The bailout state, as it stands, cannot save us. Without addressing wealth concentration, it perpetuates inequality. Without recognizing ecological limits, it accelerates environmental collapse. Without reforming political power dynamics, it entrenches plutocracy. True resilience requires a systemic transformation: redistributing wealth, realigning economic priorities with sustainability, and democratizing power?
I can't get over the absurd situation, where this fundamental frailty of the money system is such a niche concern. There is a vast industry addressing inequality, climate change etc, but hardly any attention given to what is driving it. Nor is the connection made with political and geopolitical instabilities. It is absolutely disastrous and should be in general discourse.
Surely something has to give when, as you say, "The ’shadow banking’ system - where about $217 trillion is parked - is growing at an annual rate of around 6-9%." With a reasonable set of assumptions, in just five years the $217 trillion will be $300 trillion. I assume "So relax folks" is tongue-in-cheek.
Well, Tesla is valued at >$1trillion compared to Toyota at £45bn. If my imprecise maths is right, that means that Tesla is considered to be ~25 times more valuable than Toyota. Meanwhile, Toyota net income is projected to be $12bn compared to Toyota’s $24bn. So again, pardon my maths, on this bases the ~25x valuation is based on half the profits. Like for like, it implies that Tesla is 50x times more ‘valuable’ than Toyota. Does anyone seriously believe that there will ever be a time when Tesla is creating 50 times the output of Toyota? Toyota produces ~11m vehicles per annum so prima facie, this implies that Tesla will have to produce 550m vehicles pa to justify their valuation.
So my point is, there is nothing tongue in cheek about any of this. There are only two possible paths: a gigantic asset crash that revalues the West against countries that actually produce things (products/services whatever) or, a horrifying geopolitical strategy that says: it’s all a lie but we’re the bully so we’re going to beggar thy economies to maintain our fiction. This appears to be the Trump plan. If someone can outline a gradual, careful incremental way through that doesn’t involve redesigning the world order, I’m all ears.
Trying to be optimistic I’d like to outline a tool which might be helpful. It is an information system supporting a class of parallel money (https://t.co/QlwPt624f2) satisfying some conditions (in particular, all obligations measured in the monetary unit are considered interest-free) and with no options for savings or investments. Any kind of such money would circulate beyond banking sector (i.e. the system creates money when obligation to creditor is posted by debtor and destroys money when confirmation of payment from debtor is posted by creditor). Some circular obligations may be reduced by the system itself what would enhance capabilities of several economic agents and reduce amount of fiat/credit money to be created by government/private banks. The matter is to get those agents interested to participate, and participation should start with thorough testing of the system.
I think you’re greatly underestimating the contemptuous power of broligarchs. They biggest names in Silicon Valley are DOGE piling (pronounced doggy piling) into Elon Musk’s NGO, which just happens to duplicate the functionality of the MBO, and is already demonstrating his talent for efficiency by reposting MBO publications on Twitter.
But these guys in Silicon Valley, they’re very much ultra whitewing (that looks like a spelling error, but I think I’m going to keep it as is ) libertarians. Their ideological fulfillment will come with the destruction of the US government and dismantling of dollar. It’s a crazy destructive set of idea ideas to build some sort of utopia, but they got lots of money and they believe this stuff they’ve spent hundreds of millions of dollars pursuing it.
The interest rates the Fed would normally lift in the face of inflation which we might have some expectation of, is going to be really entertaining for those with dollar denominated debt, but the fact that so many people near or on the levers of power in the United States coupled with a very, very kleptocratic administration being assembled, plus the pogroms the GOP are publicly saying they will pursue, I don’t know. Those are a lot of destabilizing buttons being pressed at the same time.
There is real problem when the elites of a nation have no skin in the game or they’re actually enthusiastic for a collapse.
We can’t even exclude a much higher risk of preventable diseases exploding like wild fire with in the U.S., emerging diseases brooding in the US becoming the next epidemic or pandemic. Or a digital kind of pandemic where the lack of competence in the leadership of US security which also includes a project 2025 clearing out experts for right wing loyalist to US wealth, leaves the US wide open to wave after wave cyber crime.
Even the FBI is now telling people to use and secure communication because whoopsie those back doors they insisted on having, have been hacked.
And there is the most certain drum beat of extreme weather and the stress that it’s placing on existing productive capacity as well as the insurance industry.
Titling ownership of assets (clear title to a home, etc.) allows these assets to be transferred without the inefficiency of moving them physically. These titled and clearly owned assets occur over the boundaries for a market which is protected by the rule of law and the military. A market establishes a mean point equilibrium about which prices trend. The cost of this mean point equilibrium is the cost of the legal system rule of law and maintaining a police and military (along with the fire department and the streets and maybe the schools).
Along with Warren Buffett, we can look at earnings compare it to total debt. There is a lot of debt out there, and there is the additional problem of collateralized unregulated debt. Art bananas and bitcoin are different from rice and heating fuel; their existence is arbitrary, their prices not constrained by basic human needs, but their prices eventually equilibrate (along some exchange flexibility) with rice and fuel.
Titling ownership of art bananas and bitcoin can create real wealth- just as it did when we started titling homes and stock ownership.
