LET'S RETHINK JOHN MAYNARD KEYNES: WOULD HE REALLY APPROVE OF THE PROFLIGATE POLICIES OF BERNANKE AND CENTRAL BANKS ALL OVER THE WORLD?
I read, over and over again, that Ben Bernanke is a Keynesian. This means or suggests at least that Keynes essentially found inflation preferable to deflation -- and generally felt printing and spending money was a relatively harmless way to try to spur economic growth. That is how he is often represented by the media: Bernanke is a second incarnation of Keynes.
Keynes did not believe this in 1917. In 1917 Keynes agreed with Nicolai Lenin, the leader of the Russian communist revolution, that the best way to destroy capitalism was to "debauch" (devalue) the currency. Keynes defined inflation as the "government's confiscation of the wealth of its citizens secretly and (generally) unobserved..."
John Maynard Keynes (the guide, supposedly, of Bernanke's insane -- my characterisation -- monetary policies) writes:
Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.
Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers," who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
Bernanke is not following Keynes' ideas. He is following his own personal hero, a Japanese Finance Minister, Korekiyo Takahashi, who, in the 1930's, 'saved' Japan from the global depression (for three years) by all the monetary ploys Bernanke began in America in 2008: QE, ZIRP, ULTBB (Unlimited Treasury Bond Buying)...which worked for three years, until Great Britain trumped the Japanese in India and China with currency debasement and tariffs to thwart the Japanese currency offensive. QE, ZIRP, Bond-Buying are designed to devalue the currency: they are the first volleys of a currency war.
Then, as interest rates rose in Japan, Takahashi tried to cut government spending, including cutting military spending, alienated the military, who executed Takahashi, himself, hacked to death by swords, as well as the Prime Minister, Inukai Tsuyoshi, three months later, in May 1936. Strangely, the plot to kill the Prime Minister also, at first, included discussion of murdering Charlie Chaplan, who was visiting Japan in May 1936.
Kyle Bass, a Dallas-based hedge-fund operator, who made a fortune shorting the US Housing Bubble, and who is now shorting Japanese government bonds with less success so far, writes:
Central bankers are feverishly attempting to create their own new world: a utopia in which debts are never restructured, and there are no consequences for fiscal profligacy, i.e. no atonement for prior sins. They have created Potemkin villages on a Jurassic scale. The sum total of the volatility they are attempting to suppress will be less than the eventual volatility encountered when their schemes stop working. Most refer to comments like this as heresy against the orthodoxy of economic thought. We have a hard time understanding how the current situation ends any way other than a massive loss of wealth and purchasing power through default, inflation or both.
He then references the Keynsian bible, The General Theory of Employment, Interest and Money, quoting Keynes prediction of what would happen should a central bank inflate without conscience, as Bernanke and friends all over the world are doing. Keynes' conclusion is that such irresponsible printing of money would result in the death of capitalism and capitalist. Capitalists' (landowners') power lies in the fact that money (land) is scarce.
Keynes' "Concluding Notes" from page 376:
This [monetary inflation through central bank policy] would mean the euthanasia of the rentier (landowner), and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity value of capital....
Well, I guess there is a bright side: we get rid of the speculators who exploit bubbles in the economic fabric. I think we should raise interest rates today and flush such speculators intot he sewer where they belong. Of cours,e there are no speculators without policies of the Greenspans and Bernankes.
Almost always Keynes is compared to the Austrian School -- somehow the liberals came to embrace Keynes, fearing the fascism of the Austrian (Austerian) School. But Keynes would be appalled by Bernanke's and the European followers lack of monetary discipline, which allows for -- indeed, seduces and tempts -- continued spending of invisible money by both governments and corporations and individual speculators...
Keynes and Ludwig Von Mies (Austrian School leader) seem to agree on what comes from profligate fiscal spending and monetary easing (the so-called 'infinite quantatative easing'). Von Mies writes:
There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.
We are being led to the slaughterhouse by a man (Bernanke) who says proudly: "We are sailing into uncharted territory now...!"
The territory is not uncharted. Every 36 years we get a global financial crisis, after 18 years of inflation/growth. What is 'uncharted' is this monetary inflation policy approach which Bernanke intends to be his legacy. But this method is not exactly uncharted either, if you read the entire story of the failed QE debacle in Japan in the 1930's, as QE, ZIRP, and other forms of Currency Wars led to a momentary victory for Japan that stemmed the tide of deflation in asset prices -- the key words being 'momentary victory' -- and then transformed into hyperinflation and depression as attempts to control debt growth in Japan led to political assassinations and then world war.
World War: Is that where we are headed again? Kyle Bass thinks so. He writes:
Humans are optimistic by nature. People's lives are driven by hopes and dreams which are all second derivatives of their innate optimism. Humans also suffer from optimistic biases driven by the first inalienable right of human nature which is self?preservation. It is this reflex mechanism in our cognitive pathways that makes difficult situations hard to reflect and opine on. These biases are extended to economic choices and events. The fact that developed nation sovereign defaults don't advance anyone's self?interest makes the logical outcome so difficult to accept. The inherent negativity associated with sovereign defaults brings us to such difficult (but logical) conclusions that it is widely thought that the powers that be cannot and will not allow it to happen. The primary difficulty with this train of thought is the bias that most investors have for the baseline facts: they tend to believe that the central bankers, politicians, and other governmental agencies are omnipotent due to their success in averting a financial meltdown in 2009.
