Wednesday, May 27, 2009
From an article in the Financial Times by Ambrose Evans-Pritchard:
It seems that from November 1921, the magnates of German industry decided that the general situation must deteriorate before it could improve; runaway inflation to wipe out Germany's debt, bring the state to its knees before them, exhaust the working people, and leave the great capitalists alone as masters of the situation. The mark fell steadily throughout 1922, and its fall became precipitous when the Ruhr was occupied.
The reporter's reference to Confucian culture as a reason for Chnese objections is quite humorous. I'm not aware of people from any culture that appreciates having the value of its assets diminished through deliberate government policy.
Richard Fisher, president of the Dallas Federal Reserve Bank, said: "Senior officials of the Chinese government grilled me about whether or not we are going to monetise the actions of our legislature."
"I must have been asked about that a hundred times in China. I was asked at every single meeting about our purchases of Treasuries. That seemed to be the principal preoccupation of those that were invested with their surpluses mostly in the United States," he told the Wall Street Journal.
His recent trip to the Far East appears to have been a stark reminder that Asia's "Confucian" culture of right action does not look kindly on the insouciant policy of printing money by Anglo-Saxons.
With that said, I'm still a deflationist, for the reasons presented by Mike Whitney yesterday:
It is important to note that the Chinese concerns and Whitney's deflationary perspective are not contradictory. It is possible for economies around the world to continue to contract, even as the US deliberately orchestrates a decline in the value of the dollar. In this, Americans would experience the worst of all possible worlds, domestic deflation and continued job losses even as the cost of imported goods increased dramatically.
The economy is in the grip of deflation. Commercial banks are stockpiling excess reserves (more than $850 billion in less than a year) to prepare for future downgrades, write-offs, defaults and foreclosures. That's deflation. Consumers are cutting back on discretionary spending; driving, eating out, shopping, vacations, hotels, air travel. More deflation. Businesses are laying off employees, slashing inventory, abandoning plans for expansion or reinvestment. More deflation. Banks are trimming credit lines, calling in loans and raising standards for mortgages, credit cards and commercial real estate. Still more deflation. Bernanke has opened the liquidity valves to full-blast, but consumers are backing off; they're too mired in debt to borrow, so the money sits idle in bank vaults while the economy continues to slump.
In such a situation, American capitalists could achieve many of the goals described by Broue in the context of German capital in 1923. Whereas the German capitalists hoped to inflate their way out of reparations, the American ones would likewise seek to inflate their way out of its foreign debt through currency devaluation. Whereas German capitalists wanted to destroy the autonomy of the working class, American ones want to eliminate what little remains of the social protections of the Great Society and the New Deal. In each instance, they have decided that the general situation must deteriorate before it could improve.
Could it get as bad here as Germany as 1923? Doubtful. But when finance capital plays these sorts of games, the door is opened to all sorts of unpredictable consequences. Indeed, the phrase the law of unintended consequences now hints at ominous, heretofore inconceivable possibilities.