The problem isn't shadow banking, or art bananas, or whatever people want to invent that is untethered to basic needs. The problem is, as I see Ann and Pettis pointing out, who is regulating the banks, and what reserve requirements are they being allowed to negotiate within their nations and in the global markets. And I don't think there is any way to regulate the bankers- we haven't really done it in the US, much less the global markets with which the US equilibrates.
I'm reading Pettifor now, and some of what Ann has written. I have a simplistic understanding of what they are saying: When a persistent imbalance in trade (of goods or money flows) occurs in the global economy, it is the result of persistent transfers of payments institutionalized by laws and military enforcement, which is pretty much the basic cause of class differences that arise. This is not "free trade", this is institutionalized trade manipulation.
Shadow assets- art bananas, bitcoin- are impossible to evaluate in real time. What is the exchange rate of an art banana to heating fuel and rice? It depends on how hungry and cold people are. Economists would say the exchange rate could fluctuate wildly.
I have a different take from the economists.. Traditional economists ply their trade with data and differential equations, and they need a big field to apply their math. That means they want to apply the Mean Value Theorem equally to rice and art bananas, that they are both economic values that equilibrate around the same point. This idea that rice and art bananas are fungible is professionalized, institutionalized bullshit. One better math model would be game theory... but my point is that Ann is saying the Fed absolutely cannot tolerate a shortage of necessary goods now, because the exchange rate with art bananas would crash, and somewhere in the global economy debt has been issued on that banana that will come due. How much debt, we don't know.
But the banks that create and that title assets and the markets that exchange them are making us in the US (and to some extent and more modestly globally) wildly wealthy as a group. And that's why there is housing and stock market and bitcoin inflation- because there is enough food and heating fuel in the US, we have a military, and housing and stocks and commodities and bitcoin are in limited supply, and we need to bail out any bubbles.
But the bailout state can indeed save us from bubbles, by inflating bubbles further. It only becomes a problem if there is a shortage of food and fuel. Then, the fantasy that rice and art bananas are economically fungible quickly vanishes- in economist's terms, the exchange rate market breaks.
The fear I have is not inflation of assets- it's deflation brought about by AI and increasing efficiency and global movement of money to where the laws are most favorable to those who have it. AI is inflationary for mobile intellectual property- algorithms, stock ownership- and strongly deflationary for wages of laborers. The bailout state cannot bail us out from social instability that can come from increasing efficiency from AI with resultant deflaton of worker's wages.
The availability of bitcoin allows individuals to toggle their wealth quickly between fiat and digital currencies. Transferring from dollars to bitcoin reduces the availability of dollars to be used as collateral for military global intervention and wars. Deficit financing requires treasury assets, not bitcoin, and was the actual purpose of the establishment of central banking in the US. I can imagine a world of modest tariffs, reduced military budgets, reduced federal roles, and increased local complexity and interactions- perhaps good things are coming.
Sounds like you haven't heard of the 18.6-year property cycle, which functions like clockwork. The same patterns that led to the 2008 crash are in play now, with a looming crisis due around 2027.
Not quite! It's amazing how predictable the patterns are. I've been reading about it for years, but I highly recommend reading The Secret Wealth Advantage (https://www.amazon.com.au/Secret-Wealth-Advantage-Profit-Economys/dp/0857198572). Even though it looks at how to exploit the cycles (no interest to me), it also explains how they work.
I have to imagine it’s some flavor of buy low sell high, which should be honest would be the foundation of any sensible investment plan, right?
Business Cycles really do exist irrational exuberance really does exist and, I think what characterizes the period we are in is the word poly crisis. There are so many balls in the air right now.
Yes, it gives an explanation of why the economic cycles exist (principally due to our mistaken relationship with land) and then basically says we might as well cash in while this foolishness persists.
And put your cash where? That’s the damnation of it all. Invest in property? Overvalued? Put it under the mattress? Inflation. Invest in something safe? What - in God’s name. Invest in Gold? Sure, but no new world order will peg money to gold. It’ll be commodities or stg that equivalents to production. Buy some wine / art? Ok, and that’s gone in a second when the mob finally breaks loose. Depressing times.
We'll get through it. The most important thing is not to be in debt. The book I mentioned above has a lot of interesting answers to those questions, but a lot of it's over my head!
Happy Christmas and thank you Ann for all your great insights.
I came across this paper from UCL: ‘The self-financing state: an institutional analysis of government expenditure, revenue collection and debt issuance operations in the United Kingdom’ - 4890683.pdf
Taking the quotes below from the above paper into account, I'd like to re-ask the question I asked before, 5 December.
Would compensating the Waspi women, lifting the 2-child benefit cap and paying the winter fuel allowance to pensioners who need it be economically sound but, given the power of the right-wing press, possibly politically risky?
It is commonly claimed that the UK Government has no agency to create money and must instead obtain funding from taxpayers or lenders; expressed in the currently favoured political parlance: ‘There is no magic money tree.’31 In this paper we have shown that this theory does not accord with the institutional reality in the UK.
The Consolidated Fund advances HM Treasury sovereign credit, backed by Parliament’s power to raise future tax revenues.
