A GSE Perspective

A GSE Perspective:
On more than a few occasions over the years I’ve been accused of having an obsession with the GSEs. For some time I’ve viewed these institutions as the key linchpins for a historic Credit Bubble along the lines of John Law’s eighteenth-century Mississippi Bubble. The GSEs, with their implied government backing, forged a fundamental – and momentous - change in the nature of contemporary “money” and Credit. Their financial and economic impact has expanded exponentially since their initial foray into system liquidity backstop operations back with their 1994 bond market/hedge fund “bailout.” I am left to scoff at the CBO’s $25bn estimate for the likely eventual cost to the American taxpayer.

With the GSEs’ quasi-governmental status, the markets have merrily assumed GSE obligations would be, if necessary, backed by the full faith and Credit of the U.S. government. It remains an irrepressible Bubble. Washington (democratic and republican administrations, congress, and the Federal Reserve) and Wall Street were happy to live/thrive with the grey area of the markets’ acceptance of implied government backing. Importantly, this market perception granted the GSEs the extraordinary capacity to create at will contemporary “money” (financial instruments perceived as being safe and liquid) and (extraordinarily appealing) Credit. This “moneyness” of GSE obligations played an instrumental role in profound changes experienced throughout the financial and economic world over the past 15 years. Never in history has an inflationary mechanism enjoyed such capacity to issue endless quantities of “money-like” instruments with nary a public protest or market backlash (at least as long as asset prices were inflating). And even recently, despite heightened market concerns, Freddie was not impeded from expanding its retained portfolio $21bn during June, or 33% annualized.

Investment horizon Summer-Fall 2008 7/20/08

discipline. no impulse purchasing is what is required. no economic turnaround can be expected before spring 2009 at the very earliest. economically, the worst has not been experienced as constrained consumption has not yet hit fully the company bottom lines, which lead to a further round of constraint. any turnaround will require the bottom of housing prices being reached and restarting a float upwards. the fed must continue to reflate until next year. guidance for the next half-year: (its going to get worse!!!) 1. trust in the dollar will experience another round of unpredictable weakening. 2. oil will float up on any dollar weakness (currently 129), but 115-125 a barrel seems about right 3. the dow will eventually head south of 11,000 (currently, 11,500) 4. add to VTI position when dow dips under 11,000 5. recycle trust accounts at Wachovia - late July 6. add to google when it reaches 420-430 7. add to PBW whenever it approaches 17. 8. face ignorance on the muni bonds if they continue to show weakness.

Here's what i saw in March:

we want to continue to remove risk from the downside. I do not trust the market has seen a bottoming. More patience is required to end my fruitless chasing of trends. Long-term we are attempting to step outside any overtly speculative positioning. for now, only our shorting positions are speculative in expectation of the market trending towards 15000. if this expectation proves mistaken, we must suck it up and accept our losses. but by all means, patience.
not unusually i'm continually making the wrong moves with my portfolio. i want to stop the chasing and cut way back on the trading.
short-positioning
we want to make changes to holdings no more than 3 times a month. i continue to expect that the market is going to break through the lower 18000 threshold for the dow. i am overweight on shorts. We will cut half the shorts at 19000 on the low end or 28000 on the high. close the position at either 18500 or 30000. At 30000 we will end our shorting expectations.
long-positioning
We wish to move toward buying index funds as market searches for bottom. We will try to shift balance towards fixed income funds. need to work out a balance. for now, 50-50 stocks and bonds.
At 19000 i will start buying vanguard large cap. adding to the position with every drop of 100 points.
we will buy pbw, vti, vv as market reaches 19000 and more as it falls from there by 100.
bonds: we will add to our postions twice a month
individual stocks:
spwr only at 50.
cash: move to savings account

Retrospective look:

Could not maintain discipline as dow bounced all the way above 13000. got killed on the short position. mistimed sunpower twice. getting hammered on Google. muni bonds so far a big bust.

