To start out today, here is my interesting piece of economic data segment (I just invented that title).<\/p>\n
As the deficit-hysteria was mounting through the second-half of last year the gold-bugs and Austrian schoolers were all advising us to sell any US dollars we might have an invest in gold – a flight to security. Wasn’t it the case that with the “ballooning” and “unsustainable” budget deficits that the Obama Administration was running and the massive reserve buildup that the Federal Reserve had engineered, hyperinflation was just a matter of days away and sovereign default wasn’t much further away.<\/p>\n
Gold, gold, gold.<\/p>\n
Anyway, it seems that there is a flight to US dollars happening and the price of gold has been in decline<\/p>\n
The following graph shows the daily price of gold since November last year up until the end of February 2010. You can get excellent data from the World Gold Council<\/a>.<\/p>\n So you gold bugs, how many of you are now holding loss-making positions?<\/p>\n But moreover, the serious point is that none of the doom prophecies are showing up in the data. How long should we wait for the signs of hyperinflation, for the sky-rocketing interest rates, and the massive tax hikes – and ultimately, the collapse of government?<\/p>\n Surely those unsustainable fiscal positions should be starting to deliver the consequences the terrorists predict?<\/p>\n Of-course, even though Japan still defies them after nearly two decades of running “ballooning” deficits with deflation and zero interest rates and the World’s largest public debt to GDP ratio – Rogoff was still over there in the last week predicting insolvency.<\/p>\n Sure enough governments might start implementing mindless austerity programs – but these will be politically- rather than financially-driven. And my prediction is that they will make matters worse.<\/p>\n Which brings me to an interesting article in the UK Guardian from last Tuesday (March 2, 2010) – The state’s role in economic recovery<\/em><\/p>\n The state’s role in economic recovery<\/strong><\/p>\n One Michael Meacher examined the The state’s role in economic recovery<\/a>.<\/p>\n In relation to the upcoming British national election, he noted that:<\/p>\n \nBoth the main political parties are focusing on one central issue (how far and how fast the budget deficit should be cut) when that is the wrong policy and the right policy is being rejected out of hand. At the same time, what should clearly be the central focus of this election doesn’t even get a serious mention.<\/p>\n Cutting public spending, whether drastically or sensitively and straight away or a bit later, is not the right policy when the “recovery” is so precarious, and particularly when the deep recession is mainly due, not to the bank bailouts, but to the collapse in private investment. That investment, especially in housing and private transport equipment (buses, trains, cars, etc), had already fallen spectacularly by 15% between the first quarter of 2007 and the second quarter of 2008, before the financial crash of September 2008. The banking failures, which then exacerbated the collapse in lending to businesses and homeowners from a healthy 20% a year growth at the start of 2007 to nil or negative two years later, compounded an already dramatic fall in private investment.\n<\/p><\/blockquote>\n How many times have you read something like this in the last year? Not many I can guarantee.<\/p>\n The writer gets to the heart of the problem.<\/p>\n The real problem that exists is a major failure of aggregate demand in most nations. This has been driven by a collapse of private spending. So ladies and gentlemen when looking around for solutions two things are important to note.<\/p>\n First, an aggregate demand collapse needs more spending to enter the economy. Simple as that.<\/p>\n Second, if the private sector spending has collapsed – guess what? – there are only two other sectors left to fill the gap – the external sector and the government sector. Net exports in most countries are not going to rise to fill the gap. That would need massive structural changes in the economies which may be impossible but would certainly take years to implement.<\/p>\n So – guess what? – there is only one sector left. This sector has the capacity (if it issues its own currency and doesn’t peg it to someone else’s currency) to fill any size spending gap in its own currency. The budget deficit should be increased to fill that gap.<\/p>\n Discretionary policies have to be designed to ensure the non-cyclical component of the gap (properly measured) should be filled by long-term spending initiatives and the cyclical component of the gap should be filled by spending programs that can be easily scaled back when the cycle improves.<\/p>\n Talk of “credible exit plans” are meaningless if the government has properly implemented its fiscal intervention. Economic growth will return more quickly if it has and the cycle component of the deficit will disappear as the automatic stabilisers reverse the slide in revenue etc.<\/p>\n Trying to engineer “exit plans” with fiscal rules and other nonsensical contrivances only will make matters worse. The budget deficit is ultimately an endogenous balance which goes up and down with non-government spending.