Majorityrights Central > Category: Economics & Finance

This is Martin Hutchinson’s current article on Prudent Bear, looking back to the mercantilist origins of China’s current grab for natural resources and pondering alternatives to the kind of future it implies.

GW

THE RETURN OF THOMAS MUN

China’s recent announcement that it would use its $2 trillion of foreign reserves to boost its companies overseas acquisitions tells us that its economic beliefs are neither those of Adam Smith, nor of Karl Marx, but of the 17th Century mercantilist Thomas Mun. It is becoming clear that in economics, unlike in “hard” sciences, old belief systems never die.

Mun (1571-1641) wrote a classic magnum opus “England’s Treasure by Foreign Trade.” Published only after his death in 1664, it was nevertheless very influential. Mun had been a Director of the East India Company, and, unlike earlier theorists, believed that foreign trade was beneficial. However he didn’t hold with any high-falutin nonsense like comparative advantage, or maximization of global economic welfare. For Mun the purpose of foreign trade was to export more than you imported and, consequently, amass a huge store of foreign “Treasure,” which you could then use to found colonies that would take control of natural resources.

To further this objective, countries should: cut back domestic consumption as far as possible; increase the use of land and other domestic resources to reduce imports; encourage the export of goods made with foreign raw materials; and export goods with price-inelastic demand because profits would be greater.

Mun’s theory made sense in the 17th Century economic jungle — and today it obviously makes sense to China. The renminbi, China’s currency, is undervalued, so exports consistently exceed imports. Domestic consumption is kept low and savings high, both of which suppress imports. In industries such as automobiles where consumer demand is inevitable, foreign manufacturers are forced into domestic joint ventures, so that domestic manufacturers can be developed to replace imports. Domestic agriculture and resource extraction efforts are intensive. China has set up free trade zones, in which foreign parts are assembled into goods that are then exported. Finally, the country has amassed a gigantic store of $2 trillion of “Treasure,” which is now to be used to assist in foreign acquisitions. Those acquisitions are not to be on Wall Street, as prime minister Wen Jiabao helpfully explained, but in natural resources, where China can assure itself of exclusive raw materials supplies for decades to come.

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Intellectual honesty requires that one address the strongest, not weakest, arguments of one’s opponent. It is called “Devil’s Advocacy” or “Giving the Devil his Due” but it is not really advocacy, nor really even viewing one’s opponent as “the Devil”.  It is simple intellectual honesty.  Now, admittedly, we live in a very intellectually dishonest world—a world in which we are routinely demonized by a theocratic supremacy utterly uninterested in the truth or freedom—so there is very little reciprocation earned from us.  That is the strongest position of those who would not give the Devil his Due:  Why bother with intellectual honesty?

The answer is simply, that we seek the truth.

With that preliminary out of the way, let me address something that has been bothering me for some time about those who continually go on about the Federal Reserve “creating money out of thin air” as though they are counterfieting.  First, the money they create is backed by the threat of punishment—if you don’t obtain their money for payment of taxes, the government will throw you in prisons to experience “sexual awakening”—hence not “out of thin air”.  Now, everyone who uses the phrase “out of thin air” will more or less agree that this “backing” by a promise not to punish you if you present the Federal Reserve tokens is real but, they will object, there is no point in discussing such fine distinctions.

Yes there is.

There is a relatively strong argument from the supporters of fiat money and fractional reserve banking that gets trotted out for the favored few journalists, economics majors and politicians who are trained to ignore the rest of us.  We, the “Paranoid”—We, the “Kooks”—We, the “Extremists”—We, the People, are not exposed to it—until now.

Imagine a world in which people have taken a step up from barter to issuing IOUs for their goods or services—IOUs which can circulate.  Farmer John issues IOUs that say: “I, Farmer John, owe the bearer of this note 1 dozen eggs.”  Tailor James issues IOUs that say:  “I, Tailor James, owe the bearer of this note 1 fitted suit.”  These IOUs are traded around the community and a monetary system is established where the currencies have backing that is as real as the credibility of their issuers.  They are “debt money” in the sense that the issuer has made a promise to the bearer but they do not bear interest to anyone in particular.