7/19/08 - a short history of current global economic instabilities.

following wwII, the us assumed the role of world protector/administrator of capitalism. The us would lend its military might to any government, no matter how corrupt, if it was judged to be favorable to capitalism. To further stabilize and extend capitalist economic relations, the us currency became the world currency for settlement of international trade.
from a contemporary perspective, the arrangement might seem a bit like racketeering, something straight out of the godfather, in return for protection from us muscle, the world would accept the dollar as international currency. the dollar being a currency beyond the control of any government but the us. in effect to pay its trade debts, the us has to just go in the back room print dollars and hand them out for the products of the world.
the ascension of the dollar to the role of the world's currency was essential to the maintenance and extension of post wwii captialism. but the fact that the dollar remained outside the effective control of any country but the us, left international holders of the dollar vulenerable to the politics of the us. there is always a temptation to print dollars to meet domestic political needs. the rest of the world is somewhat at the mercy of the good faith of the us government. everybody likes a sugar rush when feeling a bit depressed.
dollars are a price taker, not a price giver...
one systemic check to the oversupply of dollars is simply that holders of the currency will see the value of their money withering away and attempt to counter the slide. with the monetarist reaction, associated with Milton Friedman, holders of the dollar advance the common sense policy of maintaining the value of the dollar by tying it to some unchanging store of value such as gold or some given ratio of dollars to production. but by maintaining stable interest rates in the face of slowing production, the monetarist tight money position will contribute to a further slowing of the economy. finally, it is the dollar is a store of value but that value is ultimately determined by the quantity of goods and services which can be purchased by the dollar.
whose fault is this mess anyway?
the health of the capitalist system of production required the wide distribution and acceptance of an international currency. the pre-eminence of the us, economically and militarily following wwii, moved the dollar into the role of international reserve currency. the dollar's role has permitted a post-war boom and tightening of economic relations into a global capitalist system. yet this system has remained vulnerable to the fact that only one country in this system of global relations, the us, has effective control of the currency. the regime of the dollar has always been susceptible to the political needs of the us. while certainly one of those needs is a strong global economy, other political needs of domestic constituents affecting dollar policies, are not always coincident with the needs of the dollar as reserve currency.
us monetary policy for over a decade can be characterized as a loose dollar policy. the us runs a trade deficit within the global system helping to stimulate the growth of production and trade internationally at the expense of its domestic production. in return, the world uses the accumulated dollars to purchase us debt. this relieves the us from having to balance its trade and helps to keep interest rates low, permitting all manner of leveraged financial speculation and asset inflation, such as the rise in home prices.
who wins, who loses?
the us manufacturing class has lost the historically higher paid union jobs which have been outsourced to countries with lower labor costs. this plays a part in the social phenomena of growing econ inequality in the us. those with assets, such as homes, could temporarily take advantage of financial leverage to increase their personal wealth which could then be used to further leverage their purchase of more assets or simply to gain the financing for a burst of consumption of foreign imports. those with few assets were required to accumulate greater and greater amounts of debt in their effort to realize the american dream of home ownership. finally, the gap between asset inflation in home prices and flat, or decreasing, median incomes popped the housing bubble.
what needs to be done?
for over a decade, the loose dollar regime has been the favored policy of the us in its leadership role within the global capitalist sys. as expected this policy has been more favorable to the us than to other states within the system. the more weaker the economy in question the more vulnerable they find themselves to the whims of dollar policies decided in washington. in general though, the weak dollar regime, has served to keep the system functioning and even providing the fuel for an historically unprecedented boom of production in china and south-east asia.
ultimately, the global system of production and consumption is unbalanced and the dollar glut leads to an insupportable asset inflation in commodities. economic inequality is at the root of the current instability. incomes need to better reflect compensation for productive work. the consumption of the working class provides a necessary measure of value and stimulates further production. the exorbitant incomes and savings of the wealthy for the most part hinder the functioning and expansion of production and services.accumulation of wealth acts as a tax on production. the wealthy clothe greed with an ideological understanding that their money, as savings, is a necessary good for the system allowing interest rates to be lower than otherwise. but savings has little or nothing to do with the interest rate of the dollar. by syphoning off money that should be better distributed as income, it constrains demand and prevents an accurate measure of popular needs.
income maldistribution leads to societal corruption and waste and wears at the equality necessary for a healthy society.