<\/p>\n The real problems should always command the spotlight – ensuring adequate employment growth to reduce unemployment, providing adequate housing and well-resourced schools and hospitals etc.<\/p>\n Governments should concentrate on those goals and ignore the budget numbers.<\/p>\n There is also a major banking crisis – certainly with zombie banks only surviving on government handouts. They all should be closed immediately – that is, nationalised. There should be no further socialisation of losses and privatisation of gains.<\/p>\n But the wherewithal to fix (that is, stabilise) the financial system exists and it is only a lack of political will that is failing at present.<\/p>\n Meacher agrees and says:<\/p>\n \nThe obviously right response … in a deep recession is the stepping-up of public sector investment to compensate. A major public investment programme in job creation in house-building, infrastructure enhancement and the new green digital economy would provide a triple whammy to meet the current impasse. It would boost aggregate demand after private investment faded as the unsustainable housing and credit bubbles finally burst. It would go some way to filling the void left by the collapse of bank lending to businesses. And with house-building at its lowest ebb since the 1920s, it would give huge impetus to the provision of affordable social housing the lack of which, with 1.8m households currently on council waiting-lists, is by far the biggest unmet social need in Britain today.\n<\/p><\/blockquote>\n He also rejects the arguments that “bond markets won’t stand for any further extension of the … budget deficit” and that the Government would “not be able to finance its debt” and that the nation “might even lose its prized triple A credit rating”.<\/p>\n He says the:<\/p>\n \n… opposite is true” and notes that what “has caused the recent unsteadiness in the financial markets is not the size of the deficit, but rather the government’s retrenchment from its (modest) reflation of the economy, which will make the downturn much more prolonged. An economy flat-lining on the bottom is what scares markets.\n<\/p><\/blockquote>\n Real investors want burgeoining economies not depressed places with little income generation going on. That is the lesson that Argentina taught us after their default. The big organisations like the IMF and the usual array of mainstream economists (probably earning consulting fees from the creditor banks) claimed that the nation would be history and no-one would lend again.<\/p>\n As the government’s domestic oriented policy saw growth return, FDI returned. The finance minister of the time had one explanation: “greed, capital moves where it can make profit … it has no ideology at the end of the day” (or words to that effect).<\/p>\n Meacher then zeros in of the cause of the political malaise – and surprise surprise – it is the “neo-liberal agenda”:<\/p>\n \n… that private markets must be the exclusive mechanism for economic activity – remains dominant in both the main political parties.\n<\/p><\/blockquote>\n What the crisis has taught us emphatically is that this ideological perspective does not translate into real outcomes that are sustainable and which distributes the benefits of economic activity broadly across people and regions.<\/p>\n Meacher says that the “neoliberal system is clearly broken” and refers to the dominance of the financialisation over real priorities.<\/p>\n \nThe obsession with market fundamentalism, even though it has now been tested to destruction, has not given way to a needed rebalancing of the roles of the markets and the state. Privatisation, deregulation and labour market flexibility have run their course without producing stable growth or full employment. The grotesque ballooning of inequality has also generated a social recession, the stubborn persistence of poverty and unresolved and arguably deepening problems of an alienated sub-class.\n<\/p><\/blockquote>\n To which I can hear the deficit terrorists crying “commie bastard”. However, Meacher is careful not to advocate nationalisation or central planning but outlines a return to closer regulation and attention to areas of market failure.<\/p>\n The point he makes about the “alienated sub-classes” resonates with another report that has just been released in the US and documents some of the broader, not-often spoken about, consequences of the unrelenting deficit terrorism. <\/p>\n More collateral damage from the deficit terrorists<\/strong><\/p>\n The UK Guardian carried the story (March 4, 2010) that the – US facing surge in rightwing extremists and militias<\/a>.<\/p>\n Apprarently:<\/p>\n \nThe US is facing a surge in anti-government extremist groups and armed militias, driven by deepening hostility on the right to Barack Obama, anger over the economy, and the increasing propagation of conspiracy theories by parts of the mass media such as Fox News.\n<\/p><\/blockquote>\n The Southern Poverty Law Centre (SPLC) has just released a report – Rage on the Right<\/a>, which if even half accurate (and I don’t intend any slur here) is chilling evidence of the way in which deficit terrorism is creating wider damage than just the income and employment losses.