Government ‘spending’ should then be understood as a form of money creation. This contrasts with the predominant belief that government spending is financed through taxation or borrowing from the private sector or via central bank-initiated money creation.
Furthermore, it is the UK Parliament rather than the central bank or HM Treasury that governs the Consolidated Fund and thus authorises spending, with the Bank of England automatically crediting commercial bank accounts when spending takes place.
Two of the main purported constraints on government spending are not valid, namely: liquidity risk (the ability to repay debt and prevent default) and market risk (the ability to control the interest rate).
HM Treasury’s power to spend independently of the Bank of England’s monetary policy position is much less constrained than is commonly thought, given the central role of the Consolidated Fund and the importance of government securities (including indemnities and guarantees) within the monetary and financial system.
HM Treasury’s current debt management regime of ‘fully funding’ public expenditures, via either raising taxes or borrowing, appears anachronistic and at odds with the functional purpose of private sector bond purchases.
After Work and Pensions Secretary Liz Kendall issued an apology for a 28-month delay in sending out letters to those born in the 1950s impacted by state pension changes, she said, however, that she doesn't accept that compensation should be paid.
Ann, in such a context, my question is how can:
‘We can afford what we can do: monetary policy as a public good’
(April 6, 2023|Written by Ann Pettifor) be applied?
Does it mean that the government can afford, as it's payable in £££, to compensate the Waspi women, and lift the two-child benefit cap and pay the winter fuel allowance to pensioners who need it? Presumably then re-paying the borrowed money, like any other public debt, in time?
Bitcoin is constructed to be a finite quantity medium of exchange, and cannot be used for deficit spending. However, once Bitcoin has finished being mined, the "exchange rate" between the cost of mining Bitcoin, and the market value of Bitcoin will be lost. It will be like antique silver- already minted and in use, no longer constrained by the cost of electricity to mine it.
Bitcoin would still have an "intrinsic value" related to the advantage it conveys as a network effect. A single cell phone is worthess because you can't call anybody; each incremental cellphone is more useful because you can call more people. That's a network effect.
I would expect the value of Bitcoin to eventually settle on the network effect of the global community of users- and thus its value as a medium of exchange, compared to the value of dollars and other fiat coins. In other words, it becomes similar to other sovereign monies- except that the sovereinty is no longer related to national boundaries or other territory, and is instead a network effect that is becoming unmoored from territory.
It's been said (by Saylor, for instanace) that Bitcoin has won as the default hard money, in a kind of Darwinian race. I don't believe that at all, either as an understanding of biology or of Bitcoin. There is nothing preventing the establishment of Bitcoin B, Bitcoin C, and so on. Such a series of Bitcoins can all follow the same limiting method of mining. Most significantly, such a series of Bitcoins would also tend to equilibrate with each other, and act more like fiat currencies that exchange. An extrenely high Bitcoin cost would be competitive with smaller bitcoins in the series, which would tend to limit the upward speculative interest in Bitcoin.
However, this Bitcoin Series would profoundly differ from the money issued by nations as they would not be constrained by territory. This raises the possibility fo a future in which the nation states, with their nuclear weapons, are in competition with a series of Bitcoins issued by groups or associations which arise between indifiduals cooperating over the web.
In that way, one could perhaps profit from evaluating these crypto currencies along with the social nature of their associations or grups wherever they are- and buy an emerging currency as a way of participating in the economic activity of the group, perhaps as a requirement or a tariff discount. In this way, social evolution could proceed as an overlay on the current nation states, which would be competitive with internet currencies and constrained in their ability to deficit spend.
In effect, that would slowly and hopefully gently reduce the need of nation states to project power outside their boundaries. There are no other convincing solutions for nuclear power to me except rust.
-Charles Matthews author of Eve's Mark
From Eve's Mark, Vol. 1, Inferno
And he asked me if I am in a boat that is leaking badly and there are bailing pails, what would I do? And I said swim to another freaking boat. And he said you didn’t ask if there are other people with you. What if there are people in the boat with you? And I said then it depends on whether they are angels or devils. Which are you, I asked?
Numbers are pretty scary and I worked in international finance for 30-35 years. I was at a major bank in Singapore when the GFC and everything was close to melting down. Hard to believe we learned anything and leverage just got larger as CB’s used QE and even YCC. Inequality exploded as a result. Punters use 30% credit cards for food and hedge funds have access to bank and non bank financing using SOFR as reference rate.
Trump wants to re-jig global trade, surely this is one step closer to destabilising the entire system. Where else does investment flows come from but the surplus from this trade. At some point we get back to the breakdown of the “ valuation “ system
Thank goodness for the Federal Reserve in 2020. But your point about disparity between income and net worth is a good one.
It's the main metric Buffett has used to assess valuation over his career. Currently, market cap is running twice U.S GDP. This would explain Berkshire's massive cash position.
The world is priced to perfection. And the current bunch in charge have no experience at these levels.
I've long wondered about that Total Debt measure (and discussed it with Steve Keen).
