{"id":6449,"date":"2009-12-02T15:07:49","date_gmt":"2009-12-02T05:07:49","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=6449"},"modified":"2009-12-02T15:07:49","modified_gmt":"2009-12-02T05:07:49","slug":"most-bananas-are-atheists","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=6449","title":{"rendered":"Most bananas are atheists …"},"content":{"rendered":"

\t\t\t\tOver the course of this economic crisis, I have seen a lot of erroneous analysis based on the conflation of things that are not commensurate. It is getting worse as the debt hysteria mounts. These conflations are examples of category errors<\/a>, which are common in monetary and macroeconomic analysis. Most of the theoretical development in macroeconomics text books used by universities fall foul of this type of error. The one thing that follows is that when you detect this type of error you should be deeply suspicious of the arguments being presented.
\n
\nThese conflations leads us into ontology (a place I usually steer clear off in case some post modernists come out of the woodwork) and specifically into the concept of a category error<\/a>, which is:<\/p>\n

\n… a semantic or ontological error by which a property is ascribed to a thing that could not possibly have that property. All (propositional) mistakes involve some sort of misascription of properties, so in a sense any mistake is a “category mistake”: putting a thing into a class to which it does not belong. But a “category mistake” in colloquial philosophical usage seems to be the most severe form of misascription, involving the endorsement of what is in fact logically impossible. Thus the mistaken claim that “Most Americans are atheists” is not a category mistake, since it is merely contingently true that most Americans are theists. On the other hand, “Most bananas are atheists” is a category error. To show that a category mistake has been committed one must typically show that once the phenomenon in question is properly understood, it becomes clear that the claim being made about it could not possibly be true.\n<\/p><\/blockquote>\n

There have been no shortage of category errors emerging from influential academics and commentators as the economic crisis has unfolded. Readers should be always alert to them because once you detect them you can almost always disregard the rest of the analysis being presented.<\/p>\n

In this week’s Newsweek, neo-liberal Harvard economic historian Niall Ferguson writes that there is An Empire at Risk<\/a>:<\/p>\n

\nCall it the fractal geometry of fiscal crisis. If you fly across the Atlantic on a clear day, you can look down and see the same phenomenon but on four entirely different scales. At one extreme there is tiny Iceland. Then there is little Ireland, followed by medium-size Britain. They’re all a good deal smaller than the mighty United States. But in each case the economic crisis has taken the same form: a massive banking crisis, followed by an equally massive fiscal crisis as the government stepped in to bail out the private financial system.\n<\/p><\/blockquote>\n

I am still interested in knowing what a fiscal crisis is? At present all I am observing is net public spending rising (sharply as a percentage of GDP in some cases) as private spending plummets. In many cases, unemployment sky-rocketed which means that the net public injection was not large enough.<\/p>\n

So I guess that is the nature of the crisis. Governments are unwilling to net spend at a sufficient scale to stop the increase in labour underutilisation. That unwillingness reflects a political constraint which is being reinforced by so-called experts like Ferguson.<\/p>\n

He goes on to say:<\/p>\n

\nAs the U.S. is unlikely to default on its debt, since it’s all in dollars, the key question, therefore, is whether we are going to see the Fed “printing money” – buying newly minted Treasuries in exchange for even more newly minted greenbacks – followed by the familiar story of rising prices and declining real-debt burdens. It’s a scenario many investors around the world fear. That is why they are selling dollars. That is why they are buying gold.<\/p>\n

Yet from where I am sitting, inflation is a pretty remote prospect … Public expectations of inflation are also very stable.\n<\/p><\/blockquote>\n

Okay so there is no insolvency issue for the US which must also apply to all sovereign nations who issue debt in their own currency. And there is no necessary coincidence between the central bank buying federal bonds as it net spends and inflation. Ferguson makes that point by reflecting on the high unemployment and appallingly low rates of capacity utilisation common around the world at present.<\/p>\n

Note that the purchase of bonds by the central bank would not be to finance the spending. The US government is not revenue-constrained. The quaint practice of the central bank holding treasury debt – that is, the government lending to itself – reflects the neo-liberal hang ups that governments have which leads them to voluntarily impose on themselves the rule that a $ of debt issuance for each $ of new net spending. This is just an accounting entry and has no operational significance. A fraud if you like.<\/p>\n

But if you understand Ferguson’s position then you would be puzzled a bit by some earlier statements he made. Ferguson was reported in The Independent<\/a> (May 29, 2009) as claiming that:<\/p>\n

\nThe idea that countries don’t go bust is a joke … The debt trap may be about to spring … for countries that have created large stimulus packages in order to stimulate their economies … Ireland, followed by Italy and Belgium, and UK is not too far behind … Argentina is top of his list of shaky countries but … the argument that it can’t happen in major western economies is nonsense.\n<\/p><\/blockquote>\n

