A New Way Forward – Restore the Economy in the Public's Interest

Money news gets more and more interesting, and that’s good news for no one except a handful of speculators. Adding to the pressure of bondholders all over the world to make good their debt, S&P unsurprisingly cut their outlook for US debt. Now, you could say, and rightly so, who cares what the S&P says? Why just a couple years ago they were putting their triple A seal all over some of the worst garbage in financial history. Well as they like to say on Wall Street, “Past performance is no guarantee of future results.” But, there’s a lot more money news of note in the past week, and when it’s all added up, I’d suggest the Fed has lost control of events. Not that Mr. Bernanke and his fellow governors can’t greatly influence matters, but events are now firmly in the saddle.

It would seem we have great discrepancies in the global economy. Europe and the US are stuck in a great stagnation, while developing economies are choking on the flood of dollars being pumped by the Fed. There’s been a lot of talk about somehow spreading the burdens of the global monetary crown, particularly talk of making the IMF more representative. But it’s hard to look at the historical record and see much hope for this being done well. The developing countries balked at the IMF’s supposedly friendly rules on capital controls, the WSJ writes:
The IMF’s plan would have encouraged nations to treat capital controls as a last resort, after they had first tried use other tools, such as policies on interest rates, currency values and government budgets.

But ministers of developing economies resisted vehemently, viewing the proposal as an effort by advanced economies to hamstring their policies. Brazil, Turkey, South Korea and several other developing countries have adopted capital controls over the past year to limit surging inflows.

“We oppose any guidelines, frameworks or ‘codes of conduct’ that attempt to constrain, directly or indirectly, policy responses of countries facing surges in volatile capital inflows,” Brazil’s finance minister, Guido Mantega, told the IMF’s steering-committee meeting.
Far from reform, that sounds pretty much like standard old IMF procedure. Meanwhile the Chinese are continuing to struggle with all the money they dumped into their economy over the last few years. Inflation is heating up there and when the great distortions caused by a centrally controlled system refusing to account for its bad investments finally catches up with the Chinese, it isn’t going to be pretty. Doug Noland at the Asia Times has a nice piece on all these matters, and notes, that as Bill Greider was the first to recognize a few years ago, the monetary switch has flipped,

Until recently, the ultra-loose liquidity backdrop ensured that China (and others) invested enormous amounts in manufacturing capacity. Despite global credit bubble excesses, price pressures were mainly relegated to securities and real estate prices. Many argued that China – and the emerging economies – were “exporting deflation”. There are indications that the nature of inflationary forces is changing.

I am of the view that we have likely passed a tipping point where China and the “emerging” economies now exert increasingly strong inflationary pressures upon the global economy. Rapidly growing developing world incomes would tend to support elevated energy and commodities prices, while ensuring an upward inflationary bias in much that is produced globally. The cheap wages and low cost structures that combined with cheap finance to ensure seemingly endless goods seem to have run their course. It is worth noting that US March import prices were up 9.7% y-o-y, with producer price inflation trailing somewhat at 5.8%.
The real money question is dollar hegemony, allowing us to dig deeper into the question of just what is money. In the case of the dollar as the global reserve currency, money is defined overwhelmingly as oil and the Pax Americana — military power. The more the supply of oil is limited, the worse it is for oil. So, a very curious item appeared yesterday from the Sauds:
Saudi Arabia’s oil minister said on Sunday the kingdom had slashed output by 800,000 barrels per day in March due to oversupply, sending the strongest signal yet that OPEC will not act to quell soaring prices.

Now, the Sauds’ oil statements are even more unreliable than the S&P financial outlooks. If this however this is true, it means the global economy is a lot slower

than everyone thinks, if it’s not, well there’s all sorts of nefarious conjectures about why the Sauds would release such a statement, maybe something to do with their neighbor Bahrain, which they now occupy with the consent of our American humanitarians in the White House.

The Guardian has an excellent piece(tx yves) on how the bloody truths of all empires become clearly observable in their last days:
There are two reasons why all this is of interest – or should be – to more than historians: first, much of British decolonisation policy is with us still – similar aims, methods, language and justifications. The continuities are unnerving; politicians were talking of protecting “our way of life” half a century before Blair did. When counterinsurgency stalled in Afghanistan, Malaya was the model examined most closely.

