Commentary on Political Economy

Saturday 6 August 2011

PIMCO's Pimps

PIMCO is at it again. Having lost a fortune taking the wrong bet on treasuries (despite my eloquent and insulting intimations to Bill Gross not to justify a bad move with even more idiotic reasons!) - now the second-in-command, El-Erian is hoping that the S&P downgrade will miraculously re-habilitate morons such as himself and Bill Gross with a change of heart on US debt!!

But if there is one thing - one thing only in the entire universe! - of which we can be certain, it is that added "uncertainty", which is what S&P indicated as the "reason" for downgrading treasuries - added "uncertainty" will leave our beloved, dastardly capitalists such as the morons at PIMCO ever more reliant on the only source of certainty this side of Andromeda!!!  US TREASURIES! Because only the military-industrial and financial might of Uncle Sam will save these rotten bastards from the guillotine - be it in Tienanman Square or in Place de la Bastille or in Piazza della Colonna or in any other capitalist capital!

El-Erian's vaticinations about a "multi-polar" world requiring a "multi-polar" currency only illustrate his own "multi-polar disease" (a variant of "bi-polar" psychic disturbances that seem to plague the fellows at PIMCO and the murderers in Beijing who, by the way, only make noises about this in order to hide their dependence on US imports and financial markets!).

For the benefit of our friends, I am reprinting my recent interventions at the Gavyn Davies Blog on the FT on these related matters. Cheers.


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!):

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 here

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 ) 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.

(on loose US policy causing inflation and stalling growth)

roubini on double dip)

(Eichengreen on “How to Kill a Dollar”)

We hope Gavyn Davies will not mind if we thank all the people visiting our commentary at We are truly grateful for your interest - and we will not let you down.

@macmillan - The effect of monetary and non-monetary "easing" is widely accepted. Joseph Belbruno discussed this on this Blog back in May in connection with this BIS paper from Borio and Lown -

The problem is that, as Edwar Yardley whom we discussed here yesterday says "monetary policy alone cannot do the work of fiscal policy". So Bernanke and his Princeton colleagues at the Fed are having to do what Congress is not capable of doing - and this because of obvious "internal tensions" in the vision of the role of the State in the capitalist economy. We have spoken of a "fracture" in the American ruling elites and the polity between "progressives" and "conservatives". (Krugman and Eichengreen accept that this is fast becoming the biggest problem to face the US in recent history.) The growing role of the State in ensuring the "survival" of the economic system in its present form is something that Hyman Minsky above all others made plain: tersely put, each time there is a recession or contraction the State deficit grows larger and more "intrusive" into the so-called "capitalist" economy. And Martin Wolf has talked of "notionally private debt" - meaning that the debt accumulated up to the bursting of the financial bubble was "in fact" public debt "disguised" as private debt during the Great Moderation. This is the nature and extent of the "crisis" that we are confronting.

Earlier we spoke, in connection with Wynne Godley, of "the external balance", meaning current and capital account. One of the ways in which national bourgeoisies are seeking to deal with the crisis - certainly "the easiest way out" - is to push "the burden of adjustment" on to other national bourgeoisies. In Europe this is creating the havoc we know. But the US government has had enough of accommodating all the external surpluses of "export-dependent" economies (from China to Germany) and of "importing unemployment" - and that is why we will see more (not less) quantitative easing - for the simple reason that printing greenbacks will force China and Germany (already in apocalyptic difficulties with their banks and finance) to raise interest rates at a time when to do so is political dynamite.

Geopolitically, this will mean that the Chinese dictatorship (read the George Magnus piece in the FT today, linked in our previous intervention) will seek to shore up itself politically by "lashing out" at neighbours in the South China Sea. We view this as the most important development of this crisis. The US Administration and ruling elites (ld by their cash-rich financial institutions) will drive the rest of the world into a slump or bankruptcy - a Rooseveltian New Deal by any other name.

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