The Squealing of the Pigs…
You know, Paul, Reagan proved that deficits don't matter. We won the mid-term elections, this is our due.
I’m a big believer that deficits do matter.
By J.M. Hamilton 3-9-2019
One of the great things about growing up a military brat was the experience of moving every three to four years, if not sooner, and seeing different places, meeting new people, and experiencing different cultures. Something happened this week that brought me all the way back to the ninth grade.
My family had just moved to exurbs outside of San Antonio, and my new high school had one the largest agriculture (ag) barns in the State of Texas, if not the largest. And among the typical teen groups of that era – freaks, jocks, nerds, and socials – was a new group I really hadn’t encountered before, called the kickers. The kickers were the ag girls & boys, and they spent a lot of time down at the school barn. Some of these kids would go on to college at Texas A&M.
That first Texas Spring, I heard all kinds of loud animal noises – squeals & screams – coming from the high school barn. I turned to one of my classmates, wearing a FFA blue corduroy jacket, and asked him, “What is that god-awful noise?”
The fifteen year old pulled out his pouch of Red Man, placed some tobacco in his cheek, pushed back his Resistol a little bit off his brow, and listened to the crying of the animals.
Finally, he said, “It’s nut cutting time. And the boars, they don’t like it. They don’t like it at all.”
What brought about my high school flashback, this week, was all the squealing the academic and financial elite are engaged in over MMT (Modern Monetary Theory). Ironically, while the elites maybe screaming about it, MMT has been the monetary policy of the United States, arguably, since the 2008 crash.
MMT is the belief that deficits don’t matter, because as the US possesses its own currency, it does not have to rely upon taxation, or borrowing from foreign governments, to finance federal deficits (which have been running close to, or at, on average, a trillion dollars a year, since the 2008 crash… this is projected to continue as far as the eye can see, thanks to the Trump tax cuts). Instead, deficits can be monetized by the US central bank, or the Federal Reserve… we saw this in action, post-crisis, w/ the advent of QE or quantitative easing (basically, the Fed buying US treasuries and private debt). Fortunately or unfortunately, depending upon one’s perspective, the Fed is the most powerful branch of government w/in the US and the least understood by the public. That is to say, the Fed, w/ a little help from its friends at Treasury, can print money to finance the national debt, and as of late seemingly, w/ few or limited repercussions.
So why then, the elite’s cacophony of crying and squealing?
After all, the Federal Reserve has been helping to finance the national debt, which has ballooned from approximately $10 trillion in 2008 to $22 trillion plus, today. Haven’t the elite been the beneficiaries of QE and Fed intervention into private and public debt markets? Didn’t the stock market soar; weren’t Wall Street banks, shadow banking, and the elite bailed out; didn’t asset prices rise stratospherically; taxes for the wealthy – cut; military contactors enriched by credit card wars; didn’t the rich get richer… thanks to the Fed and MMT?
Absolutely.
And therein lies the rub or the tension. The financial elite – which owns the government and has captured fiscal, foreign, monetary, and tax polices (not to mention all four branches of government) – really doesn’t mind the Fed financing deficits, as long as they are the beneficiaries. But the second a few Dems, and some liberals, talk about taking the Fed’s bazooka and firing it at real problems, like: a planet in flames; free college education; an economic bill of rights; and wage & wealth inequality (last seen at these levels, during the Gilded Age)… well, then there’s a problem.
The elite, as I recently argued, have rigged a perpetual profits machine, and the engines of that machine are the Federal Reserve and the debt driven economy. And the elite like the financialization of the US economy; they like the rigged system they have built for themselves; they like – w/in the US – the preeminence of Wall Street banking, shadowing banking, and the ultra- mercenary, private equity machine. It requires so little effort to mint profits from cartel & monopoly, and gutting a company’s credit line and employee pension.
Finance is the tail that wags the Main Street dog, and the Lords of Finance – who own the establishment politicians – aren’t about to give that up. They want the conduit for Fed policy to remain the Wall Street banks & the stock market; they like trickle-down monetary policy, as it effectively, sterilizes the money flowing out of the Fed, and for the most part, keeps it out of the public’s hands.
In this manner, inflation is contained.
What inflation JM? Great question… glad you asked.
Many economists and financial eminentos (as well as myself) predicted that as a result of the Fed’s balance sheet expansion, the mopping up of US debt, and all the liquidity and money printing injected by the central bank into the economy that inflation would set in. But inflation hasn’t set in… which would debase the buying power of the dollar, as well as, harm faith in the dollar as a storehouse of value. Why?
First, thanks to the Fed’s cheap money policies, M&A has exploded. This has created cartels & monopolies, which exert monopsony power over a thoroughly defeated US labor market. In short, here in the US, as workers compete for fewer and fewer well paying jobs against global labor (thank you automation, AI, & industry consolidation, as well), wages are suppressed, while management and the ownership class take nearly all income gains .
