Perhaps the most disturbing of all of the news, at first glance, does not relate to economics. This is the incident between the US Navy and the Chinese Navy. For those that are unaware of the incident, Chinese ships harassed a US Navy (probably) spy ship in international waters (you might wish to read here for the incident), leading the US to send armed escorts to support the ship. The reason I mention this is that one of the curiosities is that the mainstream press has completely failed (at least in the articles that I have read) to link the incident to the news of the Chinese Premier expressing concern over the value of their holdings of US debt. The two incidents are very likely linked.
Essentially, China is firing an economic warning shot, and is indicating exactly who is holding the stick over whom. I wrote of a similar incident quite a long while ago in a post on China's mercantilism, in which China indirectly threatened to flatten the $US over a trade dispute. This looks like a re-run of the threat, but with an added military dimension. Such use of power (assuming this is the case) will likely not be going down well in the US, and will reinforce the recognition that, one way or another, the US must face down the Chinese threat over the $US. At this point, we have to ask about what kind of man Obama really is, as this will be crucial to how this will play out. I have no clear idea of this, so will leave you to speculate on this question. The one thing I am certain of, is that within policy discussions in both Washington and China, this massive shift in power, and how to manage it, will later have profound effects on the world economy.
Meanwhile, in the US, it appears that the US government is ever more determined to dig the economic hole it is in ever deeper. The ink on the first 'stimulus' is barely dry and already there is emergent pressure for a further stimulus:
David Obey, the chairman of the appropriations committee, said he has instructed his staff to start drafting another stimulus proposal, though he emphasised no deadlines or timelines had been set.This is the argument that the stimulus is never enough. It is the same argument that suggests that the Great Depression 'New Deal' was just not large enough or it would have worked. The trouble here is that, whatever the amount borrowed and spent, there is always the possibility of someone saying (when it fails) that it just was not enough.
However, the deeper concern is that, even if you were to accept the Keynesian theory, it is being misapplied. In particular, the US economy (and the UK for that matter) have just come out of the equivalent of a Keynesian stimulus which was provided by the Chinese government, oil states and Japan. Whilst the theory suggests that the government provides the stimulus, I can see no difference in the effect of the stimulus being provided by overseas money. In both cases money washes into the economy in order to stimulate high levels of 'activity'. If the government provides a stimulus it will, in any case, fund the stimulus through overseas borrowing (at least in part). What you therefore have is a stimulus on top of a stimulus. It also raises the question about the argument that more stimulus is needed. The total stimulus over the last few years amounts to $US trillions.....
Yesterday, I went to a talk provided by a senior official in the New Zealand reserve bank, and he mentioned that Keynes was not actually a Keynesian. At this point, I have to confess that I have not read the General Theory of Keynes, and am regretting that I have not had time to do so. As such, I will admit that I am not sure whether much of what is being discussed in current policy is neo-Keynesianism or the 'real thing'. However, my understanding is that the theory does not work on the basis of stimulus during the 'good times' and in the 'bad times'. Despite such details, it seems that the US government is determined to press on regardless of there being absolutely no rational economic explanation or theory for what they are doing.
As a note, the New Zealand reserve bank appears to be taking a relatively sane approach to monetary policy when compared with other central banks. Also of note is that the speaker from the reserve bank was quite taken with Niall Ferguson's 'Ascent of Money', which I would also recommend to all the readers of this blog. It is a good, though incomplete, explanation of many of the factors that have led to the current crisis.
