Commentary on Political Economy

Wednesday 13 July 2011

The Meaning of Quantitative Easing - Bernanke on Bucephalus!

Participants will recall that as recently as a few weeks ago (my posts on this Blog bear witness - until the FT "martyred" me - relax, it's only a play on the Greek word for "witness"!) I predicted that Bernanke would come charging back (to belabour Gavyn Davies's "cavalry" metaphor) with the might and fury of Alexander the Great on Bucephalus and a fresh dose of "quantitative easing". But Davies is entirely right to stress, as I did before, that "monetary policy alone" cannot fix US unemployment. Indeed, the point I was stressing earlier is that Bernanke is more interested in the "geopolitical" effects, in the "strategic uses" of monetary policy. What he wishes to do is to utilise monetary (and non-monetary) instruments to lower the greenback, create a healthy dose of reflation in the US to lower the "real" cost of government debt - and all the while destroy the economies of the likes of China, Germany, Brazil and India and so forth: and, hey! is he succeeding or what??
Bernanke knows, as Davies valorously suggests, that greater liquidity goes straight to inflate asset prices and speculative investments, that is, in the "carry trade" that drives up the exchange rates of yuan and euro and real alike, forcing these countries into a deep loss of "competitivity" with "System-Amerika": THAT is what "Rooseveltian Resolve" is, at bottom. And that is what we are getting! So, to reward our friends who have rewarded us with visits to our site, I will post here a brief (more "theoretical") explanation of the deeper underlying causes behind current events, one that tackles frontally the "politico-economic" meaning of the US deficit in the capitalist world order and the Fed's attempts to achieve what Carmen Reinhart brilliantly styled as "The Liquidation of Government Debt" [3]. Of course, this "liquidation" is possible only because of the "pivotal" role that US capitalism plays in the "capitalist world order" to which we just referred. (We discussed the Reinhart paper in an earlier Davies Blog.) Here it is:
THE MEANING OF “PUBLIC DEBT” (or Why the State-Plan has become a Crisis-State) – a re-statement.
I would request all participants to read the following extract from Schumpeter’s great student Paolo Sylos-Labini which encapsulates the “fracture of the Keynesian State-Plan”: -
“Public expenditure, if productive [profitable], has a double positive effect on national product: one positive that consists in the growth of production, and the other temporary…in that by increasing demand it creates investment opportunities for private enterprise. Unproductive [unprofitable] public expenditure, instead, has only this temporary effect that lasts only as long as it [unproductive expenditure] lasts. If the proportion of unproductive expenditure on total expenditure grows, it is probable that the rate of growth of public expenditure will exceed the rate of growth of national product: and this….cannot last indefinitely,” (p.255, “Oligopoly &Technical Progress”, 1982).
And here is the crunch. Because what we have witnessed since the start of the “State-Plan” with its “aggregate demand management” (which Keynes clearly intended as a “temporary” stimulus) is that the rate of growth of “unproductive” (that is, unprofitable) investments has far exceeded that of “profitable” investments mercilessly and inexorably. But the State-Plan has been able to disguise this by “privatising” capitalist investments and allowing the private sector to book profits that were entirely dependent on expansionary fiscal and monetary policies from the State-Plan. Yet this “privatisation” of apparently “productive” investments was “profitable” only in appearance because it was based in large and catastrophic part on the inflation of “asset bubbles” and speculative investments that finally exploded in the Great Financial Crisis!
Keynes in the General Theory was so focused on the short term that he underestimated the theoretical-political limits of public expenditure and so failed to reflect on the impact of these “limits” on his theory. Even Roosevelt’s New Deal Administration was very cautious (too cautious for Keynes) in taking up “profitable” direct investments for fear of trespassing on “private enterprise” territory.
With the benefit of hindsight, we can see that “the Keynesian State-Plan” was never viable as a strategy for sustained capitalist growth. As Minsky and Sylos-Labini (scholars of Keynes and Schumpeter respectively) have shown, the whole edifice of the State-Plan was built on a doomed “pyramid of credit”, a “Ponzi-like scheme” that was bound to collapse. And collapse it has done in dramatic fashion. (See links below.)
The “fracture” of the State-Plan and its trans-formation into a “Crisis-State” consists precisely in this: that to the extent that the State-Plan tries to maintain social “stability” it can only do so by maintaining public expenditure even under the guise of “private investment”, but this “private investment” is “profitable” only in a diminishing sphere of capitalist activity controlled by large oligopolies or else through “speculative” activities. In both cases, faced with growing social antagonism, “private enterprise” assumes such a scale and control over global capitalist investments that it poses “systemic risks” to the society of capital. Once these “systemic risks” come out into the open, the State-Plan is then obliged to take over the fiscal burden of this “phantom profitability” in the form of “public deficits” which the State-Plan either seeks to honour, only to face bankruptcy, or else tries “to inflate away” through hyperinflation, which clearly “de-stabilises” the capitalist system.
[1] (Minsky’s Financial Instability Hypothesis)
(Sylos-Labini on Prospects for World Economy)
Finally, may I remind everyone that this is Bastille Day: - "Le jour de gloire est bien arrive'"!

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