feel that they were relinquishing something that was theirs by right. What is ironic is that a prominent opponent of EMU, Margaret Thatcher, and the monetary institution that has supposedly most to lose from monetary union, the Bundesbank, were in fact strong supporters of these two ideas, which ultimately helped to create a climate favourable to the entry of EMU into the Treaty.”

Now, I believe that these words should be etched in… gold (if you forgive the allusion to commodity-money par excellence). What Padoa-Schioppa is saying is that “two ideas” (ideas!) “became popular” (popular!) in the 1980s: and they both “can be summed up in the expression ‘minimum government’”. So somewhere, someone decided that “minimum government” was needed: - which meant that “public intervention in the economy should be reduced and more scope allowed to the play of market forces”. Please note this beautiful expression: - “the play of market forces”. And then Padoa-Schioppa continues by stating that the “other idea” in the “monetary field” was that of “technocratic” central banks “oriented toward price stability”.

To cut a long post short, I would invite participants to think long and hard about “the meaning” of these propositions. Because what we have had with the current crisis is precisely this: the total, irrevocable and ignominious collapse of the “idea” or capitalist “strategy” of “minimum government” and “the play of market forces”. Not only has “public intervention” been necessary – but the assumption of (Martin Wolf) “notionally private debt” by the State into “public debt” means that those “market forces” have failed in the most “catastrophic” or “systemically risky” manner!!

Think about it when you reflect on the “options” available to Bernanke and Trichet! Regards and good week-end!

Discussion on "The Paradox of Toil"


This is our discussion of a paper on "The Paradox of Toil" that was deleted by the FT Editors from the Gavyn Davies Blog. It is illustrative of how general equilibrium analysis distorts our entire perception and understanding of how a capitalist economy works, and why. That paper by Gauti Eggertsson is here:
http://www.newyork...reports/sr433.html
On the "paradox of toil" proper: - Is that not the perfect argument for starting to plot a revolution anyhow? "The nature of work": how we produce, what we produce and how we apply the product": that is what we need to change!

The discussion of "the paradox of toil" that I mentioned concerned precisely this fact: that Krugman and Eggertsson (the latter is also at Princeton and certainly at the Fed) "work" from within the present constraints of what capitalism takes to be "work", namely, that work has to be "profitable". It is entirely obvious that, given the fact that "profitability" is nothing more than "political control over workers", if existing employees work "more", given the assumption that they would not be able to work "more" unless their work was "profitable", the consequent constriction and reduction of "demand" or consumption on the part of those who are out of work would tend to reduce the share of "profits" that go into the expansion of employment through new investment!!

Hence, the "paradox" is not one that applies to "economics" in absolute - but rather and crucially one that applies to a capitalist economy - which is the "economy" that we have now, not necessarily the ONLY "economy"! As Eggertsson rightly notes, this is the obverse of Keynes's "paradox of thrift" - if everyone saves, there will be less for everyone to save! Obversely, if existing employees "work more", there will be less "income" going to the less employed - and because consumption (spending) declines as incomes rise... there will be less aggregate demand, more aggregate "saving" and therefore less "investment" and "employment".

Of course, there are a number of assumptions here - the most important being that it would be "unprofitable" for capitalist firms to expand employment because the greater production from existing workers working "more" could not be sold... "profitably"! The "Keynesian" nonsense lies all in this: that we are told that we (the workers) would not be able "to consume enough" even if capitalists decided to invest and produce more!! The idiocy of this thinking is too bestial to contemplate!

And this is the argument Eggertsson makes. Here it is from the "Conclusions" section in the Eggertsson paper - read carefully, please:

"The logic is that the increase in labor supply lowers aggregate wages, which in turn gives the worker lower income to spend on goods and services. These deflationary pressures increase the real interest rate, and this cannot be offset by the central bank cutting the nominal interest rate. Thus less goods are demanded.
 Because the firms will employ labor only to satisfy any consumer demand for goods, this reduces aggregate employment. Why does the same logic not apply under normal circumstances? The reason is that, normally, when there is an outward shift in supply and downward pressures on wages and prices, the central bank will offset this by cutting of the nominal interest rate by more than one-to-one ratio because φπ > 1 in its policy rule. Hence, the real interest rate will decrease, making spending today cheaper and increasing output and employment. At zero interest rates, however, this is no longer possible due to the zero bound. Hence the paradox."

