In today's
financial world, a liquidity boom produces rising
nominal or face value in return on investment
(ROI) with an increasingly hollow economy in two
ways: (1) by devaluing all currencies against real
assets and (2) by keeping down wages and worker
benefits around the globe.
Thus while all currencies devalue steadily
but not at the same pace, all of them devalue
faster against real assets and slower against
labor cost, because wage adjustments tend to lag
behind both real and nominal inflation rates. This
translates directly into low real valuation for
labor, structurally constraining growth of demand
to fall behind growth of supply. This in turn
leads to an overcapacity economy of declining
consumer purchasing power. Neo-classical
economists call this the business cycle, which
Keynesians assert must be countered with demand
management through full employment supported by
deficit financing.
The laws of
overcapacity The first law of overcapacity
is that it is deflationary (falling market prices
of assets), which in turn requires falling wages
to maintain corporate earnings. The second law of
overcapacity is that it discourages new plant
expansion, so that existing capital assets
appreciate in market value in nominal terms as
liquidity increases, causing the stock markets to
rise even though their economic value remains
stagnant.
But the laws of overcapacity
naturally lead to a downward economic spiral that
ends in depression. Moreover, socio-political
stability requires nominal wages to continue to
rise above inflation. Thus the convenient
monetarist solution is to allow stealthy but real
devaluation of currencies against real assets, but
with a slower devaluation rate against the value
of labor.
The global regime of declining
currency value is one that will lead to a new form
of slavery, despite a rise in living standards
from higher labor productivity and resource
utilization as a result of technological progress.
Universal currency devaluation is masked
by an exchange-rate regime in which currencies
rise and fall unevenly against one another around
the benchmark US dollar as the prime reserve
currency, while all currencies fall against hard
assets in unison but at different rates due to
varying local conditions. The uneven rates of
currency devaluation present windows of profit
opportunity for arbitrageurs in the global
foreign-exchange and financial markets. A network
of interlocking asset bubbles then grows around
the world as a result of dollar hegemony and the
emergence of deregulated global currency and
financial markets, jumping over national borders,
fueled by a general devaluation of all currencies
while the trading public is distracted to focus on
the relative exchange value of one currency
against another.
Thus while both the US
dollar and the euro steadily fall, Europeans are
comforted by seeing their currency rise against
the dollar in recent years when in fact the euro
has merely been temporarily falling at a slower
rate than the dollar. As the dollar, the prime
benchmark reserve currency for trade and finance,
devalues against assets, the exchange-rate regime
in the current international finance architecture
will eventually drag all currencies down with the
dollar, lest the trading partners of the United
States find themselves saddled with trade
penalties associated with inoperative exchange
rates.
A confused public The
general public is further confused by uncertainty
about whether a rising currency is good or bad for
them. They are told to rejoice when their currency
falls, as the goods they produce will sell in
larger quantity because they can be bought with
less money by foreigners, even their own income
per unit of production will fall and they
themselves will be crowded out of restaurants and
shops in their own home towns by suddenly richer
foreign tourists.
Ironically, while any
normal citizen should find the prospect of
receiving less money for the same amount of
product he or she produces unappetizing,
policymakers insist that there is no alternative
systemically. In the meantime, the rich get richer
from declining wages worldwide.
All the
economies of the world are competing in global
markets by pushing their domestic wages and worker
benefits down in search of globalized "growth".
The global market has turned into an arena for
universal voluntary slavery to serve global
capital.
Wicksell's ideas
obsolete Swedish economist Johan Gustaf
Knut Wicksell's idea of fighting inflation by
pegging interest rates to ROI, operative under
industrial capitalism, is problematic in finance
capitalism because of the emergence of structured
finance in which the traditional discounted rate
of return for industrial investment tends to be
overwhelmed by astronomical returns from financial
manipulation routinely expected of hedge funds and
private-equity firms.