The simple summing of the three sectors' total debt (HHs, NFCs, Gov) seems like a very "gross" measure (both literally in accounting terms, and in more vernacular terms). If you net out the debt payable within that *consolidated* sector (e.g. NFC bond debt payable to HHs, and etc.), you get a very different picture.
Now, much of the summed three-sector debt *is* payable to other sectors, notably Financial (plus "ROW" which gets very confusing indeed esp with multinationals).
But IAC, Financial sector debt (mostly central-bank-chartered-and-funded "commercial banks," plus other financial institutions who use the chartered banks as their "correspondent bank" intermediaries w/ the CBs) is missing from that sum.
Even more so, intra-financial-sector debt, which is simply massive in gross terms (ignoring offsetting cross-debts) but nets to zero for the sector (depending how you treat banks' "debt" to the CB), is invisible in the three-sector sum. And we've seen that those intrasectoral cross-debts between financial firms can bring down the whole system.
Now maybe, abstracting away completely from the financial sector, focusing only on more "real" sectors 🙄, does provide a meaningful (and reliable?) indicator of an unhealthy and foreboding imbalance in the wildly complex body and metabolism that is the global economy. Equivalent to blood-sugar levels as a/the important indicator of diabetes?
To add: the *nature* of the obligations being summed varies greatly. NFCs' bond debt to HHs, if not honored, means bankrupt, shuttered NFCs. But gov debt (bonds held by other countries, by HHs, and by HHs' representatives i.e. pension funds) can always be paid but at the cost of inflation from high deficit spending — overstimulation of spending relative to real production capacity.
I have no conclusions here. But I would love to see discussion of the actual Total Debt measure being employed, and (for brevity here) "what it *means.* Thx.
P.S. I assume the IMF's definition of total debt it the same as McKinsey's. Thanks for being clear on that definition right up front! ~Nobody else is. It took me quite a while to dig it out myself...
I don’t subscribe to a) the concept of ‘deficit spending’….all loan financed investment, and pretty much all investment, is ‘deficit spending’….and the idea that government investment is automatically inflationary…is ideology not economics...
Hmmm. I start with this: To a first approximation, (more) spending causes (more) production. Ask any producer why they produce stuff. If spending bangs against production constraints, though, some of that increase “leaks out” into higher prices. (Note that those constraints can very much include workers’ reservation wages…)
So gov spending (xferring assets to people/firms’ accounts/balance-sheets in payment for producing stuff), like any spending, causes production and potentially inflation. (Gov social transfers have a somewhat lesser and delayed effect as the recipients spend over time while just holding/”hoarding” some of the new assets, just sitting on their accumulated wealth. But still.)
(To state my first premise in more extreme and absolute terms: in a purely monetary-transaction economy, “Spending IS WHAT CAUSES production, and inflation.” Thassit, full stop.)
Insightful and illuminating analysis as always Anne! My question pertains to the other half of the equation. To state the bleedin' obvious, "every money flow comes from somewhere and goes somewhere". So if 'collateral factories' are funded by public debt and ultimately taxes, what happens when non-asset holding citizens notice they are bankrolling asset holders to their own financial detriment? Is populism (largely) antsy voters smelling the coffee and expressing their displeasure with this arrangement?
Fwiw, I'm fond of Stafford Beer's POSIWID acronym – the point of a system is what it does. So if the system directs money up, no amount of technocracy (crisis of liberalism?) is going to change that. If supremely powerful individuals are fully committed to propping up the existing mind-bogglingly complex and skewed system, how do we 'peacefully' change the flow of wealth without bringing the whole house of cards crashing down?
I think it is the people ‘smelling the coffeee’..They may not be ble to express it in economic terms, but they can see what you and I can see…Never underestimate the intelligence of the electorate…Unfortunately they cannot see any government willing to challenge the system of ‘bankrolling asset holders’ - so they’re turning to ‘strongment’ for protection…just as they did in the 1930s..
I did fear your answer would be something along these lines. Rarely quote Friedman but, 'Only a crisis - actual or perceived - produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around.' Last time, a one in three chance of fascism, communism or social democracy. This time, who are the Keynes or FDRs? Yikes!
The bailout state, as it stands, cannot save us. Without addressing wealth concentration, it perpetuates inequality. Without recognizing ecological limits, it accelerates environmental collapse. Without reforming political power dynamics, it entrenches plutocracy. True resilience requires a systemic transformation: redistributing wealth, realigning economic priorities with sustainability, and democratizing power?
Well said.
absolutely...and the risk will build until something explodes
I can't get over the absurd situation, where this fundamental frailty of the money system is such a niche concern. There is a vast industry addressing inequality, climate change etc, but hardly any attention given to what is driving it. Nor is the connection made with political and geopolitical instabilities. It is absolutely disastrous and should be in general discourse.
Surely something has to give when, as you say, "The ’shadow banking’ system - where about $217 trillion is parked - is growing at an annual rate of around 6-9%." With a reasonable set of assumptions, in just five years the $217 trillion will be $300 trillion. I assume "So relax folks" is tongue-in-cheek.
