IN PRAISE OF AUSTERITY
I have not written in some time. My message is not really appreciated much, it seems; and markets keep ignoring my presage. Sometimes it is best to take a vow of silence, especially when there is a wave of animal spirits eager to get on the anti-boat, the boat that is too full, and is beginning to sink.
I have been white-balled by Seeking Alpha, outlawed from posting comments to articles, for speaking a message of which they apparently don't approve.
One of the last blogs I wrote, in which I referenced an article written by Ambrose Evans-Pritchard, one of my favorite journalists, triggered in him an email response. I don't want to put words into Mr. Evans-Pritchard's mouth, something he accused me of (and to which I plead guilty) in his email.
I think the basis of our disagreement is his opposition to 'Austerity' as a policy. To me Austerity is not a policy, but an inevitable result of its opposite coin: Inflation. Of course, the standard response to this from the Keynesian side (unfair to Keynes, I realize) is that "Why, there is NO INFLATION! Look at the CPI!" This is a ruse, of course. Propaganda. I am astonished by how much propaganda passes for news these days.
My definition is this: "Economic Growth IS inflation." The Growth Season of the Business Cycle is the Inflation Season. Many formally trained economists will scoff at this notion, having learned very successfully the formal definitions provided by the business schools. I say there are two types of inflation: Visible (when growth is fueled by expanding salaries and rising prices of assets and goods and services) and Invisible (when growth is fueled by moderate salary increases but animated by expanding debt and rising prices of assets and good and services). In the Business Cycle Expansion Season 1911 - 1929 we had Invisible Inflation (fueled by debt); in the Business Cycle Expansion Season 1956 - 1965 we had Visible Inflation (fueled by rising salaries -- and modest debt inflation); in the Business Cycle Expansion Season 1983-2001 we had Invisible Inflation again, fueled by debt.
Of course a full cycle lasts 36-years, so the 1911-1947 full cycle saw the debt problems show up at the end of the inflation, 1929 -- creating banking panics, depression, trade wars and a world war. So, the 1947-1983 full cycle saw the shadow half (1965-1983) subject to all the curses of the Night-Cycle: stagflation, high unemployment, inflation, civil discord, political scandal, a lost war, the fall of a presidency (the corrupt White King, Richard Nixon), and the eventual rising of interest rates to over 20%. This full cycle will run from 1983-2019; we are in the shadow half now, with all the problems (entropy) that comes after every Inflation -- but worse: we are still fighting the shadow, still attempting to inflate, inflate, inflate, in order to not have to 'face the music' or 'take the medicine' for our great inflation, the greatest in human history.
Anyway, Ambrose wrote me an email, outlining how I had misquoted him in my article. He wanted to straighten me out. I wrote him back. This posting includes both his correction of my earlier article; and my response, which is not only "in praise of austerity' -- but also might be subtitled "Is the American Dream Toxic"?
I happened to come across your piece seekingalpha.com/instablog/428250-michae...-hand
Just to clarify. I have not lost confidence in QE, though of course it is just a tool to be used at the right moment.
The point about the Mishkin paper is that the Fed itself is losing confidence in QE. That is what matters for markets and the World economy, and that is what I was writing about. If central banks don't want to use QE any more to contain the global depression, then other means will be found.
If I may say so, you conflate my view with the Fed's view.
I think QE has been a success, especially if you compare the US recovery with the deepening slump in Europe.
I also think it has the potential to save Japan, though Japan is already far gone.
Yes the potency of QE is now declining. This is partly because the the nature of the crisis has evolved, and partly because the methods used by the Fed have been misguided. This is a complicated theme that I didn't want to explore in that column, but I have written about at other times.
Bernanke is not a monetarist. He is a creditist. He is trying to revive growth by driving down long rates, not by trying to expand the broad M3 money supply in conventional Friedman, Fisher, Hawtrey, Cassel, style
The first efforts at QE were partly botched because they didn't target long-term assets that boost M3.
So there is QE and QE. I am very critical of the Fed.
So to conclude, I have never said QE is a failure, nor do I think its potential is exhausted. It all depends how you do it, and what you are trying to do.
Can it solve the world's problems, or cure heart disease, or lower cholesterol? No it can't. Can it prevent a deflation dynamic taking hold. Yes it can.
I am quite pleased to get your email, and quite surprised. I am very fond of you, in fact. I visit the Telegraph site every few days; and you are the only writer there I read regularly. I visit there to read you. I find you to be a writer who is not dogmatic; and one who is curious and still has a heart, which I find commendable.
