11/03/2010, 00.00
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Squandering more public resources

by Maurizio d'Orlando
The chair of the US Federal reserve meets today with his board of Governors. He is likely to talk again about what he said before in regards to the negative prospects of the US economy. The danger is that the solution envisaged, adding one to two trillion dollars, is not likely to solve the crisis, but will just out off the inevitable catastrophe by a year.

Milan (AsiaNews) - Today Ben Shlomo Bernanke (picture with Obama) should again talk about the very negative prospects of the US economy, which AsiaNews has already addressed in a previous article.1

The Fed chairman is not an economic analyst who looks at probable or possible trends in the economy; his role is operational. His speech in early October was meant to give a hint as to what the Federal Reserve was going to do. Here we shall first try to understand what Bernanke did not say explicitly or implicitly. Secondly, given the importance for the world of what the US central bank does, we shall try to predict the logical consequences of what was said or not said, and logically look at what the Fed might do as well as its fallout.  

The next move should come some, no later than December. There are in fact many telltale signs of what is to come. In a recent article, Canada’s main English-language newspaper, The Globe and Mail, quoted Boston University economist Laurence Kotlikoff 2 who said in plain language what he wrote in a more academic style3 for an International Monetary Fund publication, namely that the “U.S. government debt is not .5-trillion (U.S.), which is 60 per cent of current gross domestic product, as global investors and American taxpayers think, but rather 14-fold higher: 0-trillion – 840 per cent of current GDP. Hence, “‘Let’s get real,’ Prof. Kotlikoff says,” because “‘The U.S. is bankrupt’.”

Many others, including AsiaNews4, have been saying the same thing for quite some time. The fact that mainstream papers and institutional publications like that of the International Monetary Fund are now publicly saying the same thing suggests that something is coming up, and soon, but that it will certainly be spectacular.

Bernanke has called for a meeting of the Board of Governors of the Federal Reserve for today, a day after mid-term elections marking President Barack Obama loss control of the House of Representatives. The timing is perfect because election results will monopolise the attention of most Americans and the rest of the world.

In this meeting, we can expect Bernanke to repeat in clearer terms and in an official manner what he said in Rhode Island on 4 October. He will tell the Board that a) not only is the US economy not growing but that it is in fact showing signs of weakness; and that b) unemployment is not down, but actually up. Even though he might not be so blunt, Bernanke is likely to acknowledge the failure of both a) the economic stimulus (decided in February of last year soon after Obama took office) and the b) Federal Reserve’s Quantitative Easing (QE) policy.

Obama’s so-called stimulus and the Federal Reserve’s QE policy were in effect the two sides of the same strategy that should have led, according to their promoters, the way out of what increasingly appears to be the worst crisis in the last 250 years.

Like others, including Economics Nobel Prize winner Paul Krugman, Bernanke will say that the steps taken 18 months ago failed because they were not “bold” enough. Thus, to get out of the crisis, we must apply more of the same medicine, namely increasing the burden on public finances, according to this writer.

However, the Federal Reserve chairman has probably not learnt much from the failure of the first Quantitative Easing (QE1) policy. Given his intellectual background, he is not likely to want (or be able) to question the theoretical and intellectual bases of Keynesian “doctrine” (see Krugman) and monetarism (see Friedman and Greenspan).

No one should take it for granted that the economy is or ought to be governed by mechanistic principles (think only of Schumpeter’s notion of creativity and the principle of concreteness and the rejection of financial and monetary abstraction by the Austrian School, starting with von Mises).

Yet it is not very likely that those who wield political and financial power today can or want to acknowledge this now, before the coming catastrophe, and so reject the bases of the existing economic system.

First, such elites would have to be aware of the situation. Sadly, this is not the case since the ruling economic determinism is closely correlated to the dominant ideas, relativism and materialism practiced especially, but not only, by the ruling classes.

Economic determinism, based on the lucubrations of a swarm of obliging professors with Nobel Prizes for Economics, has been the main tool, garnished with top mathematical formulas, to consolidate and expand a system based on huge interests and financial privileges. Giving it all up in favour of another vision of the world is something quite difficult to do.

One should never underestimate how obtuse people can be. Let us not forget the generals of the First World War, inept at understanding the effects of new weapons, who pushed for more offensives just to gain a few more metres. This way, millions of men were sent to their death almost 100 years ago against, cut down by the fire of enemy machine guns.