Going bust is about insolvency. An entity running out of the wherewithall to service their nominal debt obligations. It is nothing more complex than that.<\/p>\n

Note the list of countries – three Eurozone countries (where the central bank is beyond the control of each individual elected government and treasury) and, two, sovereign issuers of their own currency with a central bank aligned with their treasury in policy space (Argentina and the UK).<\/p>\n

That is the first type of conflation we see that should immediately alert the reader that some dodgy narrative is emerging.<\/p>\n

The Independent reports that Ferguson “believes the economists are ill qualified to analyse the current economic situation since they lack the overview of historians such as himself”. Always good to self-promote. But what exactly does he understand?<\/p>\n

In the Newsweek article, Ferguson goes through a series of empire collapses in history which were prompted by debt explosions leading to default (Habsburg Spain; Prerevolutionary France; The Ottoman Empire) and:<\/p>\n

\n… don’t forget the last great English-speaking empire. By the interwar years, interest payments were consuming 44 percent of the British budget, making it intensely difficult to rearm in the face of a new German threat.\n<\/p><\/blockquote>\n

Does he tell you that these historical epochs were marked by significantly different monetary systems? The most recent era that he cites (the interwar years)was characterised by fixed exchange rates and currency convertibility, with some variations.<\/p>\n

I am a strong advocate of being schooled by history. But you also have to know when historical experience is applicable and when it is not.<\/p>\n

You cannot assume that the dynamics of, for example, a fixed exchange rate, convertible currency world apply to a fiat monetary system. They do not. Governments could become insolvent and default under the former. There are not financial reasons why they ever would under the latter.<\/p>\n

Ferguson should be more honest in his use of history. That is the second type of conflation – comparing different monetary systems that are not commensurate because the operational constraints that each places on government are starkly different.<\/p>\n

Moving on … I have to say that the UK Guardian newspaper was formerly a source of reasonably intelligent journalism. I have noted that it is in decline these days. In the December 1, 2009 edition one Jonathan Freedland wrote what he intended to be something of a mea culpa – The debt, excess and exploitation is not Dubai’s alone. We’ve all been at it<\/a>.<\/p>\n

Freedland writes that “the glitzy Gulf state is a modern parable for a world living on tick”. So the tenor of the piece is that Dubai might be bad but the West is not much better.”<\/p>\n

He says that:<\/p>\n

\nWhen future generations sit their children down to tell the story of the great crash of the early 21st century, they will surely begin with the parable of a place called Dubai … [children’s story of excess sinking back into the sand follows] … Dubai is a perfect metaphor for the crisis currently crippling global capitalism … unsustainable in every sense: economically, morally and environmentally … That’s why the money men are already asking themselves who will be next: will it be Greece, wonders the Financial Times, while others fret for Latvia, Hungary and even Ireland. They all made Dubai’s mistake, if not quite at the same pace. They pulled out the credit card and went on a wild spending binge – and now the bill has fallen due. But it wasn’t just them: we’ve all been at it. Japan is on course to have a public debt twice the size of its gross domestic product next year, while the US debt is set nearly to equal the country’s economic output. The UK is not far behind, with a debt forecast at 89% of our GDP. We’ve all been living on tick.\n<\/p><\/blockquote>\n

So immediately we are conflating emirates (states with no currency sovereignty) with countries operating under fixed exchange rates and no real fiscal authority with sovereign states in the full sense (national governments with currency issuing monopolies operating under flexible exchanger rates). About the only thing these different geographic units have in common is they all have a flag of some sort.<\/p>\n

Further, the writer is conflating non-government and government sector behaviour as if it is equivalent. It is not.<\/p>\n

For example, he says that “Today’s regime of near-zero interest rates means that we’re trying to get ourselves out of the current hole by the very means that got us into it: spending cash that was borrowed on the cheap.”<\/p>\n

Who is the we’re<\/strong> he refers too? <\/p>\n

Is this more bubble scare journalism? Recall yesterday – in More calls for job creation – but then<\/a> – I noted that Warwick McKibbon (right-wing RBA central bank board member) was whipping up hysteria in Australia about the need for sharp contraction to avoid the asset price bubble he claims is merging in world markets.<\/p>\n

So it was interesting to read a normally conservative Bloomberg journalist actually challenging the asset bubble<\/a> scare story today. In Caroline Baum’s article Roubini’s Bubbles Float on Flimsy Credit Source<\/em> we read:<\/p>\n

\nZero percent interest rates started it. A weak dollar fueled it. Speculators fanned it. And famed forecasters see it everywhere they look.<\/p>\n