Now, notice THE CONJURING TRICK that these economic geniuses (who can't see farther than their bourgeois noses!) come up with...

Look at that all-important sentence: "BECAUSE THE FIRMS WILL EMPLOY LABOR ONLY TO SATISFY ANY CONSUMER DEMAND FOR GOODS, THIS REDUCES AGGREGATE EMPLOYMENT."

What Eggertsson is saying is that "because we produce more", the capitalist firms that "appropriate what workers produce" will not be able "TO SELL THE GREATER PRODUCT BACK TO US"!! - because it is not profitable to do so given that interest rates are already at "the zero bound" - in other words, capitalist investment.... IS ALREADY UNPROFITABLE!!


AS A RESULT (!!) capitalist firms will not expand output if workers offer to work longer: ON THE CONTRARY, as Eggertsson puts it,

“[t]he negative shock ψt (people want to work more), and the expectation that it will persist, puts immediate deflationary pressure on prices in the AS equation (the right-hand-side equation in the figure) because it lowers the wage cost of firms.”


THEREFORE, the increase in “toil” offered by workers will result, at best, in a reduction in aggregate employment (whether through loss of jobs or through more “flexible employment”). QED

Game, set and match! Nominate me for a Nobel, people - it takes THAT MUCH intelligence to get one, I assure you!!

An afterthought: it is obvious from all the foregoing that Eggertsson’s "paradox of toil" exists ONLY if we accept the assumptions of his "general equilibrium model"!! In other words, these complete and utter MORONS who pride themselves in the appellation of "economists" see a "paradox" in reality where NONE EXISTS were it not for their ABSURD assumptions built into "general equilibrium analysis"!! My proposal is therefore that we demolish both the analysis and the reality that these loons IMPOSE on us!

Quantity Theory of Money, General Equilibrium and Wynne Godley's Sector Analysis

  • There are a few loose ends to be tied up in this discussion. First, some people object to the Godley sector analysis on the ground that it is “tautologous” – because it relies on accounting identities. That is pure rubbish: it is a bit like saying that the quantity theory of money is “tautologous”: yes, it is “as an identity”, but it is not when you explain the “different roles” that the component parts play in going from “disequilibrium” to “equilibrium”! The quantity theory of money will never tell you how an economy “grows” (it is a “static” analysis, part of the “circular flow” or Kreislauf that Schumpeter described); but it may tell you how the component parts will react when one or another among them is “changed” (endogenous or exogenous “shocks”). And it is the same with Godley’s framework of analysis, which therefore can be defined as a “theory”. But I will not go into that here except to state briefly that obviously Godley felt that when the economy is “stagnant”, only a government stimulus can stir it from its inertia – and if the private sector is already in surplus, there is no alternative to further fiscal stimulus because otherwise… both the private and public sectors will be in surplus! (The “external” balance then comes into contention, but we will not go into that here.)

    Returning to the quantity theory of money, once again, as with every bourgeois theory, it does not explain “why” and “how” the economy can “grow’ – because it is an “equilibrium identity”! So when Davies discusses “growth”, I (like the Nazi Gauleiter Goering whenever “culture” was mentioned)… “reach for my revolver”. The fact is that bourgeois economics deals only (only only only!) with “exchange”. And because in the “perfect” economy that capitalism represents for this pack of morons “exchange” must absolutely positively unequivocally be “equal” exchange…. there is no way known how the exchange of “equals” can ever pro-duce (bring forth, generate)… “growth”!

    And this goes back to what we were discussing yesterday: how is it even possible (“possible”!) for the kind of economy described by bourgeois economics… to “grow”? We hinted at this yesterday by emphasising the fact that capitalist world trade is not a “zero-sum game” and that much depends on how “capital” relates to “workers”. That is the whole notion of “value”. So “value creation” is a matter of determining how available resources are “utilised” to ensure greater control over human “needs”. Those “dictatorships” I was talking about (China, Japan, Korea, even Germany and Taiwan) merely seek to use social resources either to produce “capital goods” such as infrastructure and machinery, or else they produce for “export” (even of consumption goods). What they try to avoid is to expand the domestic demand of their workers through higher wages – because this would lead to “inflation” and social instability!

