Think of this as Volume 17, Number 45 of the newsletter I have written weekly since March, 1997. Enjoy.
When your politics is rejected, you feel rejected. When you feel rejected, you predict disaster. When you predict disaster, you dump everything for gold or Bitcoins. When you dump everything for gold or bitcoins you feed a disaster. When you feed a disaster you get a disaster, but not the kind you want.
There is a growing chorus predicting imminent disaster for the U.S. economy. They see the dollar becoming worthless, or stocks becoming worthless. They see the economy falling into a black hole.
What we have faced, since 2009, is basically a strike by big money. Trillions of dollars are sitting in vaults, unused. The purpose of global banking policy is to break the strike.
Strikes are traditionally broken by employers bringing in new employees, called strike-breakers. Bankers are trying to break the money strike by creating new money, and seeing that money get a return, to force money on strike to pay a price for staying off the job.
This brings us to the basic question of what's money. The apocalyptic crowd thinks that all money is money, that all money is created equal. It's not. Only money that is employed is money, only money that's working, in the market place, trying to create value, is really money. The other money, whether parked in a vault, in cash, or in Bitcoins, is just potential money.
All this brings me back to the story of Aladdin's Cave. What were all those jewels, all that gold, doing while it was in the cave? They weren't money. It wasn't visible to the rest of society. The Baghdad markets went on as before. They did value gold and jewels very highly, because there was not much to trade. But the economy kept rolling.
What happened after Aladdin returned to Baghdad, with all those jewels and all that gold? At first, it was a stimulus. But the economy quickly adjusted, and the value of gold and jewels fell precipitously. A wise Aladdin might try to keep much of his hoard out of the market, spending it slowly, as the economy caught up. But it would still be the economy that defined money, and the value of jewels or gold. And there would be constant downward pressure on the value of jewels or gold, as traders would know a great hoard was out there and might be sprung onto them at any time.
That's what is going on now. The jewels and gold in this case represent money on strike, money sitting in corporate vaults, money that's not in the economy. The value of cash is not depreciating, even as central banks pump more-and-more cash into the economy, because much of that cash is going into assets, and not going to work.
Stocks are just highly fungible assets. They're not always “risk capital,” as CNBC insists. Not all money in stocks is “going to work.”
That's because the treasurers who control the biggest stocks don't need the money. They have more than they need. They don't want to put people to work: they're part of the strike. So what do they do with it?
They have two choices:
- When a company like Apple holds hundreds of billions of dollars in cash, it doesn't really need to sell stock to keep going. It buys back stock. It may pay a dividend. It's encouraged to, in essence, give the cash back and keep it moving. But it doesn't.
- Berkshire-Hathaway holds $40 billion of cash. It's such a big pile that Berkshire-Hathaway has been buying whole companies, operating companies like Heinz. Berkshire-Hathaway, the reporters claim, is putting its money to work.
Apple's action reduces the supply of stock. It's the more common course. That action, repeated hundreds of times, drives the limited amount of stock in circulation higher in price. Berkshire-Hathaway's action, while more noble, has the same effect. When it takes out whole companies, it too reduces the amount of stock available to buy, and drives the price up.
High stock prices, in short, are a product of underemployed money. If money were pulled out of vaults and went to work, if it really went into new, risky ventures, the relative value of stocks would go down.
Meanwhile, what's the Armageddon caucus doing? They're sticking money into the equivalent of mattresses, buying things like Bitcoin. They're talking up gold. They're doing anything but keeping their money employed. They're joining the strike.
It's a mystery to these people how currencies can remain valuable with central banks continuing to pump out more money. Simple. Much of that money is joining the strike, because the money is going to the wrong people. It's going to banks, and going to rich people who already have money.
The best way to break the money strike isn't for government to issue money. It's for government to put money to work, for government to spend money, putting people to work who will then spend the money. But the Armageddon caucus has used politics to close off this solution, crying “debt debt debt,” forcing unprecedented amounts of austerity on global economies as a result.
That's not entirely bad in the long run, but in the long run we're all dead. It's ridiculous in the short run.
Back in the early 1970s, Richard Nixon said “we're all Keynsians now.” It was assumed that fiscal policy, manipulating public debt up when the economy was poor, down when it was doing well, was the only way to run a country. They were challenged by Milton Friedman's monetarists, who saw the money supply, run by central bankers, as the key to growth. They believed solely in monetary policy.
Today, most governments practice Austrian economics, which holds that depressions are good, that they teach a lesson, and that fiscal policy is a horrible tool for managing economic growth. This is what those preaching Armageddon believe in, believing in Hayek as firmly as workers 100 years ago believed in Marx. This has left us with just one tool, monetary policy, pumping out enough money to end the money strike, and it's not a great solution. It's just the only one we have.
Spending money, putting money to work in the form of public works or driving economic change, would end the money strike. Borrowing the money that is unemployed and forcing it back to work would, in time, break the money strike and cause stock prices to fall. So would forcing up costs by raising minimum wages. This would take money out of the hands of the strikers and put it into the hands of people who will spend it.
The Armageddon caucus doesn't see how their very actions are keeping the stock market bubble rising. They think that, if enough money goes on strike, the stock market fever will break. They think there's some arbitrary value at which stock prices have to “crash.” But bankers won't let the money strike succeed. They will keep pumping out new money, feeding cash into the economic car.
Which brings me to the final irony in all this. It's policies defined as “liberal” that will break the back of the money strike, and drive the stock market down. Borrowing and spending, the use of fiscal policy, a policy opposite to the one the Armageddon caucus favors, will break the money strike and pop the stock market bubble.
This economy, as I've said before, has a lot in common with the 1970s. This time, our politics, has much in common with it. The 2010s are a fun-house mirror held up to the 70s, a sort of bizarro version of it. Back then people thought you could spend your way to heaven, and of course you couldn't. Today people think that monetary manipulation is the way to heaven, and of course it isn't.
What works is balance. What works is the use of both monetary and fiscal policy, in tandem, to reduce the impact of speculation and keep economies rolling, to empty Aladdin's cave without crashing the value of jewels and gold.
But our economic debates are equipped today with ideological blinders, ignoring the complexity of reality. And against this stupidity the gods themselves contend in vain.