<\/p>\n The SPLC say:<\/p>\n \nHate groups stayed at record levels – almost 1,000 – despite the total collapse of the second largest neo-Nazi group in America. Furious anti-immigrant vigilante groups soared by nearly 80%, adding some 136 new groups during 2009. And, most remarkably of all, so-called “Patriot” groups – militias and other organizations that see the federal government as part of a plot to impose “one-world government” on liberty-loving Americans – came roaring back after years out of the limelight … The signs of growing radicalisation are everywhere. Armed men have come to Obama speeches bearing signs suggesting that the ‘tree of liberty’ needs to be ‘watered’ with ‘the blood of tyrants’. The Conservative Political Action Conference held this February was co-sponsored by groups like the John Birch Society, which believes President Eisenhower was a communist agent, and Oath Keepers, a patriot outfit formed last year that suggests, in thinly veiled language, that the government has secret plans to declare martial law and intern patriotic Americans in concentration camps.\n<\/p><\/blockquote>\n These groups etc are thus no wallflowers and are not just a pack of guys who walk around with sheets covering them out in the bush playing with matches. Racially-motivated violence is rising as are attacks on government officials (including cops).<\/p>\n They also have significant political leverage on conservative politicians (are there any US politicians who are not conservative these days?) and have spokespersons in the national media such as that idiot Fox News presenter Glenn Beck who:<\/p>\n \n… re-popularized a key Patriot conspiracy theory – the charge that FEMA … [Federal Emergency Management Agency] … is secretly running concentration camps – before finally “debunking” it.\n<\/p><\/blockquote>\n But by then the damage was done. There are a lot of unwell Americans over there who cannot tell what day it is!<\/p>\n As I catalogue the damage that the conservative movement and its media is creating you have to always bring the situation back to some perspective.<\/p>\n As I noted above in the discussion of the role of the state – the real problems of generating employment, reducting unemployment, providing adequate housing, well-resourced schools and hospitals etc – should always command the spotlight.<\/p>\n If the government concentrates on those goals and ignores the budget numbers then they will reduce the capacity of these hate groups and loony announcers to recruit the irrational. Everyone is better off then.<\/p>\n Iceland democracy survives despite its government<\/strong><\/p>\n The Melbourne Age newspaper reported today (March 5, 2010) that the Icesave referendum to go ahead<\/a><\/p>\n The traitorous Iceland government has been trying to derail the referendum which was forced by the failure of the President to sign a bill which would have seen the government hand over 3.9 billion euros ($A5.9 billion) to Britain and the Netherlands.<\/p>\n How did this come about? Please read my blog – Iceland – another neo-liberal casuality<\/a> – for a fairly detailed background on the controversy.<\/p>\n By way of summary, a privately-owned on-line bank, owned by Iceland capitalists, penetrated the UK and the Netherlands. The UK relaxed normal prudential control standards to let them trade. The bank offered ridiculously high (and unsustainable) returns on deposits to gouge depositors from other banks, while the regulators in the respective nations turned their backs.<\/p>\n After growing rapidly (by suckering in hundreds of thousands of depositors) they went broke in the financial crisis. The bank was thus a private (multinational) firm which went broke and that process is regulated through standard bankruptcy provisions.<\/p>\n The Iceland government had no legal or moral responsibility to do anything other than ensure its own citizens were protected which it did. It bore no legal or moral responsibility to the British and Dutch citizens who faced losing their saving.<\/p>\n The British and Dutch governments however did bear the responsibility to ensure the innocent depositors were protected. Accordingly, they intervened and paid out billions.<\/p>\n That should have been the end of it. It should have taught the British to regulate their financial sector more closely.<\/p>\n But the bullying Dutch and British governments decided to pressure the Iceland government, which represents a few hundred thousand people only, to pay the money back. How can you be made to pay money back when you were a party to the transaction?<\/p>\n The bullies threatened Iceland’s entry in to the Euro if they didn’t agree. The Iceland government officials who probably have been hanging out in Brussels enjoying the rich life than worrying about their own citizens panicked at the thought of not being admitted to the EMU (fancy worrying about that) and so agreed to the blackmail.<\/p>\n Come in President! The Prez then decides enough is enough – how can the citizens pay this debt when they were already being subjected to a harsh standard of living correction themselves as a result of the folly of their own capitalist greed coming unstuck. He showed leadership and loyalty to his people by vetoing the bill.