I am working on a major novel I began in 1998, CROSS EXAMINATION, which examines, among other things, the Millennium Idea into which we abruptly exploded in 2001. I am convinced that the Twin Towers experience was a kind of Biblical Tower of Babel experience; and that 2001 will mark the apex of the American Empire's expansion.. This novel is a child of Finnegans Wake in many ways -- and the most recent chapters include many of your articles from the Telegraph. I include you, I think, because I share many of your views; and I respect your writing. I also want to document the world's sliding into chaos and hell (Dante's Inferno) with intelligent articles describing why this is occurring.
I was an opponent of QE from the beginning because I felt it (while cunning) was a (moral) mortal sin (excuse the expression) against Nature's structure. I've written an unpublished book about the Global Crisis ("TURN OUT THE LIGHTS") which sees very precise 36 years cycles as governing American history, 18 years of expansion, growth, fertility and enrichment (1983-2001 being the most recent Growth Season of this Business Cycle), followed ALWAYS by 18 years of deflation, rest, contraction, gestation. It is my view that NOTHING grows perpetually in Nature; and deflation cycles are needed as much as inflation cycles are needed. Deflation cycles are needed in order to dry out the world from the Biblical Flood of cheap and easy money. Deflation brings prices back down to salaries; deflation lessens the gap between the rich and the poor; and deflation shifts the national obsession away from speculators and the fast buck and the enrichment of the 1% and back toward the mass of the world citizens, this through higher interest rates and safe returns on the growth of savings, which savings then become, at the end of the 36-years cycle, the fuel for the next organic growth of the investment/business cycle.
To put this in a Biblical metaphor, the Inflation Cycle is the Tree of Life; and the Deflation Cycle is the Tree of Knowledge of Good and Evil. The Tree of Life moves from the seed-structure to the fruit-structure (Civilization, in Spengler's notion of it); the Tree of Knowledge moves from the seed-in-the-fruit at the top of the tree, suddenly rotting, trapped in the tree, needing to fall in order to experience rebirth, to the seed-in-the-earth, buried in the soil, buried in the root-structure (nationalism, tribalism, primeval root-knowledge -- or Culture in Spengler terms) and root loyalty, contrasted to the universal international loyalty of the fruit-structure, at Noon, at the top of the tree, when all is light) -- Midnight -- Darkness -- gestation of the seed, before the next organic cycle of growth. I apologize for the awkwardness of this last paragraph.
Real Growth cannot occur with the seed still in the rotting fruit at the top of the tree, no matter how much fertilization central banks use to try to spur more growth-- the fruit has to fall, the seed has to travel back to Earth, has to contract back into nothingness, back into isolation and darkness and be buried so it can grow again. We have to go through the Dark Age for the seed to gestate. No matter how much fertilization central banks give the Tree of Life with cheaper and cheaper money, they cannot turn late Autumn and early Winter into Spring again without passing through Winter. This is what QE and the frightened central banks are trying to do -- to escape having to pass through the Black Forest of Winter and the painful debt destruction they pretended would not have to happen this time: "It is different this time. We are smarter this time. The Great Depression would not have occurred in Man had not made monetary mistakes. Man can fix everything. Man can trump nature. Man can escape death..."
My view is that Growth IS Inflation. When this growth is fueled by increasing salaries and rising prices, there is visible inflation. When this growth is fueled by flat salaries, compensated by increasing debt, and rising prices, there is invisible inflation. Debt bubbles are pictures of invisible inflation. For the government to design an inflation gauge that ignores invisible inflation (ignoring the most hideous debt bubbles in the history of humanity) is the worst kind of deception (and, perhaps, self-deception). Of course, the government wants perpetual growth, to help ensure re-election, and the progress of the society. But the only things in nature that experiences perpetual growth are cancer cells.
The Fed (and QE) and central banks all over the world today are a picture of financial death by cancer. Does it delay the apocalypse? Yes. We die more slowly. (Look at Japan from 1989 for a graphic picture of this slow death through denial and through debt-protection.) Does it cure the apocalyptic problem of debt? No. It makes it worse.
Financial debt is karmic debt. All debt is karmic. Spending tomorrow's money today has karmic implications. We like to pretend it does not. Living beyonds one's means is a mortal sin, in the sense that it causes one's moral death.