4/13/08 - Inflation Watch

Globalisation and the dollar glut are pushing inflation of commodity prices to dangerous levels. Captialist organization is running up against inherent contradiction that land, labor and money are not commodities.
Following Arrighi, we can expect a turn from the free-market dynamics of finance captial, balanced on a weakening dollar, to calls for greater regulation of home markets and leveraged finance. Profit margins will be hit by along several dimensions in the present conjuncture.
1.) the added costs of raw materials based on extending global demand and financial speculation against the dollar, 2.) higher labor costs following increased regulation of home markets hit by the rising cost of food and inputs, 3.) increased regulation intending to prevent the environmental deterioration of the home market and global landscape, 4.) calls for regulatory protection against leveraged financial speculation which has resulted in the present credit crisis and the rising wave of global inflation.
Despite international calls for strengthening the dollar, the us can be expected to maintain the dollar at its inflationary interest rate of 2% in order to try to move the economy from recession. Global inflation strains can be expected to offset these efforts by the us to jump start the economy. After experiencing a nice rise in exports at the start of the year, the current account balance has again started to rise as foreign econs cut back on their purchases.
A Way Out?
the dollar must firm or replacements proposed. this is definitely long term. a world wide recession would have some effect on relieving commodity pressure, but perhaps not as much as desired.a return to feudalisma resurgence of nationalist regulation, subsidizing necessary commodities. the prices of land, labor are not going to be easily offset even by recession.perhaps this is too bearish a prediction. in any case, growth rates will slow globally and profit margins be strained. if liquidity can be restored, the stronger will start to outmuscle the weaker companies.global penetration will be retarded at the expense of a greater turn towards nationalism and localism. not so very appetizing a prospect.
A Still Strengthening East Asia?
Asia Bubble Watch:April 8 – Bloomberg (James Peng): “Taiwan’s export growth unexpectedly accelerated in March, rising at the fastest pace in two years as customers in China, Southeast Asia and India bought more of the island's electronics. Overseas shipments rose 22.8% from a year earlier after gaining 18.5% in February…”
April 9 – Bloomberg (Yu-huay Sun): “Taiwan’s energy use rose for the eighth straight month in February on increased demand from manufacturers… Energy consumption climbed 10.1% to the equivalent of 8.83 million kiloliters of oil, or about 1.92 million barrels a day…”
April 10 – Bloomberg (Shamim Adam): “Singapore’s economy rebounded in the first quarter… Gross domestic product grew an annualized 16.9% in the three months ended March…”
Income Inequality
April 8 – Financial Times (John Plender): “Income inequality in the US is at its highest since that most doom-laden of years: 1929. Throughout the main English-speaking economies, earnings disparities have reached extremes not seen since the age of The Great Gatsby. Much like this decade, the 1920s were a period of strong corporate profits growth and increasing household debt. Awash with easy money, Wall Street became hooked on what the economist J.K. Galbraith in that subsequent seminal work on the period - The Great Crash- called ‘the magic of leverage’: the ability to increase returns through borrowing. Investment trusts provided the vehicle for this financial merry-go-round, in which one investment trust would ‘sponsor’ another investment trust, which would in turn sponsor a further investment trust. This paper-shuffling multiplication of risk bears a remarkable resemblance to the slicing and dicing of risk in highly leveraged structured credit markets today. In the 1930s, it ended with bank failures and the Great Depression. Now, after decades of ‘financialisation’ in the US and other Anglophone economies, whereby financial services have increased their share of gross domestic product, banks are being bailed out - using public money - in an effort to ensure the same does not happen again. From a political perspective the notable feature of the inegalitarian, free-market era that began in the 1980s is how little backlash there has been against the stagnation of ordinary people’s earnings… Yet there are signs that the mix of policies and economic circumstances that gave a protracted laisser-passer to the rich and to business is coming to an end. This is potentially dangerous territory.”