<\/p>\n So on Tuesday the referendum will be held and around 75 per cent of the voters are predicted to reject the payback deal.<\/p>\n The bullies are now threatening to “block a $US2.1 billion ($A2.32 billion) International Monetary Fund rescue package for Reykjavik, sharpening Iceland’s recession”<\/p>\n Okay, the first thing Iceland should do is to default on all its non-Iceland currency debts. That would be my first advice. Or … renegotiate to re-structure them in its own currency. Then they better get used to fish!<\/p>\n Whichever way it goes it will be painful for this tiny country caught up in the neo-liberal feeding frenzy of the 1990s and beyond. That came unstuck and the real damage is being left for the ordinary folk to endure.<\/p>\n And I note … the government that is doing this to its own people is a “leftist government” – same as in Greece. What do we call progressive any more?<\/p>\n You can an E-mail to President \u00d3lafur Ragnar Gr\u00edmsson – forseti@forseti.is<\/a> – in solidarity.<\/p>\n Rest and other things no longer permitted in Arizona<\/strong><\/p>\n The following photo was taken from the New York Times article – Closing of Highway Rest Stops Stirs Anger in Arizona<\/a> – and shows how absurd the emphasis on fiscal contraction has become in the US.<\/p>\n The state of Arizona has been selling buildings and making all sorts of other cuts but now the people have started to react because “the state took away their toilets”.<\/p>\n To cut costs, the government “decided to close 13 of the state’s 18 highway rest stops”.<\/p>\n Now I love to drive through Arizona – especially late in the afternoon while the sun is still out and it creates such beautiful patterns of light through the mesas and buttes that the highways wind through in certain areas. Driving through those gorges is a really lovely experience. But not if the bladder is full.<\/p>\n As an aside: along one stretch the journey through Arizona marks the end of Nevada (relief!) and the road to Utah (scary) so it might just feel good for those reasons!<\/p>\n Anyway, the government of Arizona is now squeezing the bladders of it citizens in a mindless move to save money. Apparently, this trend is generalising throughout the US.<\/p>\n A spokesperson for the Arizona Transportation Department said:<\/p>\n \nPeople think “You just go in and change the toilet paper, don’t you?” … The answer is, no, we have to maintain the water quality, we have do maintenance to the buildings and so on. Some of those places in the middle of nowhere are like their own little cities.\n<\/p><\/blockquote>\n Yes, we can relate to that – it is called basic sanitation in the advanced world.<\/p>\n When the deficit-terrorists (including Hillary Clinton<\/a>) claim that the current state of US government finances is a threat to national security – it seems that health dangers as faeces and other things pile up on the country’s roadsides will be more of a national disaster than a few numbers on a spreadsheet somewhere in Washington.<\/p>\n While the US Constitution forces states to balance their budgets, no such rule applies at the federal level – yet! A simple expansionary move would be for US government to provide each state with a per capita allowance to keep their toilets and other essential infrastructure open. That would be a good basis for another round of stimulus which should accompany the introduction of a Job Guarantee<\/a>.<\/p>\n [Correction: a reader kindly noted that the US Constitution does not force the states to balance budgets rather they chose to do that via their own statutes. So they could alter the statutes presumably. It just makes the story worse].<\/p>\n The reference to “other things” in the title of this sub-section is because parents are probably letting their children read my blog and we have to keep it clean! Unlike the roadways of America – the richest nation in the World.<\/p>\n But Germany wants more toilets<\/strong><\/p>\n The Sydney Morning Herald carried the story today (March 5, 2010) – Cash for Corfu – Greece told to sell a few islands<\/a>. This is now being widely reported around the World.<\/p>\n Two of Angela Merkel’s parliamentary members have the solution to the Eurozone problems. The SMH said:<\/p>\n \nThey’ve offered some unsolicited financial advice to their counterparts in Greece: sell off uninhabited islands and other properties to ease the debt crisis that has plunged the common currency into the doldrums and sent financial markets worldwide into jittery states of apprehension.\n<\/p><\/blockquote>\n But it doesn’t stop there. The Greeks are being advised to “offload the ancient Acorpolis. For a fair sum, of course.”<\/p>\n One of the German politicians (touted in the press as a “finance policy expert” – yeh, right) was quoted as saying:<\/p>\n \nThose in insolvency have to sell everything they have to pay their creditors … Greece owns buildings, companies and uninhabited islands, which could all be used for debt redemption …\n<\/p><\/blockquote>\n The other politician said (charmingly I am sure, not!):<\/p>\n \nSell your islands, you bankrupt Greeks! And sell the Acropolis too!