Now comes the Banker:

The typical argument you hear from the opponents of Fractional Reserve Banking is that the Banker will have a store of gold that he represents with gold certificates that circulate in the community, and that he issues more certificates than he has gold in a blatant act of fraud.  But let’s go back to Farmer John and his eggs for a moment:  Farmer John doesn’t have the eggs.  He has chickens who lay eggs on a regular basis.  If Farmer John has a “run on the henhouse” by the holders of his IOUs, he’ll be accused of having “created IOUs out of thin air” because he won’t be able to service all the demands for his eggs in a timely manner.

Now is it true that the Banker’s main monetary service is the storage of gold for people, hence issuing tokens for more gold than he has in storage is fraud?

No.  That is not the Banker’s main monetary service.

The Banker’s main monetary service is to simplify the monetary system by accepting the IOUs from others and performing 3 services:

1) Evaluate the credibility of the barter tokens issued by Farmer John and Tailor James, etc.
2) Evaluate the liquid value of the goods and/or services offered by Farmer John and Tailor James, etc.
3) Issuing the bank’s IOUs in exchange for IOUs from Farmer John and Tailor James, etc. so that the community has a single currency.

It’s that simple.

Now, one may ask, where does the banker legitimately charge interest here?

Simply:  Sometimes Farmer John fails to provide eggs.  Sometimes Tailor James fails to fit suits.  The banker needs to charge what amounts to an insurance premium based on the credibility of Farmer John’s promises and another premium based on the credibility of Tailor James’s promises, etc.  Hence, the Banker is merely attempting to do what any honest insurance man does:  Cover his, and your, risks in participating in the monetary system under his responsibility.  No Gold need be involved at all.

Now that we better understand the legitimacy of a “central bank”, let us focus on the real problem:

When the bank links up with the tax collecting agencies, as happened in 1913 with the simultaneous passage of the Federal Reserve Act and the 16th Amendment to the US Constitution, it has acquired the government as collection thugs—thugs who will “break your kneecaps” if you don’t pay up.  At some point—and it isn’t well defined exactly when this occurs—the promises for delivery of goods and services cease to be the primary backing for the banker’s notes and the threat of punishment becomes the primary backing.

That’s the real problem with the Federal Reserve.

By John Rackell

I have been assured by a very knowing American of my acquaintance in London, that a young healthy child well nursed is at a year old a most delicious, nourishing, and wholesome food, whether stewed, roasted, baked, or boiled, and I make no doubt that it will equally serve in a fricassee, or a ragout.

Jonathan Swift: A Modest Proposal for Preventing the Children of Ireland from being a Burden to their Parents or Country, 1729.

Some proposals for solving particular problems of the day may have all the merits of logic on their side, assuming one acquiesces to facile assumptions and glib premises, but their conclusions are so outrageous that the proposal must be treated as satire.  Or God help us.

In our current circumstance of economic crisis – housing bubble burst, busted banks, bankrupt states and municipalities, exploding government liabilities, depression waiting in the wings (or hyperinflation or hyperinflationary-depression) – and those are only the manageable problems, to say nothing of the trashing of the West’s 500 year hegemony and the transfer of wealth and power to Asia, and China in particular – various proposals are being mooted that formerly would have been whispered only by conspiracy theorists or dismissed by sober minded people, or treated as satire.

To wit, the ones I’m familiar with, that the (US) government will force all holders of 401k and IRA plans (private, ‘self-directed’ pension plans for non-US readers) to accept zero-coupon government bonds in exchange for the assets in their accounts; these plans representing perhaps the single largest untapped source of wealth for the US government.

The other modest proposal, and the subject here, is the idea that the US should solve the problems of housing (primarily the vast excess supply of housing relative to current demand – the supply ‘overhang’ ) by giving any foreign person a US green card – i.e. an immigration visa – in exchange for their purchase of a housing unit.

One house, one immigrant – and his extended family.  Very neat.

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by exPF

Cynicuseconomicus is a UK-centered economics blog, which develops a clear if somewhat pessimistic perspective on the state of the UK and US economies. Its most enjoyable facet is the clear discussion of the technical realities of the current economic situation - interesting to someone who wants to gain an understanding without an advanced economics degree. Things are explained felicitously.