    An article in the FT today (http://www.ft.com/...html#axzz1QFpPmBFx ) looks at just this “disappearing middle class riddle” or “middle income trap” with regard to China, where the dictatorship exploits its workers so much… that they cannot afford to pay for the infrastructure that is built (50% of GDP goes to “investment goods”) so as to make this “investment”…. “profitable”!! Is it not time, we ask, that we looked long at hard at this “capacity utilisation gap”? Good luck, and good night!



  • DISCLAIMER!! The phrase "pack of morons" is intended for "bourgeois theoreticians" who sell us "general equilibrium analysis. It is NOT intended to address most "practitioners" who deal with "instruments" (or "tools" as Joan Robinson, followed by Schumpeter in the "History of Economic Analysis" called them) that "measure" an "existing" state of affairs (not "reality", in German "Wirklichkeit" but rather "Tatsachlichkeit" - "tangibility"). Per extenso or by implication this leaves out the amiable Gavyn Davies - whom we all admire and revere, not least for his "xenia" (in these days, filled with teargas smoke from Syntagma Square, that seemed appropriate).
    The "Krisis" book that I am writing will deal with all of these theoretical matters in a "systematic" manner. Excerpts from it may be posted at the www.eforum21.com site.
    All those people who dismiss these reflections as "quasi-philosophy" ought to bear in mind the following facts:
    that one year ago we advised all and sundry to buy "utilities" on the stock market (they have wildly outperformed); that we told people to stick to treasuries and that Bill Gross was a rambling idiot (he has "lost" hundreds of millions); to stay out of China and stick with Wall Street (Paulson and Co are getting screwed blind!).
    In short, there are very material "uses" to which "quasi-philosophy" can be put - and I say this in-between skiing the slopes in Queenstown, New Zealand. Seeing, as every bourgeois knows..., is believing!

  • There are a few loose ends to be tied up in this discussion. First, some people object to the Godley sector analysis on the ground that it is “tautologous” – because it relies on accounting identities. That is pure rubbish: it is a bit like saying that the quantity theory of money is “tautologous”: yes, it is “as an identity”, but it is not when you explain the “different roles” that the component parts play in going from “disequilibrium” to “equilibrium”! The quantity theory of money will never tell you how an economy “grows” (it is a “static” analysis, part of the “circular flow” or Kreislauf that Schumpeter described); but it may tell you how the component parts will react when one or another among them is “changed” (endogenous or exogenous “shocks”). And it is the same with Godley’s framework of analysis, which therefore can be defined as a “theory”. But I will not go into that here except to state briefly that obviously Godley felt that when the economy is “stagnant”, only a government stimulus can stir it from its inertia – and if the private sector is already in surplus, there is no alternative to further fiscal stimulus because otherwise… both the private and public sectors will be in surplus! (The “external” balance then comes into contention, but we will not go into that here.)

    Returning to the quantity theory of money, once again, as with every bourgeois theory, it does not explain “why” and “how” the economy can “grow’ – because it is an “equilibrium identity”! So when Davies discusses “growth”, I (like the Nazi Gauleiter Goering whenever “culture” was mentioned)… “reach for my revolver”. The fact is that bourgeois economics deals only (only only only!) with “exchange”. And because in the “perfect” economy that capitalism represents for this pack of morons “exchange” must absolutely positively unequivocally be “equal” exchange…. there is no way known how the exchange of “equals” can ever pro-duce (bring forth, generate)… “growth”!

    And this goes back to what we were discussing yesterday: how is it even possible (“possible”!) for the kind of economy described by bourgeois economics… to “grow”? We hinted at this yesterday by emphasising the fact that capitalist world trade is not a “zero-sum game” and that much depends on how “capital” relates to “workers”. That is the whole notion of “value”. So “value creation” is a matter of determining how available resources are “utilised” to ensure greater control over human “needs”. Those “dictatorships” I was talking about (China, Japan, Korea, even Germany and Taiwan) merely seek to use social resources either to produce “capital goods” such as infrastructure and machinery, or else they produce for “export” (even of consumption goods). What they try to avoid is to expand the domestic demand of their workers through higher wages – because this would lead to “inflation” and social instability!