Second, this imperial endgame explains so much about today: for instance, the growing crisis in Bahrain, where new arrests over the weekend appear to herald a fresh bout of violent repression, and why we are not currently bombing this Gulf state with as much enthusiasm as we are Libya.
And if you need a reminder just how despicably bloody the civilized British, evolved to American, empire was, reread John Dolan’s great old piece on Kenya.

Money is certainly an interesting phenomenon. It has never had a very good relation to the actual real economy — the production and consumption of physical goods — nonetheless it is essential for the economy to operate. When Jimmy Stewart asks his guardian angel in “It’s a Wonderful Life”, if he has any money, the angel chortles, “We don’t need money in heaven.” Mr. Stewart, just rescued from a suicide attempt instigated by bankruptcy, indignantly replies, “Well, it sure comes in handy down here Bub!” And so it does, but that doesn’t stop money from being a rather queer phenomenon.

I just finished reading an excellent history on Spain in the early 17th century. Spain was in decline, the economy no longer sustainable, but it still had twice a year shipments of silver from New Spain — Mexico and Peru. The Spaniards could rely on the shipments of silver so they could continue their military misadventures and sustain the parasitic lifestyles of the aristocracy, who by this point had pretty much destroyed the Spanish economy. The book, Count-Duke Olivares: The Statesman in an Age of Decline states, “Seventeenth-century Castile was a rentier society, with people at many social levels drawing a substantial portion of their income from rentas, in the form of annuities on state bonds and individual or corporate bonds.” Sound familiar? As the real Spanish economy declined, the annual boatloads of silver from New Spain became increasingly essential to propping-up the rentier economy, even though the silver itself provided no real wealth to the economy. Sort of like our financial system and unfortunately our entire economy, without the Fed dumping boatloads of money into the system at this point, the whole thing would collapse. But, make no mistake, this continued dumping of money distorts the real economy.

An unhealthy financial system becomes

increasingly useless as a measure for the real economy. One must increasingly look to real goods, particularly to natural resources, and I’m not referring to the valueless metals gold and silver, to measure the true health of the economy. For modernity, there is one resource far more valuable than all the others — oil. It is not coincidental that you can trace the beginning of the transformation of the American economy from one of physical production to rentier at approximately the time domestic American oil production peaked in 1970, followed closely by the oil shocks of the 1970s. The American economy was irrevocably changed.

Cheap oil, not money, be it the dollar, yuan, yen or euro, is the foundation of modern life. The most astounding fact of recent American life is how for three decades, we’ve done everything we can to avoid the issue, thus increasingly harming the American and the entire global economy. Paul Schwartz of The Council of Foreign Relations has a good post(tx jesse) on the oil numbers and China, simply, they don’t work. For years, I’ve been using the simple fact that if three-quarters of the Chinese used oil on the same per capita basis as Americans, and Americans continued doing the same, there would be no oil for anyone else — no one! The nut of Mr. Schwartz piece is,

If China’s recent economic growth pace continues, it will surpass South Korea’s current per capita GDP shortly after 2020 – meaning that the world may be forced onto alternative energy sources much sooner than it realizes.

No may be about it, though it is for this exact reason Chinese per capita economic growth rate will not be able to continue its pace, call it the Oil Yoke. As soon as global economic growth reaches a certain rate, the price of oil is going to choke it right back down. This gives truth to the biggest lie of corporate globalization, that the world could live like Americans, well not even Americans can live like Americans anymore. But that’s OK, we can live better, but it in the short-run certainly doesn’t help the Chinese, whose centrally controlled economy went full force in building a cheap oil infrastructure, only to belatedly find out cheap oil doesn’t exist anymore.

When we talk about reform, whether it’s financial, political, or industrial, it all starts at one place, with energy. America has reached peak-energy consumption, and no amount of money the Fed pumps in the system is going to change that. We have both the necessity and tremendous opportunity to restructure the American economy based on renewable energy sources and even more imperative, design it to use a lot less energy than we use today. We have both the knowledge and capability, we lack the will. Having reached peak energy consumption, creating an economy based on renewables and design efficiency will not be adding new wealth, but distributing existing wealth, and that is going to require hardheaded political and financial reform. We could do a lot worse than starting by tying money to energy.

Cross-posted from Money, oil, and reform

Cross-posted from How I Learned to Stop Worrying and Love Corporate Globalization