The links on the left hand margin of the blog allow for an easy sequential reading of the past analytical work done on the blog, and one is quickly brought up to speed.

One of the recent revelations posted on Cynicus was the fact that the Bank of England’s policy of “Quantitative Easing” - in fact simply means the creation of money from nothing.  Thus being analogous to the printing of money undertaken by Zimbabwe, or Weimar Germany. He indicates on the blog that Britain is bankrupt and they are basically creating money from nuffin’ in order to finance - well, the status quo, basically.

By Martin Hutchinson

Those who have visited Michigan recently or the Mahoning Valley of Ohio in the 1980s can recognize the symptoms of a rust belt. A hitherto prosperous industry, paying high wages to its employees, has been overtaken by market changes and is forced into harsh downsizing or even bankruptcy. As a result, the lives of many inhabitants degenerate into alcoholism, home foreclosures and welfare.

This time around, the decaying industry is finance, and the rust belt cities are London and New York.

The parallels with the US automobile industry are closer than they look. In the early years of the auto industry, it included both large companies and small specialty manufacturers, the latter being remembered now as producers of “vintage” cars of very high quality. Then the Great Depression wiped out most of the specialty producers, which could not compete with the mass producers’ costs. For the next several decades the business was dominated by a heavily-capitalized oligopoly with extremely highly paid employees, quite high profitability but deteriorating product quality. Finally, it became clear that the oligopoly was uncompetitive and the industry began to shed workers and close plants.

In finance, the early specialty producers were the London merchant banks; for Duisenberg, Packard and Stutz you can substitute Hambros, Warburgs=2 0and Hill Samuel. They too had superb product quality and are remembered with great fondness by their former customers, but were driven out of the business by heavily capitalized competitors, in this case running behemoth high-risk trading desks rather than mass production assembly-line factories. The employees of the well-capitalized behemoths were even better paid than the UAW workforce in the 1950s General Motors. Then gradually product quality began to deteriorate, and bad practices such as “liar loan” securitized mortgages, accounting “mark-ups” of assets that had not been sold and self-deluding risk management crept in.

The main difference between the two cases is that the collapse of the finance sector has taken the form of a sudden Gotterdammerung rather than the steady but inexorable decline characteristic of the US automobile industry. The bottom line is the same: Detroit needs to downsize radically, but so does Wall Street.

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Dr K R Bolton FCIS

The crisis among international finance is, I’m inclined to think at this stage, more a natural cyclic product of parasitism than a manipulated contrivance as in the 1930s Great Depression.

What is interesting is that parasitic finance, or what is historically called usury, operates in the manner of social Darwinism, where even the esteemed Lehmans Bank was not saved by its fellow parasites. Lehmans has historically been up the top of the global cabal of power manipulators beside the likes of Rothschild, et al; but Goldman Sachs, also among this globalist cabal, refused a bail out. A “newer comer”, Merrill Lynch has likewise gone to the wall.

As far as results go, however, the international financial system is becoming increasingly centralised, and you can be sure that none of this cabal will suffer. They will remain part of the world power game, as the interlocking directorates of banks and other corporations ensure the positions of every member of the globalist cabal.

An interesting sidelight is that the same cabal that has promoted Free Trade ideology since the 19th Century (while simultaneously backing Marxism in pre-industrial rural-based spiritual countries such as Russia, as part of a dialectical transition from traditional society to Marxism to parasitic capitalism) has resorted to appealing for state intervention to prop up certain entities, without which the financial fallout would cause wholesale collapse, and perhaps a rerun of the 1930s where Fascism and National Socialism emerged in rebellions against Free Trade and usury.

However, while the Great Depression spawned a variety of alternatives, including Fascism, Corporatism from Portugal and Austria to Brazil, Social Credit and Distributism; and other mass movements often inspired by Catholic social doctrine, such as Father Coughlin’s Social Justice; it seems that decades of ignorance and apathy will ensure that there will be no such upsurge in popular alternatives. Aberrations such as Ron Paul, who sought the Republican nomination for presidency, were quickly reduced to invisibility with the help of an obliging media.