    An article in the FT today (http://www.ft.com/...html#axzz1QFpPmBFx ) looks at just this “disappearing middle class riddle” or “middle income trap” with regard to China, where the dictatorship exploits its workers so much… that they cannot afford to pay for the infrastructure that is built (50% of GDP goes to “investment goods”) so as to make this “investment”…. “profitable”!! Is it not time, we ask, that we looked long at hard at this “capacity utilisation gap”? Good luck, and good night!
  • Wednesday, 29 June 2011


  • Reportjoseph belbruno | June 8 5:35am | Permalink
    Here is my reply to the latest Martin Wolf Forum:


  • A couple of quick notes on "the level-playing field" in financial regulation. This is something that exemplifies beautifully the need for clear "theorisation" of economic reality - contrary to the garbage we get from professional economists. The wrestling and tussling around Basel III and derivatives regulation shows that higher capital and other banking standards will basically destroy European and then Asian banks, much to the advantage of the US counterparts. Here is Daniel Gros with the account, if anyone doubts it, of the dire state of European benking: http://lecercle.le...ules-to-default-by

    But next comes the discussion on "level-playing fields" proper at the Economists' Forum (you can link on this page at Martin Wolf's Forum icon). Nietzsche was fond of "taking observations from the street" - and that "street" could easily be Wall Street or Threadneedle Street: Here he goes: this is taken from his "Human, All Too Human":
    "25.…The older morality, namely Kant's, demands from the individual those actions that one desires from all men--a nice, naive idea, as if everyone without further ado would know which manner of action would benefit the whole of mankind, that is, which actions were desirable at all. It is a theory like that of free trade, which assumes that a general harmony would have to result of itself, according to innate laws of melioration." (HATH)
    In other words, a theory like that of free trade, or the level-playing field, assumes a "general harmony"in the capitalist world market that would come into being "of itself, according to innate laws of melioration". And we know all too well that these "innate laws of melioration" simply do not exist - that in fact the capitalist world market is one of "competition", which means conflict and confrontation.

    It is imperative, then, given the clear and present tendency of this "conflict and confrontation" to destroy the very "competition" on which the capitalist world market is founded, that "regulations" be put in place to ensure that this does not occur. So, everyone can now see what is the deadly fallacy in the analysis advanced by Amadi and Hellwig in the latest "Economists' Forum". For whilst we may all agree with them that "regulation" of financial services is absolutely insdispensable to avoid another meltdown of the capitalist financial system, we cannot accept their "relegation" of the speculative wave that caused this meltdown to "externalities" in the functioning of the capitalist "market". If anything, the Global Financial Crisis was caused by "internalities" - that is, by the very "functioning" of the capitalist world market according to its own internal logic and pursuit of "profit" or "value"!

    To attribute the GFC to "externalities" that now require imperatively "regulation" is either an act of intellectual idiocy - or, what is worse, one of intellectual dishonesty!!

    What we require of "experts" such as the authors of this piece is that they come clean... and "tell it like it is" so that we may draw the proper conclusions.



  • joseph belbruno | June 8 5:58am | Permalink
    PS: Just to highlight the glaring fallacy or "begging the question" or "petitio principii" in the argument, let me focus on these three central and successive paragraphs in the above article:

    "For the economy as a whole, the question is not whether banks are successful but where its resources are most usefully employed. Perhaps those sharp minds in investment banking might have become even more productive in innovative biotechnology?

    The best uses of scarce resources are found through an undistorted market system. Without distortions, a firm’s success in the competition for inputs is prima facie evidence that its use of these resources is economically desirable.

    However, with externalities such as health effects of pollution, job and income losses from the fallout of the financial crisis, or costs of government subsidies, market functioning is distorted. It is important to correct such distortions by suitable regulation. The elimination of distortions favouring banks will improve the functioning of the market system and enhance economic welfare."