Well, Tesla is valued at >$1trillion compared to Toyota at £45bn. If my imprecise maths is right, that means that Tesla is considered to be ~25 times more valuable than Toyota. Meanwhile, Toyota net income is projected to be $12bn compared to Toyota’s $24bn. So again, pardon my maths, on this bases the ~25x valuation is based on half the profits. Like for like, it implies that Tesla is 50x times more ‘valuable’ than Toyota. Does anyone seriously believe that there will ever be a time when Tesla is creating 50 times the output of Toyota? Toyota produces ~11m vehicles per annum so prima facie, this implies that Tesla will have to produce 550m vehicles pa to justify their valuation.
So my point is, there is nothing tongue in cheek about any of this. There are only two possible paths: a gigantic asset crash that revalues the West against countries that actually produce things (products/services whatever) or, a horrifying geopolitical strategy that says: it’s all a lie but we’re the bully so we’re going to beggar thy economies to maintain our fiction. This appears to be the Trump plan. If someone can outline a gradual, careful incremental way through that doesn’t involve redesigning the world order, I’m all ears.
You’re so right…..about Tesla vs Toyota..and about the likelihood of beggar they neighbour Trumponomics...
Trying to be optimistic I’d like to outline a tool which might be helpful. It is an information system supporting a class of parallel money (https://t.co/QlwPt624f2) satisfying some conditions (in particular, all obligations measured in the monetary unit are considered interest-free) and with no options for savings or investments. Any kind of such money would circulate beyond banking sector (i.e. the system creates money when obligation to creditor is posted by debtor and destroys money when confirmation of payment from debtor is posted by creditor). Some circular obligations may be reduced by the system itself what would enhance capabilities of several economic agents and reduce amount of fiat/credit money to be created by government/private banks. The matter is to get those agents interested to participate, and participation should start with thorough testing of the system.
Absolutely, no hint of sarcasm there, right?
I think you’re greatly underestimating the contemptuous power of broligarchs. They biggest names in Silicon Valley are DOGE piling (pronounced doggy piling) into Elon Musk’s NGO, which just happens to duplicate the functionality of the MBO, and is already demonstrating his talent for efficiency by reposting MBO publications on Twitter.
But these guys in Silicon Valley, they’re very much ultra whitewing (that looks like a spelling error, but I think I’m going to keep it as is ) libertarians. Their ideological fulfillment will come with the destruction of the US government and dismantling of dollar. It’s a crazy destructive set of idea ideas to build some sort of utopia, but they got lots of money and they believe this stuff they’ve spent hundreds of millions of dollars pursuing it.
The interest rates the Fed would normally lift in the face of inflation which we might have some expectation of, is going to be really entertaining for those with dollar denominated debt, but the fact that so many people near or on the levers of power in the United States coupled with a very, very kleptocratic administration being assembled, plus the pogroms the GOP are publicly saying they will pursue, I don’t know. Those are a lot of destabilizing buttons being pressed at the same time.
There is real problem when the elites of a nation have no skin in the game or they’re actually enthusiastic for a collapse.
We can’t even exclude a much higher risk of preventable diseases exploding like wild fire with in the U.S., emerging diseases brooding in the US becoming the next epidemic or pandemic. Or a digital kind of pandemic where the lack of competence in the leadership of US security which also includes a project 2025 clearing out experts for right wing loyalist to US wealth, leaves the US wide open to wave after wave cyber crime.
Even the FBI is now telling people to use and secure communication because whoopsie those back doors they insisted on having, have been hacked.
And there is the most certain drum beat of extreme weather and the stress that it’s placing on existing productive capacity as well as the insurance industry.
This is fine. Nothing to see here, carry on.
Spot on….
Socialism for the rich. Ordinary taxpayers underwrite their risks.
Titling ownership of assets (clear title to a home, etc.) allows these assets to be transferred without the inefficiency of moving them physically. These titled and clearly owned assets occur over the boundaries for a market which is protected by the rule of law and the military. A market establishes a mean point equilibrium about which prices trend. The cost of this mean point equilibrium is the cost of the legal system rule of law and maintaining a police and military (along with the fire department and the streets and maybe the schools).
Along with Warren Buffett, we can look at earnings compare it to total debt. There is a lot of debt out there, and there is the additional problem of collateralized unregulated debt. Art bananas and bitcoin are different from rice and heating fuel; their existence is arbitrary, their prices not constrained by basic human needs, but their prices eventually equilibrate (along some exchange flexibility) with rice and fuel.
Titling ownership of art bananas and bitcoin can create real wealth- just as it did when we started titling homes and stock ownership.
The problem isn't shadow banking, or art bananas, or whatever people want to invent that is untethered to basic needs. The problem is, as I see Ann and Pettis pointing out, who is regulating the banks, and what reserve requirements are they being allowed to negotiate within their nations and in the global markets. And I don't think there is any way to regulate the bankers- we haven't really done it in the US, much less the global markets with which the US equilibrates.
I'm reading Pettifor now, and some of what Ann has written. I have a simplistic understanding of what they are saying: When a persistent imbalance in trade (of goods or money flows) occurs in the global economy, it is the result of persistent transfers of payments institutionalized by laws and military enforcement, which is pretty much the basic cause of class differences that arise. This is not "free trade", this is institutionalized trade manipulation.