To fight stealth
inflation from currency devaluation, Wicksell's
notion of pegging interest rates to ROI in
structured finance would set interest rates so
high as to make the sky-high rate of 19.93% under
former US Federal Reserve chairman Paul Volcker
pegged to money supply look tame.
Further,
in Wicksell's time (he died in 1926 at the age of
74), there were no exchange-rate issues as there
was no foreign-exchange market, since the reserve
currency was based on the gold standard, with
other currencies adopting fixed exchange rates
against it. Cross-border movement of funds was
strictly regulated, and currency accounts between
trading nations were settled in gold regularly
through adjustment of national accounts in the
Bank of International Settlement.
Back
then, domestic interest rates had no direct
immediate effect on the exchange value of a
country's currency. Today, domestic interest rates
do have a bearing on currency exchange rates,
albeit increasingly less directly. High domestic
interest rates will push a currency's exchange
rate upward, hurting a country's current-account
balance and worsening domestic inflation, even
though this relationship is increasingly obscured
by the decoupling of nominal interest rates from
the real interest rate and the decoupling of
exchange rates between currencies from the real
value of all currencies as derivative of a fiat
dollar as the main reserve currency.
The lessons of 1987 The 1987
stock-market crash was unleashed by the sudden
collapse of the safety dam of portfolio insurance,
a hedging strategy made possible by the new option
pricing theory advanced by Nobel laureates Robert
C Merton and Myron S Scholes. Institutional
investors found it possible to manage risk better
by protecting their portfolios from unexpected
losses with positions in stock-index futures. Any
fall in stock prices could be compensated by
selling futures bought when stock prices were
higher.
This strategy, while operative for
each individual portfolio, actually caused the
entire market to collapse from the dynamics of
automatic herd-selling of futures. Investors could
afford to take greater risks in rising markets
because portfolio insurance offered a disciplined
way of avoiding risk in declines, albeit only
individually. As some portfolio insurers sold and
market prices fell precipitously, the computer
programs of other insurers then triggered further
sales, causing further declines that in turn
caused the first group of insurers to sell even
more stock and so on, in a high-speed downward
spiral. This in turn generated other sell orders
from the same sources, and the market experienced
a computer-generated meltdown.
The 1987
crash provided clear empirical evidence of the
structural flaw in market fundamentalism, which is
the belief that the optimum common welfare is only
achievable through a market equilibrium created by
the effect of countless individual decisions of
all market participants each seeking to maximize
his own private gain, and that such market
equilibrium should not be distorted by any
collective measures in the name of the common
good.
Aggregate individual decisions and
actions in unorganized unison can and often do
turn into systemic crises that are detrimental to
the common good. Unregulated free markets can
quickly become failed markets. Markets do not
simply grow naturally after a spring rain. Markets
are artificial constructs designed collectively by
key participants who agree to play by certain
rules. All markets are planned with the aim of
eliminating any characteristic of being free for
all operations. The free market is as much a
fantasy as free love.
In response to the
1987 crash, the US Federal Reserve under its newly
installed chairman, Alan Greenspan, with merely
nine weeks in the powerful office, immediately
flooded the banking system with new reserves, by
having the Fed Open Market Committee (FOMC) buy
massive quantities of government securities from
the market. He announced the day after the crash
that the Fed would "serve as a source of liquidity
to support the economic and financial system".
Greenspan created US$12 billion of new bank
reserves by buying up government securities from
the market, the proceeds from which would enter
the banking system.
The $12 billion
injection of "high-power money" in one day caused
the Fed Funds Rate (FFR) to fall by 75 basis
points and halted the financial panic, though it
did not cure the financial problem, which caused
the US economy to plunge into a recession that
persisted for five subsequent years.
High-power money injected into the banking
system enables banks to create more bank money
through multiple credit-recycling, lending
repeatedly the same funds minus the amount of
required bank reserves at each turn. At a 10%
reserve requirement, $12 billion of new high-power
money could generate
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