    You will notice in the first paragraph that the authors unequivocally and quite falsely confuse "usefulness" with "profitability". The aim of capitalist enterprise is not "usefulness" - it is "profit"!! The fact that the two do not coincide is something the authors ought to point out, and not seek to deceive us!
    Similarly, the second paragraph speaks of "an undistorted market system". But when banks used projected income streams from subprime mortgages to launch the wave of "enterprise" that led to the GFC, they were doing so according to the very inherent investment principles, aims and goals of capitalist enterprise, of the "undistorted market", that is, maximising profits!! How, then, is "regulation" supposed to restore the market to being "undistorted"? Or is it not a fact that, instead, it is the "perfectly operating capitalist market" that creates and causes unavoidably these "distortions"??

    To compound their dishonesty or utter stupidity, the authors then go on in the third paragraph to speak of "externalities" - as if speculation and financial crises were somehow miraculously "external" to the operation of the capitalist world market!! "Market functioning is distorted" - utter rubbish! "The eliminations of distortions" - nonsense!! "Enhance economic welfare" - you mean "profits"!! Total, absurd, polyunsaturated, unalloyed RUBBISH!!


  • Here is the copy of a comment posted at the Gavyn Davies Blog on the BIS Report:

    Something went by entirely unremarked by commentators in the FT the other day: the BIS Report signed by Stephen Cecchetti that said (no tongue in cheek there!) that "the world economy is growing too fast", that inflation is a growing threat, that there is little "spare capacity utilisation". 

    The remarkable thing is that such a remarkable set of lies could pass undetected beneath the keen olphactory nerves of FT commentators. - Because of course there is no truth whatsoever in what Cecchetti and his legion of myrmidons are saying - not if you consider that the US, if anything, is on the verge of deflation, that commodity prices are plunging and the dollar strengthening at every Greek sneeze, and that "near full capacity utilisation" means that 30% of Italian youngsters are out of work, together with some 40% or so in Spain (but, hey - who's counting?) and unemployment in Europe (the official figures, not including "precarious", part-time workers and people who have just given up) still hovers at around 10%.

    So there we have it, again: the productive potential of our (still capitalist) society cannot "absorb" the human resources available. Something has to give. And Jean-Marc Vittori at Les Echos today knows this all too well: writing about the European crisis he says that the stark choices are either "fraying at the ends" - meaning a general and gradual European decline followed by a serious political conflict.... or an explosion in short order. The crowds in Athens, the indignados in Madrid, the dissatisfied Italian and Irish voters are all propense for the latter - the explosion, that is.

    So why can't the European bourgeoisie "resolve" itself to take decisive action to avert a catastrophe? You would have noticed what a fun time Wen Jia Bao is having visiting the various European capitals. You see, it is much easier to deal with these squabbling idiotic European bourgeois on a one-on-one basis than it would be to deal with them if they showed some real unity of purpose and of political will! With the consequence that millions of Chinese workers get exploited by these latter-day Hitlers and Europeans kiss their hands each time they visit - so much for Goethe and Beethoven, let alone "Liberte', Egalite'... et cetera". 

    The European bourgeoisie can't decide on who should pay for the financial crisis. Their economic science and ideology tells them that "economic rationality" must be adhered to. But economic rationality says that

    self-interest is the only and the best solution! Sauve qui peut, then! For it is too difficult to ask these bourgeois to show "solidarity" when their entire livelihoods depend on selling the gospel of economic self-interest! Whither Europe? Vittori is right: the nerves will fray or there will be an explosion....

    In discussing the vicissitudes, the swings and roundabouts of European Union we need to rise, so to speak, "au dessus de la melee", to be super partes, and to judge the view below in terms of the broader "forces" that "condition" this historical movement. Europe has difficulties not merely at "European" level, but also at the "national" levels - and that is because a truly "European" bourgeoisie" is not yet born and the existing "national" bourgeoisies are also too weak. As a result, it is difficult for the existing "national bourgeoisies" to determine how to share "the burden of adjustment" that the "imbalances" of the GFC have exposed - especially in the sector of "financial capital".

    The problem of "resolution" of the crisis is compounded by the very "ideology" of market capitalism that places "competition" and not "solidarity" first and foremost on the ladder of bourgeois values. It is difficult for the European bourgeoisies to agree "to help" one another according to a "market competitive" logic, which is the "rationale" they universally share, when that "logic" dictates that "the common good" is for wach to pursue their "individual" interests. There is no "inter-esse" (no "common being") in this "interest"!