Many people seem to think there is a choice between 'growth' and 'austerity'. I believe this is an illusion. In my view, growth happens in Spring and Summer; austerity happens in Autumn (harvest) and Winter. In my mind, denying this truth is a form of insanity. The world is heading into the Black Forest of Winter -- Austerity is this realization. There can be no growth until the world's debt is destroyed -- and the destruction of this debt is the definition of AUSTERITY.
My book, TURN OUT THE LIGHTS, shows the following American history cycles -- which define distinct, discrete 18 year cycles of growth/inflation followed by 18 year cycles of deflation. As this shows, we are scheduled to begin recovery in 2019, not before; and this recovery will be like the 1983 recovery; unless we begin raising interest rates soon, we will have rates above 20% again in 2019.
Period A. 2001 - 2019: Night Cycle Deflation, Social Fragmentatiion. Chaos; Entropy.
Period B. 1983 - 2001: Day Cycle Inflation, Higher forms of Organization
Period C. 1965 - 1983: Night Cycle Deflation, Social Fragmentation, Chaos; Entropy.
Period D. 1947 - 1965: Day Cycle Inflation, higher forms of Organization
Period E. 1929 - 1947: Night Cycle Deflation, Social Fragmentation, Chaos; Entropy;
Period F. 1911 - 1929: Day Cycle Inflation, higher forms of Organization
Period G. 1893 - 1911: Night Cycle Deflation, Social Fragmentation, Chaos; Entropy.
Period H. 1875 - 1893: Day Cycle Inflation, higher forms of Organization
Period I. 1857 - 1875: Night Cycle Deflation, Social Fragmentation, Chaos; Entropy.
Period J. 1839 - 1857: Day Cycle Inflation, higher forms of Organization
Period K. 1821 - 1839: Night Cycle Deflation, Social Fragmentation, Chaos; Entropy.
Period L. 1803 - 1821: Day Cycle Inflation, higher forms of Organization
Period M. 1785 - 1803: Night Cycle Deflation, Social Fragmentation, Chaos; Entropy.
Period N. 1767 - 1785: Day Cycle Inflation, higher forms of Organization
Period O. 1749 - 1767: Night Cycle Deflation, Social Fragmentation, Chaos; Entropy
Period P. 1731 - 1749: Day Cycle Inflation, higher forms of Organization
Period Q. 1713 - 1731: Night Cycle Deflation, Social Fragmentation, Chaos; Entropy.
In almost every case, the end of the growth cycle (NOON) is accompanied by a Banking Crisis of some sort, and followed by a series of connected recessions which compose an 18-year Depression (Deep Recession). For example, the 1929 Wall Street and Banking Crisis was then followed by a 1929-1933 recession, which was then followed by a series of recessions 1937-1938, and a very vicious recession from 1946-47 that was in many ways worse than the 1929-1933 recession. They are all part of the same Night-Cycle depression.
The Key feature of my system is that interest rates must lead societies into both expansions/inflations and into deflations. This means central banks must have a long-range plan for both sides of the cycle -- and governments must plan for what Joseph in the Old Testament describes as '7 Fat Years Followed By 7 Lean Years". The idea is right; Joseph's number is symbolic; my number, 18, is literal.
The Fed should have begun raising interest rates in 2001, slowly, steadily. And rates should have continued to rise for 18 years. Every Inflation Season begins or should begin with high interest rates that come down over 18 years; every Deflation Season should begin with low interest rates that rise for 18 years. In my mind this requires a governmental system that is essentially capitalist during the Day-Cycles of Inflation and socialist during the Night-Cycles of Deflation and plans for higher tax revenue during Inflation Cycles to provide government services during Night-Cycles. This is the ultimate rational system for planning an economy.
We like to think it will be different this time. My study shows it is NEVER different this time. Bernanke's policies will fail; he is not attacking the debt; the debt is the problem. He is keeping interest rates low and encouraging MORE debt. Japanese fourth-generational QE and attempts at re-flation will also not work. Spending more money to protect bad debts and levitate asset prices is the absolute wrong thing to do, although it seems to soften the blow; it seems more humane. However, governmental attempts to protect people from their own financial mistakes (both as creditors and debtors) is not a legitimate role for government. Government should not seduce people to borrow money to spur economic growth; and it should not attempt to protect them from the inevitable destructive sides of this seduction.
We are heading for a nuclear winter of debt destruction. Bernanke understands that he is stalling. He is feeding the beast (and the beast is the Big Banks holding trillions in leveraged derivatives that cannot be addressed in any way except through eventual default, which will implode the entire global financial system. AAA TBonds are the collateral of the derivatives markets, so Ben is feeding the beast with these bonds, not knowing what else to do, hoping against hope that unlimited borrowing will not lead to the end of the AAA rating on his TBonds. He is stalling for time, kicking the can.)
America is not recovering. We are just experiencing another Fed-blown bubble. When it pops, we all go down.
The only thing that will cure the global economic crisis is HIGHER INTEREST RATES. This is the only thing that will cure us. It will also kill us. But Nature shows us, there is rebirth after the Winter. There is no easy way out of this inflation. If you choose to inflate (which is incarnation to the buddhists), then you must accept/expect death or deflation. These are two sides of the same coin.
I apologize for misrepresenting your opinion in the article you mention. I'm glad you have pointed this out. I will attempt to correct the article.
I intended to send you a pdf version of my book, TURN OUT THE LIGHTS, hoping you would take the time to read it. The pdf is too large for my mail server. I can break it into two parts if you are interested. Or I can lead you to a webpage where I am storing the manuscript. I know you have a hungry mind for ideas, and you are a curious man -- and that you mind find the ideas exhilarating. I find them exhilarating. Be forewarned, I am an admirer of Plato.
This book provides a metaphysic for understanding social, economic and historical cycles as SPIRITUAL CYCLES first. Spiritual inflation -- the Day World governed by the Sun and by the Body -- has an effect of filling the world with light and matter. Spiritual depression -- the Night World government by Lunar emptiness and darkness -- empties out this light and euphoria and affluence and Ego-satisfaction and plunges the world into darkness and chaos, and steals the world's identity (the way we all like to think of ourselves as 'on the way toward success'. The Night-Cycle screams at us that we have failed. Days and Nights govern world history, in other words; inflations and deflations of light. Material realities; always followed by spiritual realities, dreams and nightmares. Life dies; death teaches and leads one into rebirth. The American world was reborn in 1947; 1983; and will be reborn in 2019. If we don't demolish our debt and let our prices fall and let our interest rates rise, our rebirth will be weak, like the Japanese rebirth in 2007 was weak.
Let me know if you would like me to send you my book as a pdf. Here's the web-link -- the pdf version is much better, with much better graphics.
The novel I mentioned, CROSS EXAMINATION, the one in which you are a favored player at the moment, is a poetic chronicle of the Dantean descent into the Underworld, 2001 (Noon) - 2019 (Midnight). 2010 was Dusk; 2013 is about 8;30 PM. We still have a long way to go to get to the bottom of this version of Dante's Inferno. World War is quite likely ahead.
I'm living in Vietnam. Vietnam is not doing well economically. There is much fear here of a Chinese military arrogance and adventurism. Japan seems desperate militarily also -- Japan seems to understand that time is running out for them as a nation. And the Japanese miracle of new-found-inflation through currency warfare is infuriating all the nations of Asia, who are now attempting to ratchet down interest rates, where possible, to compete with Japan's crushed yen, while also keeping an eye on inflation, a gift to these peripheral countries given by Ben Bernanke and QE.
We are at the end of the world. The world we knew ended in 2001 (the Nasdaq stock bubble, followed by the Antimatter Forces attack on the World Trade Center, symbol of the global economy). The world ended in 1965 also. The world ended in 1929 in the same sense. I wrote a novel in 1977-1984 and documented the End of the World during that Night-Cycle also; that novel was titled CONVERSATIONS ON A DYING AGE. I can also send you a clip from CROSS EXAMINATION if you are interested, highlighting your recent role. You might enjoy it.
The world we build in the Day-Cycle (1911-1929), we destroy in the Night-Cycle (1929-1947). There is no more graphic picture of this than the Depression followed by World War II.
The world America built in the Day-Cycle 1947-1965 (the all-white world) was subsequently destroyed in 1965-1983 when the economy collapsed, America lost its first war, had a vice president arrested in office for bribery and had a president thrown out of office on his head.
One gets the glory and wealth in the Day-Cycle; one then gets the poverty and the shame in the Night-Cycle. One should take one's medicine with a sense of justice and reserve. Ben Bernanke is trying to cheat so he doesn't have to take his medicine. The whole advanced world is trying to cheat God, cheat the Law of Nature. But it won't work. The Lord gives for 18 years; and then the Lord takes away for 18 years.
I'm sorry this is so long. I love to write. Once I start, it is hard to stop.
I admire your work.
(to be continued in Part Two)