I have also found a number of interesting articles regarding the UK being posted in the comments section. It appears that I am not alone in considering the UK to be bankrupt. The article in question was found under a headline about house prices, which is why I missed it (I am still confident in my predictions made in my first ever post on this blog so only occasionally look at articles on house price predictions):
The Numis report says: “The bankruptcy of the UK is a very real probability as the UK Government is trying to stimulate a greater debt burden in a grossly indebted economy. We believe the scale of the macro imbalances in the UK means there is no prospect of a recovery in 2009 and we expect the UK to be mired in a deep recession through all of 2010.”The key difference here is that I believe that the UK is already bankrupt. This returns me to the subject of so many recent posts, the printing of money, and how the UK government is funding debt. I have found a fascinating article in the Spectator magazine:
In the old days, when banks lent money to people and not vice versa, UK banks would scour the globe looking for the best investments. Now, having been net sellers from 1998-2007, the British holdings of UK gilts and t-bills has surged by £30bn in the last three months – the highest since data began in 1997. No surprise, you might argue: flight to safety. But it’s funny how foreign and non-bank UK buyers seen to be able to find several better forms of safety than buying the debt of a desperate government that has just started to print money. As he so rightly says, it’s a whole new world.Perhaps, more interesting is the chart that is provided with the article. You will see that the rest of the world are net sellers of gilts, but that the UK banks have suddenly developed a strong appetite for the gilts. It it just a coincidence that the government now has control over several UK banks, and that the same banks are now bankrolling the government? Meanwhile, the printing of money to buy gilts guarantees liquidity of the gilts..... This UK bank purchasing of gilts is very much in line with what I said would happen.....but still offers no firm proof of conspiracy.
On a similar subject, the same article that discusses the bankruptcy of the UK also has this to say about the banks and government:
“The Prime Minister and Chancellor have publicly stated that they want banks this year to lend at 2007 levels,” it said. “We think this is a crazy policy, given that too much debt was one of the prime reasons why the economy has its current problems.”Another poster provided a link to an article from the BBC, which says the following:
What we are seeing is exactly what you would expect to happen when a government in deep trouble gets its hands on the banking system. It appears it is using the banking system to meet government objectives, and that means massive interventions in the broader economy. An interesting point in the article above is that John Swinney really believes that 're-invigoration' of the property market is a 'good thing'. Exactly in line with my discussions at the time that the bailouts were being enacted, the government is now pushing the banks into irresponsible lending that will see even greater ongoing losses.....
The Royal Bank of Scotland is promising to pump £1.7bn worth of mortgages into the Scottish housing market over the course of the coming year.
Finance Secretary John Swinney has welcomed the move.
He claims the bank's action will help re-invigorate the property market north of the border.Scottish Secretary Jim Murphy said the move highlighted the "positive effects" of the government's action so far to bring stability to the banking sector.
The final link from a commentator that I would like to highlight is an article on the G20 summit. The article had this to say:
Lord Malloch-Brown, a Foreign Office minister involved in the preparations for next month's London summit of the G20 countries, said that meeting must produce a substantive plan to rescue the world economy or there will be "disastrous" financial consequences.I am not sure that this may not be an overblown reaction/point of view from Mr. Malloch-Brown. However, it does illustrate the sense/perception of fragility in the current situation in government circles. Regular readers will know that I predicted a meltdown of either the £GB or $US to happen within two to three months, and we are now coming to the end of that period of time. As yet, my predicted meltdown has not happened, but it is possible to get the sense that we really are on the edge of the precipice. I have never been sure what the final trigger might be for the collapse, as it will likely be something that is as much emotional as rational. Perhaps a bad G20 might be such a trigger, but perhaps not...
In an ideal world, the meltdown would never happen. However, the world is not ideal and I can see no other final outcome. As such, I find myself on the one hand hoping that it will not happen and, on the other hand wishing it to happen before governments can make the final consequences any worse.
On a separate subject, I have noted that there has been some interesting posting on conspiracy theory, and in particular the New World Order. As such I thought that I would add my comments on the subject. Some time ago there were many links being provided in comments to various conspiracies. As such, I took a look at some of these. The first example I looked at was a video showing an Amero coin, and it turned out that it was a white supremacist behind the video. I also saw several videos, including one that ran to 3.5 hours approximately (2). I noted during the video that they were proposing that international bankers were supposed to be running the federal reserve in the US. A one minute search on Google dug up a paper on the ownership of the Fed, and it had nothing to do with international bankers.