Similarly, today’s economic orthodoxy refuses to acknowledge that it cannot predict non-linear events, subprime insolvencies for example, and extremely rare events, like the impending systemic crisis. For this reason, it is likely that more resources will be thrown away in another desperate attempt, like another charge of the Light Brigade, to solve the crisis by quantitative methods.

A new Quantitative Easing, QE2 to distinguish it from the one before, will thus have to be as big, if not bigger, than the first one if it is to have any results. Let us say hypothetically, one to two trillion dollars. Thanks to the monetary multiplier effect, its impact will be huge, theoretically 10 to 15 times5 the Fed’s push.

However, a year will be gained at best, perhaps less. Like the QE1, QE2 will be followed by disaster, brought about by a mountain of derivatives (about 15 times the world’s GDP) that built up over the past few decades (or even half a century). The fact is that money does not generate real wealth or produce useful goods and services. All it does is create monetary wealth. Thus, the economic stimulus is nothing more than another form of dirigisme, a strategy that has repeatedly failed in the past.6

Notwithstanding the many precedents in history, condemning QE2 as a failure even before it is adopted might appear premature as well as based on an unfair and malicious ideological bias on the part of this writer. That is not the case. QE2’s stated objectives will not be met because of inherent factors. It will however meet its undisclosed goals, which is to delay the collapse of the financial and banking system in order to enable elites to better reposition their wealth.

For ordinary folks, QE2 will give birth to a two-headed monster: deflationary depression combined with hyperinflation. This will dislocate the economy and shift wealth away from some to others.

In the meantime, before more can be said about what can happen, which is still only hypothetical, we must wait and see what the Federal Reserve Board will actually do in today’s meeting or those that follow.


[1] See Maurizio d’Orlando, “A global financial disaster is imminent, says Bernanke,” in AsiaNews, 13 October 2010.

[2] See Neil Reynolds, “The scary actual U.S. government debt,” in The Globe and Mail, 29 October 2010.

[3] See Laurence Kotlikoff, “A Hidden Financial Crisis,” in Finance & Development, September 2010, Vol. 47, No. 3.

[4] See Maurizio d’Orlando, “Depth of the abyss of economic, social, political chaos,” in AsiaNews, 30 September 2008; ibid, “Economic crisis: US, China and the coming monetary storm,” in AsiaNews, 9 December 2008; ibid., “U.S. debt approaches insolvency; Chinese currency reserves at risk,” in AsiaNews, 19 December 2008; ibid, “As the world waits for hyperinflation and a world government, Bernanke becomes ‘Person of the Year’,” in AsiaNews, 29 December 2009; and ibid, “This year, US public debt could reach end game,” in AsiaNews, 3 March 2010.

[5] In fact, the impact should be less significant in terms of bank money being destroyed by insolvencies.

[6] See especially a) Bill Clinton who justified financial liberalisation (the mother of all derivatives) with the noble goal of helping ethnic minorities become homeowners. Financial deregulation and legislative planning led in fact to the subprime fiasco; see also for the sake of fairness b) Bush’s war economy or c) Obama’s green economy, and back in history, d) the failed Soviet five-year plans and planned economies (an extreme form of planned economy) or Nazi military Keynesianism (another peculiar form of extreme planned economy) that was on the verge of collapse in 1938 for lack of raw materials in an autarchic system, and created a need for lebensraum and military expansion in the East. Other examples in history can be found in Asia, like e) Imperial Japan’s pre-World War Two dirigisme centred on financial and industrial conglomerates, the famous zaibatsu, like Mitsubishi, Mitsui, Sumitomo, Yasuda, etc., which led to colonial wars in Korea, Manchuria, China and the rest of Asia in the 20th century. We might add f) China’s current form of cap-com (capitalist-communist) dirigisme based on hyper-growth centred on an artificially low exchange rate and doctored statistical data. This last system has not collapsed . . . yet.

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See also
Currency wars and the Fed’s demise
Rising food prices push up inflation significantly
Economic crisis renews prospects for world currency
Ben Bernanke gets second term at Fed, but also many opponents
Bernanke's choices, no help for the real economy of emerging nations


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