Second, as the US imports many of its products, due to the offshoring of labor & manufacturing, EM nations are exporting their disinflation – exceptionally low wages – to the United States (which is good if you are a consumer, and absolutely sucks, if you are an American w/ a high school education, or less, and are attempting to find a well paying job). A quick shout out to my favorite news show, Bloomberg Surveillance, for bringing up this salient point this week.
And third, all the central banks are doing it. If the US was alone in suppressing interest rates, expanding its balance sheet, and engaged in debt monetization, through QE… The US dollar would no longer be the world’s fiat currency. But as the BOJ, the ECB, and the PBOC are all engaged in monetary sleight of hand, as well as other central banks, the impact to the dollar appears minimal. As a result, the almighty US dollar and the Federal Reserve – for now – have suffered no ill effects. In short, there’s a cartel of central banks engaged in monetary welfare for the global kleptocracy, and as long as they play nicely together, the currencies cannot be played off one another (such that it alters the various currencies' balance of power).
Bottom line: Inflation is nowhere to be seen. That is to say, as long as global M&A – and industry consolidation - continues at its extraordinary pace, it remains an employers’ job market… and as long as the plutocracy continues to keep all the economic gains of the global economy for itself (effectively, sterilizing central bank largesse), and central banks continue in lockstep w/ the same easy money policies, directed through a cartel of global banks… don’t expect inflation anytime soon.
Forcing the issue further is nation state debt itself… the central banks can only allow interest rates to creep up so high (higher interest rates would contain M&A and provide interest income to retirees and savers), before nation state debt service loads wreak havoc on government budgets.
So does MMT work, can it work? JMH can tell you this, it has worked exceptionally well for the 1% for a decade, to such an extent that we now live in a Neo-Gilded Age.
What liberals are talking about, in regards MMT, is the end of sterilization in the money supply, & largesse, issued forth by the Fed. And the end of monetary sterilization – monetary policy nut cutting time, if you will - is what causes the elites to squeal, like barnyard animals in springtime.
If the Fed largesse was to shift away from Wall Street, and be redirected at the American public - via a Green New Deal, a jobs guarantee, or a UBI – wages would rise, and this would crimp profits in the private sector. And this is what is so upsetting to the robber barons… the fact that their perpetual profits machine, loaded w/ debt, may suffer a rise in wages.
Moreover, workers - unlike the financial elite – tend to spend the money they make, and if aggregate demand outstripped aggregate supply, this, in turn, could actually bring about inflation (the very inflation, the Fed is said to have long sought). A possible rise in inflation, in turn, may cause greater scrutiny of our cartel and monopoly driven economy… the primary biz model of the cartel & monopoly economy is to restrict the supply of products & services - or fix price - to drive profit maximization.
With populism all the rage, the elites don’t want that kind of scrutiny. The model won’t bear it.
As with all things economic & monetary, when treading in unfamiliar territory, the keys to implementing an economic bill of rights, a jobs guarantee, and a UBI - financed by the Federal Reserve & MMT – would be to do so at a gradual pace. Arguably, the benefits of MMT, to date, have accrued exclusively to the 1%. Therefore, it’s long past time to spread the wealth, by redirecting Fed largesse to policies that directly help the 99%.
As for a Green New Deal, that can’t wait.
Here, the elite need only ask themselves: What good is being wealthier than King Midas, if the planet is destroyed?
Weimar Style
Short to intermediate term, I have to side w/ Cheney on deficits… longer term, unless we want to go to negative yields (which would erode debt and the principle itself, as has been done in other countries – see Germany & Japan), I have to side w/ Mr. Fink. Eventually, the national debt will have to be addressed, via a haircut.
At the end of the day, the elite have already jumped the Rubicon, and are fully engaged in MMT (aka QE). They have captured government and government policies (especially, the Fed & monetary policy) for their own personal enrichment. The elite favor deficits and debt when it enriches them, but are terrified of spreading the wealth to the 99%: partly because of their insatiable lust for profits; unmitigated greed; and partly, because they fear, greatly, a highly successful Northern European socialist model placed w/in the US.
(The elites, also, like to believe they are self-made, when in reality many are as socialist as they come. That is, their wealth, often, was obtained by crony contacts w/in government, and a rigged system. MMT, in the hands of liberals, would upend the top-down/trickle-down approach of our economy, and redirect, to a greater degree, to a bottom-up approach, or a 99% first tack).
After all, how are you going to keep boys and girls down on the farm - and dependent upon slave wages, multiple jobs, & Oxycontin - once they’ve had a taste of a highly successful mixed economy, European model (w/ a healthy dose of socialism to ameliorate the effects of a predatory, crony-capitalist system)?
The longer term solution, of course, and what will, almost, inevitably happen – as the entire house of debt is unsustainable - is there will need to be a, gradual, national debt write down. And only central banks have that kind of power to forgive that much debt. Stakeholders in our current catastrophic debt levels, those who make income off that debt – banks, shadow banking, and multinationals - are all that stand in the way of a longer term solution, and, likely, an inescapable write down (that will free up global governments to serve the will of the people & enterprise, via fiscal & monetary policies).
In the meantime, please consider hearing protection to muffle the screams & squealing.
Copyright JM Hamilton Publishing 2019
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