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The concept of the “liquidity trap” is well-known to most: it is that freak outlier in an otherwise spotless Keynesian plane, when due to the need for negative interest rates to boost the economy (usually resulting from that other inevitable Keynesian state: the bursting of an asset bubble) – a structural impossibility according to most economists although an increasingly more probable in Europe – central banks have no choice but to offset a deleveraging private banking sector and directly inject liquidity into the banking sector with the outcome being soaring asset prices, and even more bubbles which will eventually burst only to be replaced with even more failed attempts at reflation. Sadly, very little of this liquidity makes its way to the broad economy as the ongoing recession in the developed world has shown for the 5th year in a row, which in turn makes the liqudity trap even worse, and so on in a closed loop.
Since there is little else in the central bankers’ arsenal that is as effective in boosting the “wealth effect” – which is how they validate their actions to themselves and other economists and politicians – they continue to do ever more QE. And since banks are assured at generating far greater returns on allocated capital in the markets, where they can use the excess deposits they obtain courtesy of the Fed’s generous reserve-a-palooza as initial margin for risk-on trades, the liquidity pipelines remain stuck throughout the world, and loan creation – that traditional money creation pathway – is permanently blocked (as is the case empirically in both the US and Europe, where private-sector loan creation is declining at a record pace).
Everywhere except the one place that has yet to actually engage in conventional quantitative easing: China. At least explicitly, because loan creation by China’s state-controlled entities and otherwise government backstopped banks, is anything but conventional money creation. One can, therefore, claim that China’s loan creation is a form of Quasi-QE whereby banks, constrained from investing in a relatively shallow stock market, and unable to freely transfer the CNY-denominated liquidity abroad, are forced to lend it out knowing that if things turn soure at the end of the day, the PBOC will bail them out. Paradoxically, this “non-QE” is exactly how QE should work in the US and other developed markets.
That’s the long story.
The short story is far simpler.
In order to offset the lack of loan creation by commercial banks, the “Big 4” central banks – Fed, ECB, BOJ and BOE – have had no choice but the open the liquidity spigots to the max. This has resulted in a total developed world “Big 4” central bank balance of just under $10 trillion, of which the bulk of asset additions has taken place since the Lehman collapse.
How does this compare to what China has done? As can be seen on the chart below, in just the past 5 years alone, Chinese bank assets (and by implication liabilities) have grown by an astounding $15 trillion, bringing the total to over $24 trillion, as we showed yesterday. In other words, China has expanded its financial balance sheet by 50% more than the assets of all global central banks combined!
And that is how – in a global centrally-planned regime which is where everyone now is, DM or EM – your flood your economy with liquidity. Perhaps the Fed, ECB or BOJ should hire some PBOC consultants to show them how it’s really done.
Submitted by Dr. Frank Shostak, via The Cobden Centre blog,
According to the popular way of thinking, bubbles are an important cause of economic recessions. The main question posed by experts is how one knows when a bubble is forming. It is held that if the central bankers knew the answer to this question they might be able to prevent bubble formations and thus prevent recessions.
On this, at the World Economic Forum in Davos Switzerland on January 27, 2010, Nobel Laureate in Economics Robert Shiller argued that bubbles could be diagnosed using the same methodology psychologists use to diagnose mental illness. Shiller is of the view that a bubble is a form of psychological malfunction. Hence the solution could be to prepare a checklist similar to what psychologists do to determine if someone is suffering from, say, depression. The key identifying points of a typical bubble according to Shiller, are,
- Sharp increase in the price of an asset.
- Great public excitement about these price increases.
- An accompanying media frenzy.
- Stories of people earning a lot of money, causing envy among people who aren’t.
- Growing interest in the asset class among the general public.
- New era “theories” to justify unprecedented price increases.
- A decline in lending standards.
What Shiller outlines here are various factors that he holds are observed during the formation of bubbles. To describe a thing is, however, not always sufficient to understand the key factors that caused its emergence. In order to understand the causes one needs to establish a proper definition of the object in question. The purpose of a definition is to present the essence, the distinguishing characteristic of the object we are trying to identify. A definition is meant to tell us what the fundamentals or the origins of a particular entity are. On this, the seven points outlined by Shiller tell us nothing about the origins of a typical bubble. They tell us nothing as to why bubbles are bad for economic growth. All that these points do is to provide a possible description of a bubble. To describe an event, however, is not the same thing as to explain it. Without an understanding of the causes of an event it is not possible to counter its emergence.
Now if a price of an asset is the amount of money paid for the asset it follows that for a given amount of a given asset an increase in the price can only come about as a result of an increase in the flow of money to this asset.
