Friday, 8 December 2017

Chronicles of A Crisis Foretold - 4

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

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

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

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

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

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

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

Charles Bean, BoE:

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

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

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

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

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

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

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

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

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

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

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

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

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