December 21, 2015
The injustice of central-bank enforced neofeudalism cannot be suppressed like interest rates.
In traditional feudal systems, serfs were the landless peasantry who worked the land of their feudal lords in exchange for protection. In our present-day neofeudal system, serfdom has a different definition: present-day serfs own little or no productive capital and have few opportunities to ever acquire any.
The Marxist term wage-slaves describes those who, lacking capital, have only their labor to sell. This describes the vast majority of people in both capitalist and socialist systems, but what makes the present system neofeudal is the central banks: by extending essentially unlimited credit at near-zero interest rates to financiers and corporations, the central banks have given the top .01% the ability to outbid mere savers for income-producing assets (i.e. productive assets).
Just as the feudal-era serf had no choice but to enslave himself and his family to the manor-house lord, the modern-day serf must indenture himself to banks to “own” a car or home or “buy” a college education.
The X22 Report and I discuss this and related topics in the podcast Central Bankers Are Creating A World Where We Are All Serfs (38:10).
We are living in a time that can only be considered monetary chaos. The U.S. Federal Reserve has manipulated key interest rates down to practically zero for the last six years, and expanded the money supply in the banking system by $4 trillion dollars over that time. And with the true mentality of the monetary central planner, the Fed Board of Governors are now planning to manipulate key interest rates in an upward direction that they deem desirable.
The European Central Bank (ECB) has instituted a conscious policy of “negative” interest rates and planned an additional monetary expansion of well over a trillion Euros over the next year. Plus, the head of the ECB has assured the public and financial markets that there is “no limit” to the amount of paper money that will be produced to push the European economies in the direct that those monetary central planners consider best.
We also should not forget that it was the Federal Reserve that earlier in the twenty-first century undertook a monetary expansion and policy of interest rate manipulation that set the stage for the severe and prolonged “great recession” that began in 2008-2009, in conjunction with a Federal government distorting subsidization of the American housing market.
The media and the policy pundits may focus on the day-to-day zigs and zags of central bank monetary and interest rate policy, but what really needs to be asked is whether or not we should continue to leave monetary and banking policy in the discretionary hands of central banks and the monetary central planners who manage them.
Most experts are of the view that the massive monetary pumping by the US central bank during the 2008 financial crisis saved the US and the world from another Great Depression. On this the Federal Reserve Chairman at the time Ben Bernanke is considered the man that saved the world. Bernanke in turn attributes his actions to the writings of Professor Milton Friedman who blamed the Federal Reserve for causing the Great Depression of 1930s by allowing the money supply to plunge by over 30 percent.
Careful analysis will however show that it is not a collapse in the money stock that sets in motion an economic slump as such, but rather the prior monetary pumping that undermines the pool of real funding that leads to an economic depression.
Improving the Economy Requires Time and Savings
Essentially, the pool of real funding is the quantity of consumer goods available in an economy to support future production. In the simplest of terms: a lone man on an island is able to pick twenty-five apples an hour. With the aid of a picking tool, he is able to raise his output to fifty apples an hour. Making the tool, (adding a stage of production) however, takes time.
During the time he is busy making the tool, the man will not be able to pick any apples. In order to have the tool, therefore, the man must first have enough apples to sustain himself while he is busy making it. His pool of funding is his means of sustenance for this period—the quantity of apples he has saved for this purpose.
The size of this pool determines whether or not a more sophisticated means of production can be introduced. If it requires one year of work for the man to build this tool, but he has only enough apples saved to sustain him for one month, then the tool will not be built—and the man will not be able to increase his productivity.
The island scenario is complicated by the introduction of multiple individuals who trade with each other and use money. The essence, however, remains the same: the size of the pool of funding sets a brake on the implementation of more productive stages of production.
When Banks Create the Illusion of More Wealth
Perhaps the most famous, and prescient, financial cartoon in American history is the depiction of the Federal Reserve Bank as a giant octopus that would come to parasitically suck the life out of all U.S. institutions as well as free markets. The image is taken from Alfred Owen Crozier’s US Money Vs Corporation Currency, “Aldrich Plan,” Wall Street Confessions! Great Bank Combine, published in 1912, just a year before the creation of the Federal Reserve. Here it is in all its glory:
Our ancestors were wiser and far more educated than modern Americans about the dangers posed by a centralized, monopolistic system charged with the creation and distribution of money, and our society and economy have paid a very heavy price for its ignorance.
More than two months have passed since the August “flash crash.” Fragilities illuminated during that bout of market turmoil still reverberate. Sure, global markets have rallied back strongly. Bullish news, analysis and sentiment have followed suit, as they do. The poor bears have again been bullied into submission, as the punchy bulls have somehow become further emboldened. The optimists are even more deeply convinced of U.S., Chinese and global resilience (the 2008 crisis “100-year flood” view). Fears of China, EM and global tumult were way overblown, they now contend. As anticipated, global officials remain in full control. All is rosy again, except for the fact that global central bankers behave as if they’re utterly terrified of something.
The way I see it, underlying system fragility has become so acute that central bankers are convinced that they must now forcefully (“shock and awe,” “beat expectations,” etc.) react to any fledgling market “risk off” dynamic. Risk aversion and de-leveraging must not gather momentum. If fragilities are not thwarted early, they could easily unfold into something difficult to control. Such an outcome would risk a break in market confidence that central banks have everything well under control – faith that is now fully embedded in the pricing and structure for tens of Trillions of securities and hundreds of Trillions of associated derivatives – everywhere. With options at this point limited, the so-called “risk management” approach dictates that central banks err on the side of using their limited armaments forcibly and preemptively.
With today’s extraordinary global backdrop in mind, I’m this week noting a few definitions of “Hobson’s Choice”: