Following my recent interpretation of the G20 communique, the editor of Expresso wrote back: “Catherine, can you elaborate a little more about this printing euphoria?”

The Chairman of the Federal Reserve, Ben Bernake, has been adamant. He will not let a deflation take hold. He is fighting significant drops in stock and real estate market values and a “stall” in economic activity by expanding the money supply.

Hence, the Fed has been aggressive in providing loans and liquidity to the market while the Treasury has been generous with bailouts. However, much of these funds are simply covering losses in the large mortgage and derivative portfolios — the capital injections do not appear to be rippling through the larger economy. In essence, large institutions are hoarding the resources and cutting off the smaller institutions in a way that is devastating for the real economy.

That means that insiders can now buy up assets in the real economy on-the-cheap … which was their goal from the beginning. It’s another example of how “trickle down economics” translates into “drop dead economics.”

Part of the challenge is that our economy does not need more debt. We need more circulation of equity, greater transparency, and open competition that will improve performance on equity. Such changes, however, would be in conflict with continued centralization.

So, how do you keep an economy going when it is being heavily taxed by centralization and lawlessness in the allocation of capital? You print money. The theory is that consumers can keep spending on consumer products without ever having enough money to compete for ownership of the real economy. My prediction is that it will not work.

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16 Comments

  1. Dalmazio and Catherine:
    I totally concur with your analysis: We essentially have a fascist system in place today and
    if you read between the lines in the platforms of key global movers and shakers such as G 20,
    you will note they make no bones about control of the media and implementing a new global currency
    in the coming months.

    Dave Clumpner

  3. Alfred:

    I apologize for the length of this post. But I disagree with your characterization that what we have today is just “capitalism” and not “disaster capitalism.” The original intent behind “capitalism” in the U.S. which came with the American Revolution, was a free market, anti-mercantislist system. A laissez-faire system where the market would be left free to decide all business and economic activity, free from the intervention of government or any other institution. In fact, the role of government was negative: it was mandated that government *refrain* from being involved in the market in any way and instead only ensure that it remained free. Government bureaucrats have since lost that noble free-market vision and purpose, and instead insist on *fixing* everything. Here is a worthwhile quote from John DiLorenzo’s article “Celebrating America’s Capitalist Revolution” (http://www.lewrockwell.com/dilorenzo/dilorenzo72.html)

    “Thus it was that in 1776, the year that Jefferson wrote the Declaration of Independence, so many of the acts of tyranny that King George III was accused of had as their objective the implementation of British mercantilism in the colonies. The American Revolution was at least partly a capitalist, or anti-mercantilist revolution. In the same year that the Declaration of Independence was written Adam Smith published his famous treatise, An Inquiry into the Nature and Causes of the Wealth of Nations. The “Wealth of Nations” is a prolonged attack on the policy of British mercantilism and a defense of its opposite: free trade and the institutions of capitalism (even though the term “capitalism” had not yet been coined).”

    The argument I hear you making, at its core, is the same argument former Fed Chairman Alan Greenspan made at one of the recent Congressional hearings. He spoke of the mistake he had made in trusting and believing in free markets. Paraphrasing, he said that his former world-view, that free markets work, was in error, and now he admitted his error. The only problem with his admission, and your statement, is there haven’t been any truly free markets in existence for the better part of a century! Free markets have become increasingly an extinct species since the early 20th century, and since then have increasingly gone down the path towards “disaster” capitalism: the kind of capitalism in which virtual monopolies run rampant under the guise of a (interconnected and indecipherable) web of subsidiary companies and power/wealth consolidation ad infinitum.

    It’s not that capitalism doesn’t work. If it were real, as in laissez-faire capitalism, where elected representatives did their job and ensured the market remained free, it would work. What we have in the U.S. and increasingly all over the world is what Buckminster Fuller called the Grunch of Giants, or to put it colloquially, corporatocracy. Large multinational corporations now control our governments and major institutions. And they didn’t come into being because of capitalism, but rather through the absence of free-market capitalism parading as capitalism.

    You say capitalism results in inevitable wealth/power consolidation. This is not where capitalism takes us. This is where “disaster” capitalism takes us. True capitalism, à la laissez-faire capitalism, takes us in a very different direction. Wealth/power consolidation is not possible under laissez-faire capitalism. As the free market by its very nature would correct for this through greater competition, thereby spreading the wealth/power. Consolidation of wealth/power only occurs when the free market is inhibited in some way. I.e., when capitalism is not functioning.

    Competition under capitalism may be bad for the profits of any given company if that company doesn’t innovate, differentiate, and produce. The problem is that many large companies that have lost the spirit of innovation and entrepreneurship have instead tried to change the rules of the playing field in lieu of competing. And when corporations succeed in changing the rules of the playing field, that is no longer a free market. That is no longer capitalism.

    Best,
    Dalmazio

  5. Thanks for excellent analysis Catherine. Your information is always helpful. One comment about the discussion:

    It is not “disaster capitalism”. It is just capitalism. Disasters, real or manufactured, are capitalized on, but Klein is wrong about her re-reading of history. Social movements were voilently repressed in those countries where Klein asserts her “shock” theory. Its violent repression, not “disaster capitalism” or “shock” that pushed through the measures discribed in her poor book.

    This is where capitalism takes us: inevitable wealth/power consolidation. The mechanics of this is spelled out by Prof Robert Brenner in his now famous article: “The Origins of Capitalist Development: A Critique of Neo-Smithian Marxism” (This helped set off what is now known as “The Brenner Debate” in historical circles)
    What prominent social scientists have argued for decades concerns the effects of power. Competition under capitalism is bad for profits and there are always power/wealth differentials betweeen corporations. Consolidation and the use of power to disrupt competitors inevitably leads to one corporation of a group of corporations with interlocking directorates control the market and fix prices since profit is the motive.
    I think we need to end capitalism to save ourselves.

  6. For the “shock” of your life read The Shock Doctrine by Naomi Klein. She has an agenda (doesn’t everyone), but she explains the history of Milton Friedman’s Chicago School Ecomomics and how they have used Shock Therapy and Distaster Capitalism to privatize everything from Chile’s copper mines to the US military’s basic services (mess, laundry, reconstruction). Seems that people will agree to anything if times get difficult enough (just like now). Those who disagree seem to go missing or have a “re-educational experience”. This is a very difficult read for a number of reasons. Try to stick with it and you will never look at the “system” the same way again.

    Frankly, I hope she has mis-interpreted the facts and is totally incorrect. You be the judge.

  7. Dismantling the U.K. Welfare State – it is interesting to note that one of the sanctions or punishments for the unemployed is work itself. Working for welfare – (working) slavery as forced labour, (welfare) economic means barely sufficient to maintain life. This argument is about control (work) and power (subsistence) over a section of society which has by a quirk liberated themselves from the prevailing economic system.

    If assaulted this large section of society will morph into a political force which none of the present U.K. political parties will benefit from – in fact they will be held in contempt and possibly finally destroyed. The outlook is at best civil strife at worst civil war.

  8. But I would say its working wonderfully if you happen to be someone who is the recipient of the bailouts. As all you would have to do is use free money to buy hard assets like Gold and then (assuming you are allowed to print legal tender) print up the equivalent amount in money. That way you get free gold, while after six months or so the rest of the countries citizens get lots and lots of new crisp worthless dollar notes to spend.

    That sounds to be working out well to me. Gravy train springs to mind. These guys must be laughing their heads off. Need to be chopped off really though.

  9. Maria:

    What you indeed describe is one possible scenario. Yes, it could happen here.

    When I was in Estonia a few weeks ago, someone said they had gotten a call from a friend who was traveling in the United States. They said that it had become a third world country.

    The phenomenon we are dealing with is global — it is everywhere.

    Catherine

  10. HOLA CATHERINE, I AM FORM MEXICO. IN 1995, WE HAD THE TEQUILA EFFECT; AND THE MONEY WAS DEVALUED ALMOST 300%. BUT BEFORE THAT WE HAD LOTS OF DEVALUATIONS. THE MEXICAN PESO WAS USELESS; INFLATION WAS RAMPANT; AND WE HAD TO USE MILLIONS OF PESOS TO BUY A POUND OF CHEWING GUM. IN 1993, THE GOVERNMENT REMOVED THREE(3) ZEROS FROM THE PESO BILL, CREATING A NEW PESO. OUR MONEY WAS REALLY DEVALUED BY: DEVALUED AND INFLATION !!
    DO YOU THINK THIS WILL HAPPEN HERE IN THE U.S. ? WILL THE GOVERNMENT HAVE TO CHANGE THE CURRENT DOLLAR BILLS DUE TO DEVALUATIONS AND INFLATION? AM I IN A THIRD WORLD COUNTRY AGAIN?
    THANKS, MARIA K.

  11. Hi Catherine

    Just a quick thank you for all your exceptional work – I am based in Europe and you have a following here too – very informative and possibly life saving. As a quick note my belief also is even though we are in the midst of a deflationary spiral I believe the main driving force in all of this is hyper inflation – as banks,companies, hedge funds et al are de-leveraging everything is being sold at fire price sales – however physical production and shipping seems to be imploding at the same time (see Baltic dry index) in the medium to short term future it is my opinion we will likely have a lack of goods and commodities and an exponential increase in the money supply (as of now) = few goods and lots of FIAT paper = sky rocketing prices.

    Then we my see interest rates unthinkable as of today

    GOT GOLD?

    God bless

  12. “The theory is that consumers can keep spending on consumer products without ever having enough money to compete for ownership of the real economy.”
    Dear Catherine, this is the clearest and most sensible explanation that I have seen of the particulars of what the Fed is doing. [I expect there are other reasons also (e.g., keeping the current equivalent of Lords and Squires loyal, as is done in Central and South America; centralizing power)] I also think the real practical meaning of The New World Order is Ruthlessness.

  13. this is an email i sent to Speaker Polosi and Barbara Lee today. i wanted to send to Barny Frank but he doesn’t accept emails from people outside his constituency…

    Dear Speaker/[Ms Lee]…,

    Please forward to me a clear description and reasoning why we (the government and you) are giving bailouts to bankers that clearly have not managed their businesses properly.

    It may not be obvious from your perch that these bank managers are not competent to manage these institutions and the “free” money they have been given at taxpayer’s expense. And why would you be ok with them keeping their exorbitant salaries?

    Why have you not demanded ownership stakes such as stock warrants; aas well as demanding new management and access to seats on their corporate boards?

    This is very upsetting to “us” people earning our livelihood with no safety net.

    I have always supported you and Barney Frank (moved to Berkeley from MA) but it seems like you and he are not standing up and leading and demanding excellence from the people you have given money to. (and B Frank does not accept emails from folks outside his constituency while managing national policy… what gives?)

    Please advise in a timely manner.

    Thanks for serving,

    oren

  15. It depends on your definition of “work”. How far are those who created this mess for their own purposes, willing to go to either MAKE it work (for them) or to put off any kind of reckoning, unless it’s one where the taxpayers get shafted (again, as usual)? In other words, what proof is there that business canNOT be continued as usual?

  16. I totally agree with yr realistic conclusions.

    My boodle is in 3 mo treasuries.

    At research.stlouisfed.org the chart of money supply, after rising gradually for many decades, has gone vertical up.

    Will the value of my boodle in terms of Whole Foods groceries go vertical down?

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