    It is difficult therefore to find an "internal" force that can push toward greater European Union. Mercifully, however, there is a forum externum, a force majeure, an "external dynamic" that will make the result inevitable: and that is the fact that the European bourgeoisies are confronted by ominous challenges that they need to face virtually by themselves (as Robert Gates has told NATO) - and also there is the "external" force of the dynamic needs of European capital itself created by its growing and irreversible "inter-dependence" and "concentration". This is the framework within which this entire process must be viewed: these are the "forces" whose "balance" we need to weigh and measure. Cheers to all.
    Please note that the FT have also deleted (after having preserved them for over a year) all Belbruno's comments (some quite lengthy and of theoretical interest) at the Martin Wolf Exchange. These will now be published and archived here on this site over the next few days. Furthermore, some exclusive excerpts from Belbruno's book on Nietzsche (titled "Umwertung: On Nietzsche's Transvaluation of All Values") will appear here over coming days. Many thanks to all our friends.

    We note that the FT have banned ("gagged", in actual fact) Joseph Belbruno until the end of August (!). So we will have to ask fellow participants to follow us for further comments at our own ongoing online commentary site on FT and stories from major world media sources on a new website that will start in days at www.eforum21.com



    We note that Martin Wolf’s Column today analyses (impeccably - after all, if you are intelligent and fair and you are very knowledgeable on a subject, why should your analysis be mistaken?) the BIS Report that we signalled only yesterday at the Gavyn Davies Blog, so we will turn briefly to what Wolf does not say. Over a number of months now, Joseph Belbruno has been pursuing this line of analysis but basing it on a different theoretical framework, either in comments to Martin Wolf’s Columns or at the Gavyn Davies Blog or at the Economists' Forum - so you can follow him there or you can check his archive in a few days at the site linked above.

    We note in this regard, Paul Krugman’s assessment of his own analytical-predictive record to date here - http://krugman.blogs.nytimes.com/2011/06/28/3-5-out-of-4/

    Krugman gives himself a 3.5 out of 4 predictive score – failing only on the “downward rigidity of nominal wages”. We defy any reader here to look back over our record in the past year, therefore, and tell us whether our score is not a resounding 4 out of 4! The “downward rigidity of nominal wages” has been one of our cries de Coeur, so to speak!



    Martin Wolf in his latest Column writes correctly:

    “The BIS is right: normalisation of monetary and fiscal policy is needed. But it is impossible to eliminate structural fiscal deficits until either the private sector structural adjustment is complete or we see big shifts in the external balances. It is impossible, finally, for this external adjustment to occur without big changes in the surplus economies.”



    The question is then: if what Wolf suggests is right, then why is it not "implemented"? What are the "obstacles" and "who" is posing them? In a nutshell, the obstacles are set by the fact that the world economy through the Great Moderation was operating on the basis that what was produced cheaply in China and other "emerging economies" (BRICs, for instance) could then be "exported" in large part to the United States where real and nominal wages could remain low (no inflation) and the capital accumulated could be re-invested through the Western financial institutions (in "core" centres like New York and London). The upshot was that much of this capital could simply no longer be invested "profitably" by producing real goods for consumption - because this would entail a rise in living standards of workers, which in turn would "emancipate" them politically and cause (you guessed it) inflation and political upheaval.


    Not used to such largesse, Finanzkapital had to invest the capital earned on the blood and sweat of poor workers in China and other places by beginning a phenomenal wave of "speculation" on "real assets", from mortgages to commodities, because when there is such a "surplus" of capital it is better to "go for safety" and buy "real assets" instead that are essential to the reproduction of capitalist society. And this is precisely what happened, initiating a speculative wave that gathered tsunami strength until inevitably it hit the shores of Western capitalist financial institutions - resulting in the Great Financial Crisis. Once you understand this new "framework of analysis", the rest pretty much follows. But rather than bore you further here, we will ask you to follow us at the Gavyn Davies Blog and, again in a few days, at the website linked above. Cheers to all.