April 9 – Bloomberg (Courtney Schlisserman): “The difference in incomes between the richest and poorest U.S. families has widened since 1998 as unemployment failed to decline to prior lows and tax cuts benefited the wealthy, a private study showed. Average incomes for the bottom fifth, adjusted for inflation, dropped 2.5% in the eight years that ended in 2006, compared with a 9.1% gain for the top group, according to…the Economic Policy Institute…”
A sideways market for the next 2-3 years?
May 26 - Inflation fears may be overly high. Commodity prices can't be expected to go much higher and still permit adequate profits. of course, what does adequate mean? most likely, commodity prices will continue to rise but not at the same pace. at the same time, commodity prices will be hitting profit margins in a large part of the economy where costs can not easily be passed on. it may be just the time to take 5% fixed income plays as 5% rises in the general economy may be difficult in the next 2-3 years.
May 31 - however, inflation will take time to work itself into production from its base in commodities. perhaps taking as long as 18 months to have its full effects.

4/23/08 Arrighi 2005

Does dollar sovereignty underwrite US military strength, making possible funding for the deficits incurred by the military? Or does military strength secure the dollar's continued function as reserve currency?
US leadership after WWII, required resurrecting the destroyed capitalist centers of Europe. this could only be politically made palatable by inflating the Soviet threat. 'to scare hell out of the american people', according to Truman. this spread the policies of Keynsian-new dealism to europe. the war on terror, on the other hand, only serves in the current conjucture to further undermine the dollar's position as reserve currency, without stimulating production. in a world of excess liquidity.
the power logics of territory and capital accumulation. never-ending accumulatin requires a power which can extend geographically with the reach of capitalist expansion.
David Harvey on capitalist production of space:
"The aggregate effect is . . . that capitalism perpetually seeks to create a geographical landscape to facilitate its activities at one point in time only to have to destroy it and build a wholly different landscape at a later point in time to accommodate its perpetual thirst for endless capital accumulation. Thus is the history of creative destruction written into the landscape of the actual historical geography of capital accumulation"

4/4/08 Johnny Boy and the Future of American Militarism

As american econ power wanes in preference to the growing dynamism of south-east asia, militarily the us remains unchallengeable. however, the benefits of having the world's stongest military versus its expense have become increasingly problematic since vietnam demonstrated that a relatively undeveloped country could challenge and defeat the mightiest. iraq is again demonstrating the limits to us military projections. as costs balloon while the economy slouches toward recession this elective war appears glaringly unjustifiable to the american electorate. thus, johnny boy's conundrum, but in the long run america's question, other than a keynsian stimulus, how do we benefit from the costs of the military. as long as the world supports the dollar as reserve currency, the costs are subsidized. meanwhile, infationary pressures mount within the global dollar economy.

4/3/08 New Mexico perspectives and update on market

The government continues to innovate means to unfreeze credit markets, accepting unwanted debt from the largest investment houses. the game remains the only one in town, to assert american finance at the center of global capitalism. This requires that deleveraging of speculation be unwound in order to restart the leveraging excesses anew. but the Fed seems to fear the consequences for the global credit markets and dollar superiority of letting bad debt fail. thus the unwinding of leverage is being simply put off with the idea that with sufficient passage of time the bad debt will again prove liquid. can this strategy succeed? a guess requires a return to survey the economy.
Financial wealth has been dependent upon the bet of leveraging on constantly appreciating assets and commodities, coincident with a rapid growth in dollar-backed debt vehicles in global finance circuits. South-east asia has become the world's factory. so-far these economies have been unable, or unwilling, to absorb their surplus. They remain overly dependent upon exports, especially to the us, and thus accumulate dollar debts. these dollar debts possessed by foreign interests in the form of treasury bills allow americans to consume with a dollar gradually losing value.
it can be expected that south-east asia will in time acquire greater momentum of their domestic economies, allowing a greater portion of the surplus to stay at home. this domestic enlargement of their econs will also provide greater freedom from the present need to support a devaluing dollar.
for its part, the us must protect the great advantages adhering to the dollar's role as reserve currency. the fed is currently involved in emergency actions to provide liquidity to global credit markets, this is having an historic weakening in confidence in the dollar. global inflation of commodities is one symptom of this erosion of confidence. the more rescue operations engaged, the weaker the dollar's appeal.
we can expect that the fed will not lower further the discount rate. confidence is already too shaky in the dollar. the gov will attempt to reflate the housing market, to put a floor under the fall in prices through tax policy allowing tax deductions for buyers of foreclosed housing and extending fed guaranteed home mortgages to a wider range of homes. a floor may be reached, but the rapid appreciation of home prices will go missing without a return to lax mortgage lending standards. but future securitization and leveraged speculation on home assets will be a long time in returning.
what might play the future role of housing for leveraged speculation? long-term, dollars will pump into emerging markets
the dollar's value must be defended if it is to take advantage of its primacy in global finance to invest and extract surplus from foreign production.
long term investment: 25% should be in emerging markets, though there will be abrupt ups and downs. the us has advantages in finance, technoloy, biotech and maybe green tech. of course, commodities and their producers, as well as military suppliers are highly profitable.
specific stocks: corning, comcast

3/18/08 Investment Strategies

3/18/08 Investment Strategies
Dow closes at 12396The market closed up 420 pts.
Mergers and Acquisitions?
The action by the fed to open the discount window to investment banks at 3.25% loans for 30 (90?) days, not done since the depression is probably more the reason for the big market move than a further large drop in the fed fund rate. By being able to borrow at the low rate, investment banks should be able to put off trying to sell their asset backed securities, which in fact the fed will accept as collateral for their loans. This should provide a great boost in liquidity. Meanwhile, the asset backed securities will continue to drop in market value as the housing market sees no near-end to its drop. This continue fall in the value of these loans should continue to depress lending between institutions. but, thanks to the fed offer of use of the discount window, will borrowing from other finance groups be necessary. the new borrowing will allow leverage to again function but in a recession lending possiblities are greatly reduced. Perhaps, we can expect mergers and acquisitions to gain momentum now. Speculation, as well.
3/20/08
Dow Closes 12361
Has the Fed opening of the Discount window to the largest investment houses put a floor under the market by fending off the credit crunch? Analyst Bove, who called the July drop in financials, now characterizes financials as in a historic buy opportunity. But the search for the liquidity of treasuries in the repo market remains in panic mode. Will the trickle down in liquidity pick up speed to unfreeze the market for asset-backed securities?
Personal Investing
we want to continue to remove risk from the downside. I do not trust the market has seen a bottoming. More patience is required to end my fruitless chasing of trends. Long-term we are attempting to step outside any overtly speculative positioning. for now, only our shorting positions are speculative in expectation of the market trending towards 15000. if this expectation proves mistaken, we must suck it up and accept our losses. but by all means, patience.
not unusually i'm continually making the wrong moves with my portfolio. i want to stop the chasing and cut way back on the trading.
short-positioning
we want to make changes to holdings no more than 3 times a month. i continue to expect that the market is going to break through the lower 18000 threshold for the dow. i am overweight on shorts. We will cut half the shorts at 19000 on the low end or 28000 on the high. close the position at either 18500 or 30000. At 30000 we will end our shorting expectations.
long-positioning
We wish to move toward buying index funds as market searches for bottom. We will try to shift balance towards fixed income funds. need to work out a balance. for now, 50-50 stocks and bonds.
At 19000 i will start buying vanguard large cap. adding to the position with every drop of 100 points.
we will buy pbw, vti, vv as market reaches 19000 and more as it falls from there by 100.
bonds: we will add to our postions twice a month
individual stocks:
spwr only at 50.
cash: move to savings account

