Wednesday, November 21, 2012

A few thoughts on the matter of deficits: Do they matter or what?

Family and financial problems have prevented me from updating this blog, and I also have to prepare from moving from Greece to Australia, so my free time is limited.

However, I just read a couple of articles that caught my eye, and I'd like to share a few quick thoughts on the matter of deficits:

Britain's official public deficit climbs higher

Public sector net borrowing soared to £8.6 billion ($A13.28 billion) last month, the Office for National Statistics said in a statement on Wednesday.
That compared with £5.9 billion ($A9.11 billion) in October 2011.
Market expectations had been for public borrowing of £6.0 billion in October, according to analysts polled by Dow Jones Newswires.
Everyone knows that almost all Western nations have been running trade deficits for decades know, and that it was once -famously- said that "deficits don't matter". This may sound strange, but I kind of agree: 

It's not the 'deficits/debts' themselves that matter, rather than the 'ability to repay these debts in the future through future productivity" that actually matters. For example, there are no people that would loan me 1.000.000$, because noone seriously believes that I will be able to produce enough wealth in the future to repay such a loan. But there are a lot of people that would gladly loan 1.000.000$ to APPLE, because they think (rightly or wrongly so) that APPLE will be able to produce enough wealth in the future to repay this loan (+ interest of course, why else would the bondholders loan the money?). 

The problem today is that most corporations (AND countries) have very little (or zero) CREDIBILITY (i.e noone believes that they will be able to repay their loans). 

This is why deficits didn't used to matter, but now they do: People used to think that "countries are always able to repay their loans", so they are always credible, and thus "their deficits don't matter [because they will be able to repay their debts in the future through future productivity]". Now, their credibility is gone, so now "deficits matter"...

Here's another interesting article, from the NY Times:

A Call for Japan to Take Bolder Monetary Action 

For years, proponents of aggressive monetary policy have offered this unusual piece of advice as a way to end Japan’s deflationary slump and invigorate the economy. Print lots of money, they said. Keep interest rates at zero. Convince the market that Japan will allow inflation for a while.
Japan’s central bankers long scoffed at such recklessness, which they feared would ignite runaway inflation. But now, the bank’s hand could be forced by an unlikely alliance of economists and lawmakers who have argued for Japan to take more monetary action after more than a decade of weak growth and depressed prices. 
Championing their cause is the former prime minister Shinzo Abe, who is favored to return to the top job after nationwide elections next month.
Japan’s monetary pump-priming is “like a morphine addiction that is getting worse,” Ryutaro Kono, chief economist for Japan at BNP Paribas, said Tuesday. “Fiscal or monetary policy doesn’t have the power to create new value” for Japan, he said.
Unfortunately, Japan is not the only Western nation that is doing this. It has been doing it for several years now, and it is probably reaching "the end of the road": More and more people are noticing that Japan, and most Western nations actually, are no longer producing a lot of products that the market actually wants and is willing to buy (i.e. "competitive products") [*].

So, what do these countries do? Well, they can't seem to be able to innovate their way out of the crisis by creating new, valuable products, so they start printing more and more money: This way, they decrease the wages of the workers, making them more competitive, and thy also use the newly-printed money to recapitalize the banks. Here's something from one of my previous posts:

1) Capitalism is based on the exploitation of the workers by the capitalists.

2) After the collapse of the former USSR, all the workers of the Soviet block + the Chinese workers were intergraded into the labor marker that truly became global.

3) Capitalists off-shored production to Asia, as the workers of those countries could be exploited much more so than the workers of the West (as the Western workers had achieved some important victories through a century of labor struggles, that inhibited the capitalists ability to exploit them).

4) As the industrial base of the West was diminishing, capitalism became more "leveraged" and credit-based, as it needed more and more "banking loans" to keep the system going:
-If a factory was closed down, either because the owner off-shored production to Asia or because it just couldn't compete against the cheaper goods that were made in China, the workers of that factory could still get a job, or start a business themselves, by getting a loan from the banks.
-The workers wages have stagnated for a long time (link), but they could still "afford" a new house, by getting a mortgage. And they could also afford rising tuition fees for their children's education, by getting a student loan. And they could even a new plasma TV set, by getting another "consumer's loan". And the list goes on and on.
-This meant that the construction workers could find a job (thanks to all these mortgages), and the companies that produce this plasma TV set and the merchants who sell this TV would make a profit. So, there would be a job for those who make these TV sets, or sell them.

5) The problem with all this is that the houses that the people live in are not "their" houses, they belong to the bank. And if you can't make your payment on your mortgage, then the bank kicks you out. Can all these debts be repaid? No, of course not.

6) So, the Western workers earn relatively low wages, and are deeply in debt, as they had to keep the system going by "overconsuming" for a very long time. And it's not just the workers, entire states are heavily indebted and cannot possibly repay their debts.

7) As the people cannot get any more loans, capitalism can't keep growing. No jobs for the construction workers, factories close down as noone can consume all the good that they produce, etc.

8) But as these debts cannot be repaid, the banks are also in trouble, as they have to write down heavy losses. This is a very heavy blow for them, as they are ALL bankrupt, just like Lehman Brothers.

9) The difference is that, unlike Lehman (and a lot of smaller banks), the rest of the banks were saves through endless bailouts. Let's not forget that the banks have become bigger than ever, as capitalism needed more and more credit. So, the bankers have the politicians in their pockets, and they managed to get the money they needed (from us). After all, they are "too big to fail", whereas we are not, we are "replaceable". So, all the wealth of our societies is being redirected to the banks, in order to cover their losses, leaving the rest of us to starve.