Shadow assets- art bananas, bitcoin- are impossible to evaluate in real time. What is the exchange rate of an art banana to heating fuel and rice? It depends on how hungry and cold people are. Economists would say the exchange rate could fluctuate wildly.
I have a different take from the economists.. Traditional economists ply their trade with data and differential equations, and they need a big field to apply their math. That means they want to apply the Mean Value Theorem equally to rice and art bananas, that they are both economic values that equilibrate around the same point. This idea that rice and art bananas are fungible is professionalized, institutionalized bullshit. One better math model would be game theory... but my point is that Ann is saying the Fed absolutely cannot tolerate a shortage of necessary goods now, because the exchange rate with art bananas would crash, and somewhere in the global economy debt has been issued on that banana that will come due. How much debt, we don't know.
But the banks that create and that title assets and the markets that exchange them are making us in the US (and to some extent and more modestly globally) wildly wealthy as a group. And that's why there is housing and stock market and bitcoin inflation- because there is enough food and heating fuel in the US, we have a military, and housing and stocks and commodities and bitcoin are in limited supply, and we need to bail out any bubbles.
But the bailout state can indeed save us from bubbles, by inflating bubbles further. It only becomes a problem if there is a shortage of food and fuel. Then, the fantasy that rice and art bananas are economically fungible quickly vanishes- in economist's terms, the exchange rate market breaks.
The fear I have is not inflation of assets- it's deflation brought about by AI and increasing efficiency and global movement of money to where the laws are most favorable to those who have it. AI is inflationary for mobile intellectual property- algorithms, stock ownership- and strongly deflationary for wages of laborers. The bailout state cannot bail us out from social instability that can come from increasing efficiency from AI with resultant deflaton of worker's wages.
The availability of bitcoin allows individuals to toggle their wealth quickly between fiat and digital currencies. Transferring from dollars to bitcoin reduces the availability of dollars to be used as collateral for military global intervention and wars. Deficit financing requires treasury assets, not bitcoin, and was the actual purpose of the establishment of central banking in the US. I can imagine a world of modest tariffs, reduced military budgets, reduced federal roles, and increased local complexity and interactions- perhaps good things are coming.
-Charles Matthews
author of "Eve's Mark"
Sounds like you haven't heard of the 18.6-year property cycle, which functions like clockwork. The same patterns that led to the 2008 crash are in play now, with a looming crisis due around 2027.
I actually thought we were overdue for a crisis.
Not quite! It's amazing how predictable the patterns are. I've been reading about it for years, but I highly recommend reading The Secret Wealth Advantage (https://www.amazon.com.au/Secret-Wealth-Advantage-Profit-Economys/dp/0857198572). Even though it looks at how to exploit the cycles (no interest to me), it also explains how they work.
I have to imagine it’s some flavor of buy low sell high, which should be honest would be the foundation of any sensible investment plan, right?
Business Cycles really do exist irrational exuberance really does exist and, I think what characterizes the period we are in is the word poly crisis. There are so many balls in the air right now.
Yes, it gives an explanation of why the economic cycles exist (principally due to our mistaken relationship with land) and then basically says we might as well cash in while this foolishness persists.
And put your cash where? That’s the damnation of it all. Invest in property? Overvalued? Put it under the mattress? Inflation. Invest in something safe? What - in God’s name. Invest in Gold? Sure, but no new world order will peg money to gold. It’ll be commodities or stg that equivalents to production. Buy some wine / art? Ok, and that’s gone in a second when the mob finally breaks loose. Depressing times.
We'll get through it. The most important thing is not to be in debt. The book I mentioned above has a lot of interesting answers to those questions, but a lot of it's over my head!
Happy Christmas and thank you Ann for all your great insights.
I came across this paper from UCL: ‘The self-financing state: an institutional analysis of government expenditure, revenue collection and debt issuance operations in the United Kingdom’ - 4890683.pdf
Taking the quotes below from the above paper into account, I'd like to re-ask the question I asked before, 5 December.
Would compensating the Waspi women, lifting the 2-child benefit cap and paying the winter fuel allowance to pensioners who need it be economically sound but, given the power of the right-wing press, possibly politically risky?
As Steve Keen puts it: governments create money by spending more than they get back in taxation... cutting government spending reduces the money supply and reduces GDP.... The UK doesn’t need to abolish winter fuel payments - https://profstevekeen.substack.com/p/watching-uk-labour-destroy-itself?utm_source=profile&utm_medium=reader2.
Excerpts:
It is commonly claimed that the UK Government has no agency to create money and must instead obtain funding from taxpayers or lenders; expressed in the currently favoured political parlance: ‘There is no magic money tree.’31 In this paper we have shown that this theory does not accord with the institutional reality in the UK.
The Consolidated Fund advances HM Treasury sovereign credit, backed by Parliament’s power to raise future tax revenues.
Government ‘spending’ should then be understood as a form of money creation. This contrasts with the predominant belief that government spending is financed through taxation or borrowing from the private sector or via central bank-initiated money creation.