The greater the expansion of money is, the higher the increase in the price of an asset is going to be, all other things being equal. We can also say that the greater the expansion of the monetary balloon is, the higher the prices of assets are going to be, all other things being equal. The emergence of a bubble or a monetary balloon need not be always associated with rising prices – for instance if the rate of growth of goods corresponds to the rate of growth of money supply no change in prices will take place.
We suggest that what matters is not whether the emergence of a bubble is associated with price rises but rather with the fact that the emergence of a bubble gives rise to non-productive activities that divert real wealth from wealth generators. The expansion of the money supply, or the monetary balloon, in similarity to a counterfeiter, enables the diversion of real wealth from wealth generating activities to non productive activities.
As the monetary pumping strengthens, the pace of the diversion follows suit. We label various non-productive activities that emerge on the back of the expanding monetary balloon as bubble activities – they were formed by the monetary bubble. Also note that these activities cannot exist without the expansion of money supply that diverts to them real wealth from wealth generating activities.
From this we can infer that the subject matter of bubbles is the expansion of money supply. The key outcome of this expansion is the emergence of non wealth generating activities.
It follows that a bubble is not about strong asset price increases but about the expansion of money supply. In fact, as we have seen, bubbles – i.e. an increase in money supply – can take place without a corresponding increase in prices. Once we have established that an expansion in money supply is what bubbles are all about, we can further infer that the key damage that bubbles generate is by setting non-productive activities, which we have labelled as bubble activities. Furthermore, once it is established that formation of bubbles is about the expansion in money supply, obviously it is the central bank and the fractional reserve banking that are responsible for the formation of bubbles. As a rule, it is the central bank’s monetary pumping that sets in motion an expansion in the monetary balloon.
Hence to prevent the emergence of bubbles one needs to arrest the monetary pumping by the central bank and to curtail the commercial banks’ ability to engage in fractional reserve banking – i.e. in lending out of “thin air”. Once the pace of monetary expansion slows down in response to a tighter central bank stance or in response to commercial banks slowing down on the expansion of lending out of “thin air” this sets in motion the bursting of the bubbles. Remember that a bubble activity cannot fund itself independently of the monetary expansion that diverts to them real wealth from wealth generating activities. (Again bubble activities are non-wealth generating activities).
The so-called economic recession associated with the burst of bubble activities is in fact good news for wealth generators since now more wealth is left at their disposal. (An economic bust, which weakens bubble activities, lays the foundation for a genuine economic growth). Note again that it is the expansion in the monetary balloon that gives rise to bubble activities and not a psychological disposition of individuals in the market place.
Psychology and economics
Psychology was smuggled into economics on the grounds that economics and psychology are inter-related disciplines. However, there is a distinct difference between economics and psychology. Psychology deals with the content of ends. Economics, however, starts with the premise that people are pursuing purposeful conduct. It doesn’t deal with the particular content of various ends.
According to Rothbard,
A man’s ends may be “egoistic” or “altruistic”, “refined” or “vulgar”. They may emphasize the enjoyment of “material goods” and comforts, or they may stress the ascetic life. Economics is not concerned with their content, and its laws apply regardless of the nature of these ends.
Psychology and ethics deal with the content of human ends; they ask, why does the man choose such and such ends, or what ends should men value?
Therefore, economics deals with any given end and with the formal implications of the fact that men have ends and utilize means to attain these ends. Consequently, economics is a separate discipline from psychology. By introducing psychology into economics one obliterates the generality of the theory, and renders it useless. The use of psychology is counterproductive as far as economic analyses are concerned.
Summary and conclusions
Contrary to Shiller, in order to establish that a bubble is forming we don’t need to apply the same methodology employed by psychologists. What we require is the establishment of a correct definition of what bubbles are all about. Once it is done, one discovers that bubbles have nothing to do with some kind psychological malfunction of individuals – they are the result of loose monetary policies of the central bank.
Furthermore, once we observe an increase in the rate of growth of money supply we can confidently say that this sets the platform for bubble activities – for an economic boom.
Conversely, once we observe a decline in the rate of growth of money supply we can confidently say that this lays the foundations for the burst of bubble activities – an economic bust.
Former Clinton administration Labor Secretary Robert Reich explained, saying:
“Of all developed nations, the United States has the most unequal distribution of income, and we’re surging towards every greater inequality.”
America’s 400 richest elites have more wealth than half the population. Jacob Kornbluth’s new documentary film “Inequality for All” examines disturbing truths.