Obama is presented as the man of the people to overcome crises, just as Roosevelt was, and both were backed by the same cabal.

Additionally, the Catholic Church, once a major factor in spawning mass alternatives to both capitalism and socialism, on the basis of Papal encyclicals and historic opposition to usury, has long since abdicated its role as offering any worthwhile alternative other than a banal crypto-Marxism called the social gospel. A notable exception is the Canadian based Pilgrims of St Michael, a social credit movement spawned in the 1930s, which has retained the old crusading zeal that has long since evaporated from all other such movements and parties.

Kerry Bolton is the editor of Restoration Magazine.

Several times over the last few months I’ve considered putting together a post about one or other jaw-dropping new development in the banking crisis.  But then I’ve realised how difficult answering any of the really big questions, as they will affect the lives of our people, really is.  So I restricted myself to one post on the politics of sub-prime and one on the privatisation of profit and the socialisation of risk (a polite way of saying “theft”).

Now, with the sudden acceleration of events to completely undreamt of levels of destructiveness, I think it’s time to at least acknowledge the moment.

Prior to the collapse, there were five truly global investment banks cum securities trading and brokerage firms in Wall Street.  Bear Stearns and then, in one momentous day, Lehman Brothers and Merrill Lynch were despatched.  The remaining two seem to be taking on the appearance of dominos:-

“The fear is who is next,” said John O’Brien, senior vice president at MKM Partners LLC in Cleveland. “It almost feels like people scour the books and say who is the next likely target that we can put a short on. And that spreads continuous fear.”

Shares of Morgan Stanley and larger rival Goldman fell as much as 43 percent and 27 percent, respectively, even after both reported better-than-expected quarterly earnings on Tuesday.

“I’m assuming that Goldman Sachs and Morgan Stanley are lining up dancing partners. They don’t want to be ... this week’s victim,” said William Larkin, fixed income manager at Cabot Money Management in Salem, Massachusetts.

... “Seems like the SEC is a day late on the rule ... Morgan Stanley is clearly in the short-sellers’ sights,” said Andrew Brenner, senior vice president at MF Global in New York.

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Martin Hutchinson treated his readers at Prudent Bear to a dose of blue collar reality this morning, mourning the technological manufacturing future that a generation of American politicians, financiers and businessmen threw away for short-term gain.
GW

GE’s announcement a week ago that it would accept offers for its appliances business marked the death-knell of yet another US manufacturing business, one among so many in US manufacturing’s long and seemingly unstoppable downtrend since 1980. That decline may seem an inevitable historical trend, and Wall Street’s analysts would claim that the US economy can prosper just fine without it. Yet impartial analysts of the putrefying corpse of US manufacturing capability are forced into an inescapable question: did it die of natural causes or was it murdered?

For the last 30 years, Wall Street’s insouciant attitude appears to have made sense. US manufacturing has slowly declined, as operations have moved to lower-wage centers in the Third World. However the US economy as a whole has continued to thrive, as financial services doubled its share of Gross Domestic Product and grew to provide 40% of the earnings on the Standard and Poors 500 share index. Prosperity was heavily skewed towards the very rich, but the majority of Americans continued to enjoy a general, if halting improvement in living standards.

The collapse of the financial services bubble has however called into question three of Wall Street’s most cherished beliefs about manufacturing:

·  First, Wall Street believes that financial services and other services can take the place of manufacturing, and that the United States can remain a prosperous economy thereby.
·  Second, it believes that manufacturing tangible products is an intrinsically low-skill and uninteresting operation, so that the US would do much better to specialize in “symbol manipulation.”
·  Third, it believes that the decline in US manufacturing was and is inevitable, so that decline would have happened whatever strategies management had adopted, and whatever resources and attention it had devoted to manufacturing activities.

The inevitability of manufacturing’s decline is in some ways the most interesting question, which has not been addressed much elsewhere. Most large-scale events of this nature appear inevitable in retrospect, yet if examined in detail can be shown to have been triggered by a series of decisions that could have gone the other way.

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