\n<\/p><\/blockquote>\n That is generally what happens when a non-government entity that is revenue-constrained becomes insolvent although it is usually the case that the richer the non-government entity the more asset-rich their family trusts or their wives\/husbands become just before they file for bankrupcty.<\/p>\n But the revenue-constrained status of a non-government entity is not a voluntary position – it is the product of the currency system. Citizens and firms use the currency that the authorities issue.<\/p>\n Now the government can also be revenue-constrained in the same way and can therefore become insolvent in the currency of use. But, unlike the non-government entity, this status is entirely voluntary for the government. They can choose to adopt these constraints if they want. Equally, they can choose not to adopt them.<\/p>\n For a fiat currency-issuing government there is never a solvency question. They never have to have “asset sales” to pay back their debts. In fact, they never even have to go into debt if they didn’t want to.<\/p>\n Greece is in the category of countries that have voluntarily chosen to constrain their monetary and fiscal policy capacity and expose the nation to insolvency and default on sovereign debt.<\/p>\n However, before they start carving up their land mass which the Germans were not able to dominate when they last invaded (they needed the Italians to help them!) and\/or selling their ancient archaeological relics, the Greeks might like to consider the second option.<\/p>\n That is, blow out the Euro and re-issue the drachma – convert all the Euro debts in drachma (at the threat of default) – have a few advertising campaigns promoting Corfu as a desirable tourist destination (to get some US dollars or Euro!) – prevent any IMF officials from entering the country – and bunker down for the adjustment process. And, I forgot – tell the Germans to take a long walk (along a short-pier).<\/p>\n Meanwhile, as the Greek government embarks on a unsustainable austerity program the unionists invaded the “finance ministry and prevented staff entering the building” while wider strike action was mooted.<\/p>\n So they are not very happy and I expect this unrest to generalise and render the austerity campaign of the government impossible to implement. They are entering a vicious circle of austerity, rising budget deficits (via the automatic stabilisers), more cries for austerity, wider spreads on their bonds relative to Germany etc, rising budget deficits as the deflation worsens the real economy and … crash bang … it just gets ugly.<\/p>\n The problem in the Eurozone is structural and lies at the heart of their ill-conceived monetary union. They will just lurch from one crisis to another now that the current crisis has exposed the flaws in their system that were apparent from the outset to those who (a) understood how monetary systems operate; and (b) didn’t have their Brussel-Frankfurt thug ideological blinkers on. Please read my blog – Euro zone’s self-imposed meltdown<\/a> – for more discussion on this point.<\/p>\n But things are not always straightforward. Maybe the German plan has some merit. Further analysis is required. So I fired up my GIS software and … <\/p>\n GIS analysis – my current EMU solution<\/strong><\/p>\n My advanced GIS analysis of European cartography tells me that the island marked A on the map below certainly looks to be part of Germany and so it only reasonable that they get it back again. How terrible for them that they have been deprived of it for so long in their history. So kommen Sie griechische bastards … Seite ist es vorbei! [editor’s note: So come you Greek bastards … hand it over!].<\/p>\n But I have an even better suggestion. Melbourne (my home town) in Victoria, Australia is the second-largest Greek speaking city in the World outside of Athens. So I suggest the EMU bureaucrats hand over the whole of the Greek peninsula and all its islands to Germany, and put all the citizens there on a boat and ship them to Melbourne where they will be able to eat Greek food, talk about Greece, dance to Zorba the Greek, and otherwise enjoy Greek culture. Then the Germans will enjoy some sun in peace without all those Greek-speaking Latins in their midst and … lady and gentleman bureaucrats in Brussels – your Euro crisis is over.<\/p>\n Only problem is that all the Greeks will be arrested by our paranoid government here and detained on Christmas Island as criminals such is the Australian Government’s to refugees who arrive here in boats. However, the plan breaks down further because Christmas Island island isn’t large enough to detain them all on.<\/p>\n We will need an austerity package somewhere in all of this but at this stage I cannot exactly see how it will help bring my otherwise ingenious solution to the fruition it deserves.<\/p>\n But on reflection I realise where the fiscal austerity package can still be implemented. If my plan is implemented then the health budget in EMU nations will escalate violently out of control as the skin cancer rate among Germans accelerates. Yes, the Eurozone is not indistinguishable from Germany – the other hangers-on are riff-raff of various tongues who don’t really matter.<\/p>\n So I have all angles covered at present except the size of Christmas Island. Any advice gratefully received. 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