US inequality is at historic highs. Since 1970, America’s economy doubled. The top 1% benefitted hugely. They earn more than 20% of national income. It’s triple their 1970 percentage.
The gap between rich and all others keeps widening. Inequality hurts everyone, says Reich. Since economic recovery began in 2009, America’s top 1% got 95% of the gains.
Adjusted for inflation, median household income keeps declining. Where will most people “get the money they need to keep the economy going,” asked Reich?
“We’re the richest economy in the history of the world. For the majority of Americans not to get the benefits of this extraordinarily prosperous economy, you know, there’s something fundamentally wrong.”
America has less upward mobility than any other developed country. If you’re poor, you’ll stay that way.
If you’re lower middle class, “the cards are going to be stacked against you. You will probably never get anywhere,” says Reich.
“Who is actually looking out for the American worker? The answer is nobody.”
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The nation is headed toward becoming a “100 percent plutocracy.” Inequality this extreme fuels public anger. It hurts economic growth. Force-fed austerity assures worse ahead.
Reich teaches a popular Wealth and Poverty course at UC Berkeley. His book “Beyond Outrage” explains what’s wrong with America’s economy.
It doesn’t work. It benefits the privileged few. It harms most others. Doing so undermines America. Expect worse ahead unless people react, he says.
He’s never been more concerned about things than now. He cites “the corrupting effects of big money in politics,” regressive hard right policies, and unprecedented “wealth and power at the very top.”
Things are “perilously close” to falling apart altogether. People are right to be outraged. It’s a “prerequisite for social change.” It’s vital to “move beyond outrage and take action.”
The stakes are too high to be ignored. Nothing good happens in Washington unless people mobilize, organize and demand it.
“Nothing worth changing in America will actually change unless you and others like you are committed to achieving that change,” he stresses.
So-called US economic recovery is fake. Main Street poverty, unemployment, underemployment, hunger and homelessness are at Depression era levels.
Half of all US households are impoverished or bordering it. Recovery benefitted only America’s most well off. Most others endure deepening deprivation.
According to economist Emmanuel Saez:
“For the first time in nearly 100 years, the percentage of income taken by the top 10 percent of Americans topped 50 percent.”
From 2009 to 2012, “(t)op 1% incomes grew by 31.4% while bottom 99% incomes grew by only 0.4%.” Adjusted for inflation, they declined considerably.
From 2007 – 2009, average real family income declined 17.4%. It’s more than any period since the Great Depression. Wealthy Americans recovered and then some. Conditions for most others went from bad to worse.
According to Saez:
“We need to decide as a society whether this increase in income inequality is efficient and acceptable and, if not, what mix of institutional and tax reforms should be developed to counter it.”
Russell Sage Foundation president Sheldon Danziger said:
“The continued high rate of poverty is no surprise, given ongoing high unemployment, stagnant wages and government spending cuts.”
“Poverty is higher today than it was in 2000, and household incomes are lower. The ‘lost decade’ is likely to turn into ‘two lost decades.’ ”
According to Marx:
“Accumulation of wealth at one pole is at the same time accumulation of misery, agony of toil, slavery, ignorance, brutality, and mental degradation at the opposite pole.”
America’s wealth distribution is extreme. It keeps shifting disproportionately upward. Most people are more than ever on their own.
Financial elites run America. Whatever they want they get. Popular needs go begging. Things go from bad to worse.
In 1962, Michael Harrington’s “The Other America: Poverty in the United States” exposed the nation’s dark side, saying:
“In morality and in justice, every citizen should be committed to abolishing the other America, for it is intolerable that the richest nation in human history should allow such needless suffering.”
“But more than that, if we solve the problem of the other America we will have learned how to solve the problems of all of America.”
Jack Kennedy addressed the issue. In his January 8, 1964 State of the Union address, Lyndon Johnson declared war on poverty.
He barely scratched it. Inequality was severe. Today, it’s unprecedented and growing. It bears repeating. Census data show around half of US households impoverished or bordering it.
Government data most often over-estimate good news and understate what’s bad. Unprecedented numbers of US households are impoverished under protracted Main Street Depression conditions.
Bipartisan harshness assures greater pain and suffering. Over 20% of US households haven’t enough money for food and other essentials.
On November 1, Supplemental Nutrition Assistance Program (SNAP) benefit cuts are coming. One-person households will get $11 per month less.
For 2 people, it’s $20. For three it’s $29. For four it’s $36. Expect more cuts ahead. Food costs are rising. Family incomes are falling. More help is needed. Congress and Obama intend less.
America’s most needy will be harmed most. So will tens of millions of children. They may end up without enough to eat.