There’s only one problem with the claims that the dollar-carry trade — borrowing dollars cheaply to invest in higher-yielding assets abroad — is inflating bubbles across the globe: There is no visible credit expansion … to support them … There is no sign of excess credit creation on U.S. bank balance sheets. From October 2008 through October 2009, bank credit fell 5.3 percent. That reflects an 8 percent decline in loans and leases and a 3.4 percent increase in securities. Within the securities category, Treasuries were the clear winner, with a 13 percent increase.\n<\/p><\/blockquote>\n

At least, Wolfgang M\u00fcnchau<\/a>, is honest enough to admit he is conflating incommensurable constructs. He says:<\/p>\n

\nAfter Dubai, will Greece be next? This question is technically a category error, since Dubai World is not a state but a state-owned company. But many investors rightly do not care about the difference. Last week investors started to fret about sovereign default in earnest. So what about Greece?\n<\/p><\/blockquote>\n

Note the term “category error”<\/p>\n

Comparing the operational prospects for a government under fixed exchange rates with those applicable under flexible exchange rates is a category error.<\/p>\n

Comparing a sovereign government (such as Japan, the US, the UK, or Australia) with Dubai, a non-sovereign state is a category error.<\/p>\n

Comparing a sovereign government (such as Japan, the US, the UK, or Australia) with a Eurozone country such as Ireland, Belgium is a category error.<\/p>\n

It is clear that a fixed exchange rate country could “run out of money” (which really mean’t they ran out of foreign reserves).<\/p>\n

It is clear that a Eurozone country would need the help of the ECB if it got into trouble. Politically, I don’t see one of the Eurozone defaulting. The conditions that ECB might place on Greece or Ireland to help them remain solvent are likely to be onerous.<\/p>\n

But it is a possibility because they are, individually, no longer sovereign in the Euro. The simple solution if one of them (like Ireland) was confronted with this dire circumstance would be to abandon the Euro and go sovereign in its own currency.<\/p>\n

That is what Argentina did in 2001 when it abandoned the currency board it ran (peso pegged to the US dollar) and defaulted. Please read my blog – Why pander to the financial markets?<\/a> – for more discussion on this point.<\/p>\n

Going back to Freedland. The one thing I agree with him on is the foreign worker situation which brings into focus the importance of fair trade rather than free trade. He says:<\/p>\n

\nNevertheless, something else sticks in our craw about Dubai. It’s that the eye-popping luxury was built on the backs of foreign workers, toiling in a form of modern bondage. Over a million men and women from India, Bangladesh, Nepal and across Asia have turned Dubai from a sleepy village of pearl-divers and fishermen into a shimmering Arabian Las Vegas – and have been rewarded with next to no rights and meagre pay. They sleep in labour camps, each one crammed with 3,000 or more people. In the strict hierarchy of the emirate, their role is to serve the expats and wealthy natives. It is all but a slave society.<\/p>\n

We are right to find that morally repugnant. But we should beware the mote in our own eye. For if the west enjoyed economic boom times for the 15 years that preceded 2008, it did so thanks to low inflation. How did inflation stay so low? Because labour costs were kept down, thanks to millions of Chinese workers prepared to sweat for wages we would consider close to slavery. So, yes, we can be repelled at those ladies buying Herm\u00e8s bags and Manolo Blahniks by the crateload in the Dubai shopping malls. But they weren’t that different from the folks snapping up the bargains at Primark. Both groups rely on the fact that, far away and out of sight, somebody is prepared to work very hard for very little money.\n<\/p><\/blockquote>\n

But as long as we continue to support products that come from places which pay wages and offer working conditions that we would not tolerate on our own shores then the hypocracy will drive further exploitation. Capitalism has no values. Markets are without morals or values. That is why they need to be heavily regulated to reflect our sense of value.<\/p>\n

Although the fact that we have supported governments which have allowed markets to “self-regulate” (an oxymoron if there ever was one) means that we are ultimately responsible.<\/p>\n

Conclusion<\/strong><\/p>\n

Beware of those godless bananas! They are everywhere at present.<\/p>\n

Digression: Did I miss something?<\/strong><\/p>\n

After receiving the Nobel Peace prize earlier this year I concluded President Obama must be a man of peace.<\/p>\n

Today I read he was fast-tracking another 30,000 US troops to go to Afghanistan and slaughter the Taleban.<\/p>\n

Is there some disconnect here or what?<\/p>\n

CofFEE Conference<\/strong><\/p>\n

Tonight the CofFEE Party is on in Newcastle with lots of modern monetary researchers in town. It is always a good time when we get together.<\/p>\n

Tomorrow CofFEE hosts our annual conference – this year the 11th Path to Full Employment Conference\/16th National Unemployment Conference<\/a>. The final program is very exciting and we should have a great two days.<\/p>\n

My blog may be late tomorrow night and on Friday I will provide a video of the MMT forum which is one of the feature sessions of the Conference.\t\t<\/p>\n","protected":false},"excerpt":{"rendered":"

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