The interesting thing about this example was that the video was full of insinuations, but lacking in any firm evidence, and that they never actually pinpointed who the owners of the Fed might actually be. I also noticed an undertone of anti-semitism throughout the video. I have since read the 'Ascent of Money' by Niall Ferguson, and interestingly this reveals that one of the discussions in the video was originally put out by the Nazi party in Germany. This is the matter of how the Rothschild family made their money in the bond market after the Battle of Waterloo. In the ascent of money, written by a very good historian, there is no 'evil' market manipulation, but in the video this is the implication.
As I have said in several posts, conspiracies do happen in the real world. Politicians, given enough space and opportunity, and down on their luck, seeking wealth, or in a difficult position, may well conspire against the public interest. The problem with these conspiracy theories that we see is that they undermine the credibility of those who seek to find the real conspiracies. As I found in my early post on the subject of the New World Order conspiracy, just having the words in the title saw an uplift in visitor numbers. In other words, duping people with these invented conspiracies is a sure way to boost reader numbers, to sell books, or more disturbingly, can be a subtle way of promoting agendas such as anti-semitism.
As such, I urge readers to be open minded to conspiracy (in particular in these difficult times) but also to be cynical and suspicious of such theories, in particular those that are based upon half fact and insinuations. You may note that, wherever possible, I have sought clarification, and have reported the clarifications in full (e.g. the BoE money printing case).
In today's post I have asked questions about UK bank purchases of gilts, but have provided a chart of activity from a reputable source. This does not mean proof, as it is also possible that the banks would have, in any case, moved into UK gilts. However, there is no obvious reason why they should do so, and therefore we might have grounds to suspect that the purchases are the result of government influence. We do not need images of shady characters in smoke filled rooms plotting world domination for such a scenario, just incompetence and desperation. A philosopher of Critical Scientific Realism (1) suggests that we should look for plausibility in theory, and incompetence and desperation are very plausible motivations. On the other hand, the genius Dr. Evils stroking their cats whilst plotting world dominion in smoke filled rooms might be seen as less plausible (I am exagerating here, but hope the point is still clear).
On that note, I will end this rather rambling post. Many thanks for the comments and the links, which are always appreciated.
(1) Doppelt, G 2005, 'Empirical Success or Explanatory Success: What Does Current Scientific Realism Need to Explain?' Philosophy of Science, vol. 72, no. 5, pp. 1076-87.
(2) I think the video was titled 'Money as Debt' but they have now blurred into one in my memory. I have linked to the videos in previous posts on the subject, and there are plenty of links to various videos in the comments against posts. If you know the title and can link to it (I think/hope that there can only be one example that is so long) please feel free to add the link.
Note 1: I have just found this article, saying that at the G20:
The Americans are thought to have arranged private meetings with Chinese officials this weekend after the Chinese premier Wen Jiabao cast doubt over the country's willingness to provide financial support for President Obama's $787bn (£560bn) stimulus plan.Events appear to be moving, and we will see what comes of such discussions......
Note 2: A while ago I discussed a system of fixed supply of currency. I was thinking in terms of the conspiracy theory about how useful it would be to have a world currency with a fixed supply. This really would be a real New World Order....but one with only positive benefits. I could think of no good argument against it, but can not imagine that the politicians would ever cede their power for tinkering....I may post more on this in the future, but hesitate to do so on the basis that it is so unlikely to ever happen.
Note 3: The New Zealand Reserve bank official mentioned that nobody predicted this crisis, so I offered a correction for this statement. I did not mention that I predicted the crisis, but pointed to the Austrian school as an example. It seems that this story that nobody predicted the crisis simply will not go away. I also threw in my view on banking regulation, pointing out the contributions of Basel I & II in the crisis, and this point was conceded by the official. I had many other points and questions that I wanted to raise, but there were many present, so the opportunity was very limited. One of the key points I would love to have raised is the ongoing use of GDP as a measure in the economy, but felt that it could not be abbreviated into a brief question.
I should also add that there was an refreshing openness in the whole talk. Overall I was quite impressed with this aspect of the talk, and felt that I was hearing a person who genuinely sought to make sense of the situation. I have since sent an email linking to a page in the blog, but have no idea whether it will be read.