America’s great divide is greater than ever. In 2009, around half of US households had no assets. Today it’s more than half.
Most Americans don’t earn enough to live on. Things go from bad to worse. Hardwired inequality is deepening. Casino capitalism takes precedence.
America’s criminal class alone benefits. Ordinary people are swindled. Venal politicians serve wealth, power and privilege. Democrats and Republicans are in lockstep. Few benefit at the expense of most others.
On July 28, AP headlined “Exclusive: Signs of Declining Economic Security,” saying:
“Four out of 5 US adults struggle with joblessness, near poverty or reliance on welfare for at least parts of their lives.”
It’s a disturbing “sign of deteriorating economic security and an elusive American dream.”
“Survey data exclusive to The Associated Press points to an increasingly globalized US economy, the widening gap between rich and poor, and loss of good-paying manufacturing jobs as reasons for the trend.”
Hardship for white Americans is rising. AP-GfK poll numbers show “63 percent of whites called the economy ‘poor.’ ”
Fifty-two-year-old Irene Salyers perhaps spoke for others, saying:
“I think it’s going to get worse. If you do try to go apply for a job, they’re not hiring people, and they’re not paying that much to even go to work.”
Economic insecurity is much worse than government data show. It affects over three-fourths of white Americans.
It’s defined as experiencing unemployment some time during working years or needing government aid to survive.
According to Professor William Julius Wilson:
“It’s time that America comes to understand that many of the nation’s biggest disparities, from education and life expectancy to poverty, are increasingly due to economic class position.”
Government data fall short of explaining things. Conditions are much worse than official reports. Most Americans struggle to get by. Impoverishment or close to it affect them.
It’s harder than ever for millions of disadvantaged households to survive. Their numbers keep growing exponentially. Vital social protections are eroding. It’s happening when they’re most needed.
“By race, nonwhites still have a higher risk of being economically insecure, at 90 percent.”
“But compared with the official poverty rate, some of the biggest jumps under the newer measure are among whites, with more than 76 percent enduring periods of joblessness, life on welfare or near-poverty.”
“By 2030, based on the current trend of widening income inequality, close to 85 percent of all working-age adults in the US will experience bouts of economic insecurity.”
According to Professor Mark Rank:
“Poverty is no longer an issue of ‘them.’ It’s an issue of ‘us.’ Only when poverty is thought of as a mainstream event, rather than a fringe experience that just affects blacks and Hispanics, can we really begin to build broader support for programs that lift people in need.”
Data Professors Tom Hirschl and John Iceland compiled provide more context. They show:
• for the first time in nearly three decades, impoverished single-mother households surpassed or equaled black ones; they exceeded numbers of Hispanic single mother families; and
• numbers of children living in high-poverty neighborhoods increased.
According to a University of Chicago General Social Survey, whites are more pessimistic about their futures than since the depths of the early 1980s.
“Just 45 percent say their family will have a good chance of improving their economic position based on the way things are in America,” said AP.
Polls show over 80% of Americans mostly don’t trust government. Congress’ approval rating is 11%.
It’s barely above its all-time February and August 2012 10% low. Given the margin of error, they’re’s virtually no difference between then and now.
Americans are suffering. Things go from bad to worse. Republicans and Democrats are in lockstep. They’re cutting social protections when they’re most needed.
Expect greater harshness ahead. Most people are fed up. Poll numbers show it. Conditions are far too deplorable to ignore. It remains to be seen what’s next.
A previous article said people power alone can save us. They’re’s no other way.
Stephen Lendman lives in Chicago. He can be reached at firstname.lastname@example.org.
His new book is titled “Banker Occupation: Waging Financial War on Humanity.”
Visit his blog site at sjlendman.blogspot.com.
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- Why Robert Reich cares so passionately about economic inequality (pbs.org)
- ‘Inequality is bad for everyone’: Robert Reich fights against economic imbalance (pbs.org)
- Must-See Movie, “Inequality for All” with Robert Reich, Opens Sept. 27 (huffingtonpost.com)
- More Inequality Updates (madeinamericathebook.wordpress.com)
- Project Censored’s Top 25 Most Censored News Stories from 2012-2013 (consciouslifenews.com)
- “Intervention” (thecosmicsandbar.wordpress.com)
- Germany Speaks Up Against Military Intervention in Syria (novinite.com)
- Yoder says no to military intervention in Syria (kansascity.com)
- China Warns Against Syria Intervention (voanews.com)
- Western Military Intervention in Syria Could Be a Warning to Egypt, Says Estonian Experts (news.err.ee)