17 March 2015

New Gold, Part The Second

Well, that didn't take long. Time for the Second Installment. And I still Hate Neil Irwin; perhaps I should sue ESPN and Laettner for trademark infringement? It was just a few days ago that New Gold got its own serialization. Today Neil Irwin offers up some quotes that I couldn't get.

Let's start with:
In India, it is a leading electric utility, Jaiprakash Power Ventures, selling off facilities and negotiating with lenders to avoid a default, having increasing its debts thirtyfold in six years.

Before getting into the New Gold aspect of that, a quick tangent. Gentle reader may recall the observation that even the 1% will require Obamacare if they get their way in excluding a significant fraction of the 99% from healthcare. The issue, of course, is amortizing the fixed cost of healthcare. It was reported yesterday (I forget which newscast I heard it from), that electric utilities here in the USofA are banding together to penalize home solar. The argument is simple: for every house that goes off grid with solar panels, the fixed costs thus lost to price must be born by those that remain on the grid. The utility lobby is shrewd in framing the issue as, "the rich can avoid the grid, leaving higher costs to the poor on the grid". Or, as the old saying used to condemn stupid businessmen: "we lose money on each widget, but make it up on volume". In fact, that's exactly how large corporations do make money; they spread large fixed cost over large output. (This is also why obliterating the middle class is bad for capitalists, but they haven't figured that out yet.) If Rolex sold watches by the tens of millions, they'd cost not much more than a Timex. You can do the thought experiment as an exercise.

OK, back to New Gold. What Irwin, and other high priced pundits, doesn't tell you is what QE was all about. The right wingnuts in particular framed QE as "printing money" into the general economy; dropping dollars from an airplane over every Anytown, USA. "Inflation is coming. Inflation is coming." Of course, that hasn't happened, because QE was structured so it couldn't happen. QE raised the demand for bonds, thus driving up their price and driving down return (interest rate). The Fed (and ECB and Japan and ...) was pushing a string, assuming that by lowering the opportunity cost of physical investment, corporations would turn all that moolah into plant and equipment rather than yet more convoluted fiduciary instruments.

But, none of these "banks" bothered to look at the history of The Great Recession. To wit: it was caused by The Giant Pool of Money ending up in housing (by definition, a non-producing asset class) rather than physical productive investment in the first place; the lack of willingness to turn fiduciary capital into physical capital was the real cause of The Great Recession, so QE by itself didn't matter. Changing the rules to remove the obvious egregious uses helped. So, most of QE went into various fiduciary products. Stock buybacks. Sub-prime used car loans (d'oh!). And, it turns out, all those explosive emerging markets.
In effect, as Fed policy makers sit around a mahogany table in Washington to try to guide the United States economy toward prosperity, their actions are having outsize, often unpredictable impacts across the globe, owing to the dollar's central role in the global financial system. [my emphasis]

The point, of course, is that the impacts are purely predictable. The US buck is New Gold and if there isn't enough to go around, markets get screwed.
By September 2014 there were $9.2 trillion of such dollar loans outside the United States, up 50 percent since 2009, according to the Bank for International Settlements.

The cries of anguish from the likes of Apple and IBM and ... over the devaluation of their winnings in other currencies just break my heart.
Since the Federal Reserve signaled in summer 2013 that it would wind down its "quantitative easing" policy of buying billions of dollars in bonds using newly created money -- that the gusher of dollars flowing into the global financial system would come to an end, in other words -- the dollar is up 25 percent against a basket of commonly used international currencies.

Again, the mistake of assuming that US bucks are all the same. They are, of course, but not really if they remain sequestered in the banking industry. Again, the Fed didn't send out 747s dropping Franklins over the countryside; if they had we'd be closer to real full employment than we are. Businesses only expand to satisfy unmet demand; the notion that they create output just because they can is silly. The US banking system had all those trillions of bucks sitting on the balance sheet. American corporations had no use for them; they also had/have outlandish cash positions, even with the foreign devaluations. Real returns, direct real returns, come from new productive plant and equipment put to good use. Returns from fiduciary instruments aren't inherent, but depend on increased income from the holder. Which is why The Great Recession happened; houses don't produce saleable output and household incomes certainly weren't/aren't rising.

Hyun Song Shin, who heads research at the Bank for International Settlements, argues that a rising dollar has an effect of tightening the supply of money across the global economy.

As they say in Texas, "Boy, howdy!!"

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