attitudes towards money, central bank actions, checks and balances, climate change, commodity attitudes, consumption as planned obsolescence, counterbalances, debt, economic cycles, economic models, Federal Reserve, fiat currency, fiat money, financial bubbles, fiscal stimulus, foreign currency exchanges, global reserve currency, gold standard, government bonds, household debt, interest rates, landfills, leverage, modern monetary theory, monetary models, monetary stimulus, natural resource depletion, perceptions, pollution, post-consumer society, post-consumption society, QE, quantitative easing, safe-haven status, silver standard, slow-growth economy, strengthening dollar, U.S. dollar, weakening dollar
This morning, Bloomberg News reported the strengthening of the U.S. dollar. Citigroup sees this as the foreign-currency exchanges anticipating the end of the Federal Reserve’s monetary stimulus. Bloomberg News’ slant was this: Since the U.S. economy is strengthening, the Federal Reserve will pull back on its quantitative easing efforts.
I’m taking a contrarian view: The gain in the dollar isn’t based on some new-found confidence in the U.S. economy, but rather currency investors are simply seeking a safe haven in the coming deluge of economic weakness, taking advantage of the U.S. dollar’s global reserve currency status. Consider the recent headlines:
- New York region’s manufacturing shrank for the fourth month
- Jobless claims jumped in November of 2012
- Euro area slumps into a recession for second time in four years
- Consumer prices rose at a slower pace in October of 2012
- U.S. industrial production drops 0.4%
- Economist anticipate the United kingdom’s GDP shrinking in 4Q 2012
- A recession looms in Japan
The upshot of all this is that as the dollar strengthens in a counter-intuitive cycle – after all, the Fed’s quantitative easing efforts should be weakening, not strengthening the dollar – this only encourages the modern monetary theorist’s thinking that the U.S. dollar has found some new reality, and monetary and fiscal stimulus can continue unabated.
This reminds me of the economists who, in the late ’90s, proclaimed the U.S. economy had become recession proof.
That one ranks right up there in unanchored optimism with “Dewey Defeats Truman.”
So what’s the connection between monetary policy and a post-consumer society?
There are no counterbalances in a fiat money system, no checks and balances baked into such a monetary system. And that changes attitudes towards money, at the individual, firm and governmental levels.
Consider: Rates should have been raised in the late ’90s to head off the tech bubble, but were not. At the time, Greenspan was desperately looking for an engine to pull the economy through the subsequent recession, and found housing. He and Bernanke continued to keep rates down, creating the housing bubble. And looking back, this was simply one of many finance bubbles created by cheap money. It has been one bubble after another and after they burst, a recession ensues and the Fed is then forced to keep rates down in a frantic attempt to keep the economy afloat.
These cycles emanate from a fiat money system, not because a fiat money system -couldn’t- be managed properly, but because it -will not- be managed properly since politicians and corporations have a deeply vested interest in keeping money “cheap.” Fiat money provides an atmosphere wherein -commodity attitudes- are formed: there’s always more money to be had, to be printed, to be borrowed at low rates. There are no counterbalances. These attitudes account for such dangerous financial activity as derivatives, with money chasing money rather than money being invested in substantive economic activity.
I dislike using the gold example, because someone will accuse me of being a gold bug. I am not. I am agnostic towards a gold standard because the restrictions it would place on money circulation may turn out to be so severe that it could place a death grip around the neck of our economy. However, with that being said, one of the positive aspects of the gold (or even a silver) standard is that it has a built-in counterbalance that prevents a commodity attitude from forming over money.
Right now, central banks are scrambling to stop the global economy’s slide, and they are attempting to do so by creating/allowing layer after layer after layer of leverage (mostly debt) in the desire of propping it up long enough and hoping, somehow, in some unexplainable way, a spark will reignite the economy and right the ship.
But layers of leverage won’t right the ship. In fact, the increasing layers of leverage are only hastening its sinking. The central banks are using buckets to try to bail the water out of the Titanic, while the hole in the hull just enlarges from the pressure. MMT may accurately explain the workings of our current monetary system, but that doesn’t change the eventual outcomes. The models may work as the system stands today, but the models use assumptions that cannot anticipate its eventual failure (just as economic models failed to anticipate the current credit crisis). In fact, MMT aficionados seem to have added another layer onto the theory, that of justifying the system, rather than simply explaining it.
We have to find a monetary system that will get the finance junkies off their leverage highs, that will stop politicians thinking that the government will always find a way to redeem public bonds, and most importantly, prevent consumers from framing credit-card use in the pursuit of consumption-as-planned obsolescence as spending money when, in fact, it is debt accumulation supporting stuff accumulation.
As long as we have a monetary system that views money as just another commodity, we will struggle to bring the consumption-as-planned obsolescence era to a close, to usher in the post-consumer society, the slow-growth economy. We will continue to experience economic cycles (waves) with ever-increasing amplitudes in the highs (that largely benefit the 1%) and the lows (which inflict pain on the 99%). On the front end, we will continue to harvest massive amounts of natural resources out of the earth, depleting its bounty for generations to come. On the back end, we will continue to emit carbons into the atmosphere, to fill our landfills to (over) capacity.
Just as drugs alters the user’s perception of reality, cheap money alters the user’s perceptions, inducing one to think they are creating substantive economic activity, rather than seeing this activity as wrecking one’s financial future, and wrecking the environment.
In fact, the only thing that is being created is a mirage.
Attitudes. They are hardly accounted for in monetary theories, yet can drastically change how we function as individuals, as a globe.