Furthermore, it is the UK Parliament rather than the central bank or HM Treasury that governs the Consolidated Fund and thus authorises spending, with the Bank of England automatically crediting commercial bank accounts when spending takes place.
Two of the main purported constraints on government spending are not valid, namely: liquidity risk (the ability to repay debt and prevent default) and market risk (the ability to control the interest rate).
HM Treasury’s power to spend independently of the Bank of England’s monetary policy position is much less constrained than is commonly thought, given the central role of the Consolidated Fund and the importance of government securities (including indemnities and guarantees) within the monetary and financial system.
HM Treasury’s current debt management regime of ‘fully funding’ public expenditures, via either raising taxes or borrowing, appears anachronistic and at odds with the functional purpose of private sector bond purchases.
After Work and Pensions Secretary Liz Kendall issued an apology for a 28-month delay in sending out letters to those born in the 1950s impacted by state pension changes, she said, however, that she doesn't accept that compensation should be paid.
Ann, in such a context, my question is how can:
‘We can afford what we can do: monetary policy as a public good’
(April 6, 2023|Written by Ann Pettifor) be applied?
Does it mean that the government can afford, as it's payable in £££, to compensate the Waspi women, and lift the two-child benefit cap and pay the winter fuel allowance to pensioners who need it? Presumably then re-paying the borrowed money, like any other public debt, in time?
If not, what practically, does it mean?
Thank you
"On Bitcoin and Art Bananas
Bitcoin is constructed to be a finite quantity medium of exchange, and cannot be used for deficit spending. However, once Bitcoin has finished being mined, the "exchange rate" between the cost of mining Bitcoin, and the market value of Bitcoin will be lost. It will be like antique silver- already minted and in use, no longer constrained by the cost of electricity to mine it.
Bitcoin would still have an "intrinsic value" related to the advantage it conveys as a network effect. A single cell phone is worthess because you can't call anybody; each incremental cellphone is more useful because you can call more people. That's a network effect.
I would expect the value of Bitcoin to eventually settle on the network effect of the global community of users- and thus its value as a medium of exchange, compared to the value of dollars and other fiat coins. In other words, it becomes similar to other sovereign monies- except that the sovereinty is no longer related to national boundaries or other territory, and is instead a network effect that is becoming unmoored from territory.
It's been said (by Saylor, for instanace) that Bitcoin has won as the default hard money, in a kind of Darwinian race. I don't believe that at all, either as an understanding of biology or of Bitcoin. There is nothing preventing the establishment of Bitcoin B, Bitcoin C, and so on. Such a series of Bitcoins can all follow the same limiting method of mining. Most significantly, such a series of Bitcoins would also tend to equilibrate with each other, and act more like fiat currencies that exchange. An extrenely high Bitcoin cost would be competitive with smaller bitcoins in the series, which would tend to limit the upward speculative interest in Bitcoin.
However, this Bitcoin Series would profoundly differ from the money issued by nations as they would not be constrained by territory. This raises the possibility fo a future in which the nation states, with their nuclear weapons, are in competition with a series of Bitcoins issued by groups or associations which arise between indifiduals cooperating over the web.
In that way, one could perhaps profit from evaluating these crypto currencies along with the social nature of their associations or grups wherever they are- and buy an emerging currency as a way of participating in the economic activity of the group, perhaps as a requirement or a tariff discount. In this way, social evolution could proceed as an overlay on the current nation states, which would be competitive with internet currencies and constrained in their ability to deficit spend.
In effect, that would slowly and hopefully gently reduce the need of nation states to project power outside their boundaries. There are no other convincing solutions for nuclear power to me except rust.
-Charles Matthews author of Eve's Mark
From Eve's Mark, Vol. 1, Inferno
And he asked me if I am in a boat that is leaking badly and there are bailing pails, what would I do? And I said swim to another freaking boat. And he said you didn’t ask if there are other people with you. What if there are people in the boat with you? And I said then it depends on whether they are angels or devils. Which are you, I asked?
Numbers are pretty scary and I worked in international finance for 30-35 years. I was at a major bank in Singapore when the GFC and everything was close to melting down. Hard to believe we learned anything and leverage just got larger as CB’s used QE and even YCC. Inequality exploded as a result. Punters use 30% credit cards for food and hedge funds have access to bank and non bank financing using SOFR as reference rate.
Trump wants to re-jig global trade, surely this is one step closer to destabilising the entire system. Where else does investment flows come from but the surplus from this trade. At some point we get back to the breakdown of the “ valuation “ system
Thanks for this…and on Trump and trade, see my post before this one...
Thanks for this, Ann. Couple thoughts, if I may.
Thank goodness for the Federal Reserve in 2020. But your point about disparity between income and net worth is a good one.
It's the main metric Buffett has used to assess valuation over his career. Currently, market cap is running twice U.S GDP. This would explain Berkshire's massive cash position.
The world is priced to perfection. And the current bunch in charge have no experience at these levels.
Good time to take cover.
I have always been a Buffet fan…and his remark about when the tide goes out….
I've long wondered about that Total Debt measure (and discussed it with Steve Keen).