031708-TheCreditCrunchDeepens.txt

03/17/08 Dollar's Fall
Undoubtedly, the continued reach of US military power requires that the dollar remain the world's reserve currency.
What's new in the profile of this recession?
I. Persistent globally high commodity prices
The loose dollar regime architected by the Fed since Greenspan has encouraged the further hollowing out of US manufacturing by the outsourcing of investment to Asia resulting in the historical boom in capitalist production in China and India. The demands of this global production boom has led to a surge in commodity prices threatening to undermine any solitary efforts by nations to stimulate their economies as the prospect of recession grows.
II The Credit Crunch
the onset of the global downturn is a crisis in liquidity as the debt instruments which allowed the us to continue its rate of consumption while running current account deficits now show a frightening fragility in their architecture. As the Fed pours more money to shore up bad debt, the prices of commodities rises in parallel. Thus the weak dollar regime generalized infationary pressures world-wide.
III The Dollar Crisis
Fed stimulus and bail-outs has the sense of desperation. Rather than fearing inflationary consequences, the Fed appears to regard the crisis in liquidity as the crisis of the dollar.
Europe has elected to try to fight the inflationary effects of the dollar's fall by refusing to lower interest rates in tandem with the US. this will prevent a rise in US imports that might otherwise help pull the US from recession.
Japan has watched its currency fall under 100yen to a dollar with devasting consequences for the ability of its export markets to compete. this will close off another import market needed for an american turn-around.
Currency reserves of dollars held by foreign countries are getting hammered.
IV The Global Climate Crisis.
V. The domestic economy's split into Haves and Have-nots
VI. The way forward
the liquidity crunch must be held off at all costs seems to be the Feds message. the world econ powers will demand that the US dollar avoid further downfall. This will cut off an export-led recovery for the US in return for the dollar retaining its position as the world's reserve currency.
Asian economies must start to reorientate production from an emphasis on export and further domestic investments. This will allow for the eventual displacement of the dollar's prominence.
CreditBubbleBulletin March 10 2008
. When the seemingly irrepressible bubble in Wall Street finance was inflating, aggressive Federal Reserve rate cuts fed quickly into speculative leveraging; heightened demand for securitizations; aggressive lending in the asset markets; asset inflation; and the inflation (of volume and prices) of myriad credit instruments with perceived limited liquidity and credit risk (certainly including ABS, MBS and agency debt, along with more sophisticated Wall Street debt instruments and structures).
The Fed didn’t really need to concern itself with the dollar. Not only were foreign financial institutions rushing in to play the boom in US "structured finance", the US credit system was creating perceived "money"-like securities that were the envy of the world. As fast as our trade deficits and speculative outflows flooded the world with dollar liquidity, this finance would return to find a perceived "safe and secure" home through various monetary processes right back into our asset-based securitization markets. It was a bubble of historic proportions and it’s all laid out on the L.107 page in the Fed’s Z.1 report.
We haven’t heard much of the "Bretton Woods II" nonsense lately. Somehow, everyone wanted to make believe that we would always enjoy the luxury of trading endless new securities for imported energy, commodities, capital equipment, cheap electronics, and all the consumer goods we could ever dream of. The problem was that our credit system was issuing ever larger quantities of increasingly suspect financial claims (well documented in the Fed’s "Flow of Funds").
Well, the entire world has become aware of our situation and will be less than keen to accumulate more of our debt. The Fed’s willingness to cut rates so drastically in the midst of faltering confidence and heightened inflationary pressures is certainly exacerbating the very dangerous dislocation that has erupted in the agency, MBS and investment-grade corporate markets.
For the year, total credit (non-financial and financial) expanded a record $3.998 trillion (8.9%) to $48.808 trillion. This was a moderate increase from 2006’s growth of $3.859 trillion (9.4%), and compares to 2005’s $3.310 trillion, 2004’s $3.178 trillion, 2003’s $2.779 trillion, 2002’s $2.781 trillion, 2001’s $2.020 trillion, and 2000’s $1.679 trillion. Total credit market debt averaged $2.500 trillion annual growth over the 10-year period 1997 to 2006. Non-financial credit increased $2.351 trillion (8.1%) in 2007, compared with the previous year’s $2.334 trillion. Financial credit surged $1.569 trillion (11.1%), up from 2006’s $1.273 trillion (9.9%) and 2005’s $1.015 trillion (8.5%). It is worth noting that financial sector credit growth averaged about $500 billion annually during the nineties.
In true bubble blow-off fashion, total corporate debt expanded at a 12% annualized rate during the fourth quarter, with 2007's growth of 11.6% the strongest since 1998. Now that bubble has burst as well. We’re now poised for a year of significantly slower debt growth - a serious dilemma for both the highly over-leveraged financial sector and the deeply maladjusted US bubble economy. The negative effects to the real economy from a lack of credit are becoming increasingly evident.
3/18/2008Dow Gains 420"i'm going to place my bet with the guy with printing press for dollars"
Mergers and Acquisitions?
The action by the fed to open the discount window to investment banks at 3.25% loans for 30 (90?) days, not done since the depression, is probably more the reason for the big market move than a further large drop in the fed fund rate by 75 basis points. By being able to borrow at the low rate, investment banks should be able to put off trying to sell their asset backed securities, which in fact the fed will accept as collateral for their loans. This should provide a great boost in liquidity. Meanwhile, the asset backed securities will continue to drop in market value as the housing market sees no near-end to its drop. This continue fall in the value of these loans should continue to depress lending between institutions. but, thanks to the fed offer of use of the discount window, will borrowing from other finance groups be necessary. the new borrowing will allow leverage to again function but in a recession lending possiblities are greatly reduced. Perhaps, we can expect mergers and acquisitions to gain momentum now. Meanwhile, commodity inflation will renew its rise, placing growing strains on asian and european economies, and lessening the effect of the rate cut stimulating the economy.