10) But the banks need a lot of dollars. Trillions and trillions of them. So, this "money" is being "created out of thin air" (quantitative easing - money printing). This process of money printing has being going on for many decades now, ever since Nixon abolished the gold standard. The system needed more credit, and so it became more leveraged. The gold standard was interfering with capitalism's need for increased leverage, so they abolished it. And now that the banks have to be bailed out, they are printing even more money than before - here's a great chart:

11) All this newly created "money" (currency) goes to the banks, so that they won't have to face another "Lehman-type" moment, or even a global collapse of the entire banking sector. But this newly created 'money' isn't based on newly created wealth (new products/services), nor on wealth's"monetary counterpart", gold (gold, as we have already explained, is the "monetary representation" of wealth, as capitalism has a tendency to monetize everything, and so all goods and services have a value that can now be expressed through gold, in order for the people to be able to exchange them in the market (buying/selling).

As all this newly created "money" is not based on new wealth/gold, it is simply a way to debase the currency and redistribute wealth:
The banks get bailed out, by getting all the newly created "money", and the workers get paid less (as the value of the currency in which they are getting paid is being diminished). This is necessary for the capitalists, who get to save the banks, and improve the "competitiveness" of the working class. The destruction the currencies is a sacrifice that they have to make, in order to save the banking sector from collapsing, and at the same time to reduce the wages of the wokers, so that they become "more competitive", thus attracting capital investments.

13) One of the greatest "side-effects" of this process of "money printing" is that fewer and fewer people want to own/use the various currencies, as they can easily understand that these currencies will lose a lot of their current value in the future. More and more capitalists turn to gold for protection of their wealth, as they realize that gold is the one thing that will always remain constant. So, China, Russia, the oil states (and many other rich "players") are buying gold, and they are trying to dump the dollar when they trade with each other. The oil states have a "special role" to play in all this, because if and when they reject the dollar as a means of payment, the world will experience a great "oil crisis", much bigger than the 1973 oil crisis (which was the first time the oil states publickly rejected the dollar and demanded to be paid in gold, as they obviously didn't like America's decision to abolish the gold standard in order to print as many dollars as the USA wanted).

13) The West is obviously caught between a rock and a hard place. But saving the banks and impoverishing the workers are the top priorities, so this process of "money-printing" will continue, despite the various obstacles, twists and turns. Money printing is today a "systemic necessity" for capitalism, and there is not much point in putting the blame solely on Bernanke, Obama, Bush, the FED or their English/Japanese/European counterparts (The Europeans are also printing money, although Germany does not need the same amounts of "money-printing" as the rest of Europe, as the German workers are already very competitive, thanks to their high productivity. But Germany also accepts the need for money-printing, as it is the only way to save the banks from their "toxic loan situation". And they are VERY WELL PREPARED for the coming destruction of the dollar (hyperinflation), as the euro-system has combined the European nation's gold, making it the "least bad" option in a world of fiat currencies that are being massively debased).

14) But gold is not just an inflation hedge or a deflation hedge - it is a measure of trust in the system: The reason why gold was considered to be a "fringe investment", or even "a thing of the past" is because there was a lot of trust the system's ability to grow. The capitalists don't really like gold's stability, because capitalism wants to constantly expand. So, the capitalists prefer investments that return a profit for them, like starting a business, or investing in stocks, etc.. If and when the economy is doing well, then businesses make profits, investing on stocks is also profitable, etc. So why buy gold? Why would anyone want to save his capital for another day, when he can invest his capital today, and make a lot of money?

15) Things change however, and today the capitalists are not very confident that the economy will grow in the future (there is no trust in the system). There is enough capital concentrated in the hands of a few oligarchs, and there are many cheap workers in Asia - and yet the capitalists are NOT willing to make a lot of investments (especially in the West, where the workers are "too expensive"). As the workers lack the necessary "purchasing power" to buy things, it is obvious that a lot of products will not be consumed (because the people are too poor to buy them).

16) But the capitalists prefer to let the workers starve to death, even if this aggrevates the crisis on the short-term. The more desperate the workers become, the more inclined they will be to accept serfdom (or "increased competitiveness", as the capitalists see it). So even if a few capitalists get killed in the process ("coladeral damage"), the end result will be great for the rulling class, as they will have created an "ultra-competitive" world, where a few oligarchs own almost everything, and the workers work for scraps (->more profits for the capitalists). It is only then that they will start investing again (especially in the West). Until thw workers accept working for scraps, the capitalists will not invest.

17) In order to achieve this goal, the capitalists need a safe place to store their capital: GOLD. Once the workers have become "desperate enough" to accept serfdom, the "business cycle" can start again, and they will invest some of their gold in productive investments. But until they feel confident that they will make a profit, they choose to save their capital for the future - and gold is the only thing that will not lose value when everything else is collapsing.

[*] Don't get me wrong, the West is still producing a lot of great products, but, with the notable exception of Germany, they are all running trade deficits (i.e. the goods they buy from the market have a greater market price than they goods they sell on it. Note: Please notice how I used the term market price instead of market value, because these two things are not the same, unless for example you honestly think that footballs players are worth all these millions of dollars that they get. But that is another discussion, for another time).