The simple summing of the three sectors' total debt (HHs, NFCs, Gov) seems like a very "gross" measure (both literally in accounting terms, and in more vernacular terms). If you net out the debt payable within that *consolidated* sector (e.g. NFC bond debt payable to HHs, and etc.), you get a very different picture.
Now, much of the summed three-sector debt *is* payable to other sectors, notably Financial (plus "ROW" which gets very confusing indeed esp with multinationals).
But IAC, Financial sector debt (mostly central-bank-chartered-and-funded "commercial banks," plus other financial institutions who use the chartered banks as their "correspondent bank" intermediaries w/ the CBs) is missing from that sum.
Even more so, intra-financial-sector debt, which is simply massive in gross terms (ignoring offsetting cross-debts) but nets to zero for the sector (depending how you treat banks' "debt" to the CB), is invisible in the three-sector sum. And we've seen that those intrasectoral cross-debts between financial firms can bring down the whole system.
Now maybe, abstracting away completely from the financial sector, focusing only on more "real" sectors 🙄, does provide a meaningful (and reliable?) indicator of an unhealthy and foreboding imbalance in the wildly complex body and metabolism that is the global economy. Equivalent to blood-sugar levels as a/the important indicator of diabetes?
To add: the *nature* of the obligations being summed varies greatly. NFCs' bond debt to HHs, if not honored, means bankrupt, shuttered NFCs. But gov debt (bonds held by other countries, by HHs, and by HHs' representatives i.e. pension funds) can always be paid but at the cost of inflation from high deficit spending — overstimulation of spending relative to real production capacity.
I have no conclusions here. But I would love to see discussion of the actual Total Debt measure being employed, and (for brevity here) "what it *means.* Thx.
P.S. I assume the IMF's definition of total debt it the same as McKinsey's. Thanks for being clear on that definition right up front! ~Nobody else is. It took me quite a while to dig it out myself...
I don’t subscribe to a) the concept of ‘deficit spending’….all loan financed investment, and pretty much all investment, is ‘deficit spending’….and the idea that government investment is automatically inflationary…is ideology not economics...
Hmmm. I start with this: To a first approximation, (more) spending causes (more) production. Ask any producer why they produce stuff. If spending bangs against production constraints, though, some of that increase “leaks out” into higher prices. (Note that those constraints can very much include workers’ reservation wages…)
So gov spending (xferring assets to people/firms’ accounts/balance-sheets in payment for producing stuff), like any spending, causes production and potentially inflation. (Gov social transfers have a somewhat lesser and delayed effect as the recipients spend over time while just holding/”hoarding” some of the new assets, just sitting on their accumulated wealth. But still.)
Gov def spending BTW is utterly diff from bank lending, because with the def spending, the recipients of the newly-issued assets don’t incur any new liabilities! (Unless we want to get into some kind of Ricardian-equivalence explanation, which I find to be…excuse me…utter nonsense. 🙃) Gov defs increase PS assets AND NW. Unlike bank lending which increase PS As and Ls in equal measure. https://cdn.bsky.app/img/feed_fullsize/plain/did:plc:ppc7esxmuuhfy36dnz6hchhv/bafkreievnbe2tildjap4kkwkm2pxcvpumchd7b5gofl5u5frycrj5iowdy@jpeg
(To state my first premise in more extreme and absolute terms: in a purely monetary-transaction economy, “Spending IS WHAT CAUSES production, and inflation.” Thassit, full stop.)
P.S. It's amazing how empirically accurate that asset-creation table is, cross-checked against accumulated balance-sheet assets over half a century... https://cdn.bsky.app/img/feed_fullsize/plain/did:plc:ppc7esxmuuhfy36dnz6hchhv/bafkreifir5vixfcjbc3q7rqnwzpqaohr7cjulq7n6qyt7ynaydezd35av4@jpeg
Insightful and illuminating analysis as always Anne! My question pertains to the other half of the equation. To state the bleedin' obvious, "every money flow comes from somewhere and goes somewhere". So if 'collateral factories' are funded by public debt and ultimately taxes, what happens when non-asset holding citizens notice they are bankrolling asset holders to their own financial detriment? Is populism (largely) antsy voters smelling the coffee and expressing their displeasure with this arrangement?
Fwiw, I'm fond of Stafford Beer's POSIWID acronym – the point of a system is what it does. So if the system directs money up, no amount of technocracy (crisis of liberalism?) is going to change that. If supremely powerful individuals are fully committed to propping up the existing mind-bogglingly complex and skewed system, how do we 'peacefully' change the flow of wealth without bringing the whole house of cards crashing down?
I think it is the people ‘smelling the coffeee’..They may not be ble to express it in economic terms, but they can see what you and I can see…Never underestimate the intelligence of the electorate…Unfortunately they cannot see any government willing to challenge the system of ‘bankrolling asset holders’ - so they’re turning to ‘strongment’ for protection…just as they did in the 1930s..
I did fear your answer would be something along these lines. Rarely quote Friedman but, 'Only a crisis - actual or perceived - produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around.' Last time, a one in three chance of fascism, communism or social democracy. This time, who are the Keynes or FDRs? Yikes!
Excellent post. Thanks
Thank you Carlos…always good to get positive feedback.