Giovanni Arrighi on Brenner 3/2003

Brenner's history of the global economy from boom to bubble, a posteriori attempts to delineate a endogenous logic in world capitalist development. inter-capitalist relations are structured on a logic of uneven development leading to overproduction constantly threatening to lower the rate of profit, leading to the long downturn of development from 1973-1993. Government features as the one exogenous actor functioning to try to stem a destruction of low-profit captial.
Arrighi questions Brenner's choice of remedy to the capitalist crisis in the destruction of capital through a prolonged depression. Is this ever a politically possible option for the world's economies? Brennar seems to criticize efforts by government to deflect the destruction of high-cost, low-profit capital which would end in depression, but which Brennar maintains is the only means to restore adequate profits.
"The central thesis underlying all Brenner’s contentions is that the persistence of relative stagnation in the world economy at large over the last thirty years has been due to ‘too little exit’ and ‘too much entry’—too little and too much, that is, relative to what would be required in order to restore profitability in manufacturing to the level it had attained during the long boom of the 1950s and 1960s. As we have seen, Brenner traces this tendency to the mutually reinforcing action of the behaviour of higher-cost incumbent firms and the policies of the governments of the world’s three largest economies."
Arrighi posits that recovery from the era of stagnation can be expected to follow a pattern not dissimilar to that which brought about the belle epoc at the turn of the 20th century after a similiar period of capitalist stagnation from 1873-1896.
"As argued in detail elsewhere, and further specified in a later section of this article, this upturn can be traced to a response to system-wide intensifications of competition that has characterized world capitalism from its earliest, pre-industrial beginnings right up to the present. This response consists of a system-wide tendency, centred on the leading capitalist economy of the epoch, towards the ‘financialization’ of processes of capital accumulation. Integral to the transformation of inter-capitalist competition from a positive- into a negative-sum game, this tendency has also acted as a key mechanism for restoring profitability, at least temporarily, in the declining but still hegemonic centres of world capitalism. From this standpoint we can detect resemblances, not just between the great depression of 1873–96 and the long downturn of 1973–93, but also between the Edwardian belle époque and the US economic revival and great euphoria of the 1990s"
Arrighi in comparing the long downturn of the late 19th century to that described by Brenner as occuring between 1973-1993, points out that the earlier period was dissimilar in that capacity remained high and prices consistently tended lower, whereas in the latest downturn inflation has been a problem accompanying unused capacity. Sweezy and Magdoff in their analysis of the 70s and early 80s found the cause of this discrepancy among the 2 periods in the appearance of monopoly capital, which made price cuts unnecessary. currently econ analysis does not make use of monopoly production conditions to explain price levels. globalization is accepted as having made monopoly control of markets unusual. nevertheless, monopoly conditions in raw material extraction would seem to be an exception with its undeniable direct effect on price inflation.
A survey of effects of the global surge in commodity prices.
a. inflation of raw material costs will strain the bottom-line of less efficient capitals, threatening their destruction.
b. raw material prices are approaching heights which may allow more sustainable alternative supplies to be economically competitive. e.g. organic produce, solar energy,...
c. the boom in commodity prices is approaching that threshold which can make viable alternative, more sustainable production.
d. the cost of labor power must follow the rise of raw commodities. the days of cheap exploitation of the earth's resources is drawing to a close.
e. commodity producers will face increasing demands for nationalization. not just oil any longer, but bauxite, coal, copper, even wheat and corn.
f. the rising price of commodities will require that governments allocate subsidies for life's necessities. alternatively, incomes must rise to offset commodity prices.
among the most serious misgivings i have regarding another clinton presidency is the tendency to continue to praise bill's balanced budget idolotry and to criticize greenspan's interest rate cuts. of course, one could not have existed without the other. without greenspan's push of lowered interest rates, recession would have hit the US severely before 2001. the stock market boom helped then to enable a balanced budget.