The overarching belief is that there will always be someone or something there to act as the safety net. The safety nets worked so well recently that investors now trust they will be underneath them ad infinitum. Markets and economists alike now believe that quantitative easing ("QE") will always "work" by flooding the market with relatively costless capital. When the only tool a central bank possesses is a hammer, everything looks like a nail. In our opinion, QE just doesn't stimulate private credit demand and consumption in an economy where total credit market debt to GDP already exceeds 300%. The UK is the poster child for the abject failure of QE. The Bank of England has purchased over 27% of gross government debt (vs. 12% in the US). UK bond yields have all but gone negative and are now negative in real terms by at least ?1%. Unlimited QE and the zero lower bound ("ZLB") are likely to bankrupt pension funds whose expected returns happen to be a good 600 basis points (or more) higher than the 10?year "risk?free" rate. The ZLB has many unintended consequences that are impossible to ignore.
Despite reading through Keynes' works, we didn't find a single index referencing the ZLB or any similar concept. In his General Theory, there are 64 entries in the index under "Interest" but no entry for the ZLB, zero rates, or even "really low rates".
Our belief is that markets will eventually take these matters out of the hands of the central bankers. These events will happen with such rapidity that policy makers won't be able to react fast enough.
On the lunacy of such "modern" "economic" "theories" as MMT (which may or may not stand for "Magic Money Trees")
The fallacy of the belief that countries that print their own currency are immune to sovereign crisis will be disproven in the coming months and years. Those that treat this belief as axiomatic will most likely be the biggest losers. A handful of investors and asset managers have recently discussed an emerging school of thought, which postulates that countries, as the sole manufacturer of their currency, can never become insolvent, and in this sense, governments are not dependent on credit markets to remain fiscally operational. It is precisely this line of thinking which will ultimately lead the sheep to slaughter.
The inevitable end of that supremely flawed monetarist experiment - the Eurozone:
Each subsequent "save" of the European debt crisis has been devised by the Eurocrats coming up with some new amalgamation of an entity that is more complex than its predecessor that is designed to project size, strength, and confidence to investors that the problem has been solved. Raoul, a friend of mine who resides in Spain, put it best:
"Let's just clear this up again. The ECB is going to buy bonds of bankrupt banks just so the banks can buy more bonds from bankrupt governments. Meanwhile, just to prop this up the ESM will borrow money from bankrupt governments to buy the very bonds of those bankrupt governments."
The EFSF, the IMF, the ESM, and the OMT (and who knows what other vehicles they will dream up next) have all been developed to serve as an optical backstop for investors globally. The Eurocrats are sticking with the Merkelavellian playbook of hiding behind the complexity of these various schemes. All one has to do is review the required contributions to said vehicles from bankrupt nations to realize that the circular references are already beginning to show in broad daylight. Does anyone stop to consider that the two largest contributors to the IMF are the two largest debtor nations in the world? Are things beginning to make sense now?
In the end, the EMU won't look the same, if it exists at all.
And finally, a less than rosy outlook for the entire "developed" world.
Trillions of dollars of debts will be restructured and millions of financially prudent savers will lose large percentages of their real purchasing power at exactly the wrong time in their lives. Again, the world will not end, but the social fabric of the profligate nations will be stretched and in some cases torn. Sadly, looking back through economic history, all too often war is the manifestation of simple economic entropy played to its logical conclusion. We believe that war is an inevitable consequence of the current global economic situation.
I will end on that somber note. If we raise interest rates, then we have to pay ourselves for our sins against nature (debt bubbles ARE sins against nature). If we lower interest rates, and seek to diminish the value of our currency, we attempt to cheat people in their good-faith investment in American debt; we also explort inflation all over the world, rather than take the bitter medicine of higher interest rates ourselves. Once we start a currency war, then other nations must respond. Bernanke started the currency war in 2008, with QE, ZIRP, and ULBB -- Great Britain followed quickly -- one can argue that China's peg to the Dollar was also a form of currency war -- what is certain is that smaller, poorer nations are the first tragic casualties of the currency war with the giants of the world, for they receive the inflation exported by the richer nations, and the recessions caused by higher interest rates responding to the soaring inflation they have received.
When you spend like a drunken sailor, as America has, as the world has, the most noble path is to admit this and to respond by making money more expensive, drying out one's own society. The least responsible path in a moral sense is the path we are following. The selfish path led us to take on more and more debt, to live today in comfort, to hell with future generations. We continue to follow the most selfish path. Because of this, world war becomes inevitable. World war is a way that God will punish us for this selfishness.
Michael J. Clark, CGTS