030208-dollarDevaluationProspects.txt

keeping it simple
dollar devaluation. globally, the commodity asset bubble strengthens, putting a greater strain on productivity. in short, inflation is generalized throughout the world economy. inflation has more harmful effects on those economies with a lower standard of living. dollar devaluation leading to unprecedented rises in the costs of food and energy. Additionally, the dollar has the advantages of seignurage to discount some of the inflationary effects and reducing the value of dollar reserves held by foreign governments. dollar devaluation is exporting the strains of the us economy globally.
possible reactions.
finally, dollar devaluation with commodity inflation will undermine confidence in the dollar and lead to challenges to the dollar's role of maintaining value as international currency.
so far the euro zone has attempted to reduce the infationary impact of the dollar's fall by refusing to follow the dollar in devaluation. this will limit the effect of stimulus to us exports that might be expected from the dollar's decline. southeast asian countries will additionally attempt to maintain their export market share by devaluaing their own currencies in line with the dollar. this will threaten generalized inflation throughout the region.
almost certainly the bubble in commodities must be squeezed before areas other than the us can reflate. but how? the oil producers will simply lower supplies to keep prices high. perhaps the prices of other raw goods sectors are not so susceptible to concerted price actions. coal, potassium, sillicon, gold, copper, etc. perhaps, wheat, corn and foodstuffs even less. hopefully that will be the case and much more food can be brought online with government subsidies. perhaps china will lead the way here to a rationalization and greater efficiency in its agriculture.
profits worldwide will tend lower as the us enters recession in spring 2008. lax monetary policy and gov stimulus will help the us and the world econ avoid the worst. but the consequent inflationary effects of dollar devaluation will considerably weaken growth in south-east asia and even stop growth in euroland.

2/25/08 Global Asset and Commodity Bubble

The global asset bubble in commodities, food and energy does seem new and frightening in the post war II world. the only way to pop the bubble would seem to be a severe world econ deceleration in growth. eventually the energy markets will put an unbearable squeeze on profits, predictably hitting first those industializing asian countries which require the highest proportion of energy inputs. the lower us dollar is squeezing asia through high energy prices. the only long-term way out is the development of sustainable alternative sources. how long will that take? the bubble in food and energy will require a new approach to the dollar as the world reserve currency. slowly and painfully the world will have to wean itself from the debt engine of the us.
The boom in commodities and resource prices may be indicative of a looming crisis of profitability, as speculation focuses on the purchase of fixed stores of value rather than upon investments in their productive manufacture. excess liquidity is likely as much the source of inflating commodity prices as industrial demand. the rise in commodity prices caused by an increase in world demand receives the jolt which has resulted in a commodity bubble from the excess liquidity stemming from the loose dollar regime of the us. this inflation portends a busting of bottom-line profits world-wide. a much faster and deeper consolidation and concentration of profitable manufacturing capital.
the fed's actions in lowering the fed funds rate is generalizing the pain of america's economic problems throughout the world. pushing up inflation world-wide and squeezing profits and growth rates.

020508 - A Living Wage

globally the costs of living are rising with the surge in prices for energy, food, housing and the increasing push of environmental distress. Shockingly these essential dimensions of a higher cost of living are recorded in the Us as falling outside of the factors of "core inflation".