April 22, 2015

Voodoo Economics Enforced by Hoodoo Policymakers

Despite Government and Central Bank efforts to stem the tide of deteriorating economic conditions, Inequality is rising at an increasing rate. The problem is not ignorance, but rather the illusion of truth. 

The World's financial markets have been in a state of flux to say the least. Over the past 5 years asset classes of all types and varieties have been buffeted by extreme price tilts in large part due to the Keynesian economic policies and other supply-side variants that have focused on capital easing rather than cleansing the inefficiencies of the financial status-quo.

What is currently happening is that financial markets have been flooded with capital with the aim of stimulating the broader economies of various countries. The big problem has been the hoarding of that capital by the very institutions that caused the debt-linked problems which sovereign governments conveniently underwrote despite tax payer resistance. The hoarding has meant corporate balance sheets have strengthened since the GFC while further large-scale write-downs have been avoided.

The result is that the broader economies have only improved marginally and not equally. The financial sectors of the G20 and other Western countries have been rescued which in turn has helped broad economic indicators to remain stable or show marginal improvement. However, the majority of individuals globally including small businesses are suffering due to savage inequality that has only been exacerbated by the multilateral central bank response to the Global Financial Crisis (GFC).

The economic policies implemented by the world's major central banks are excercising 'voodoo' economics whereby they do the same ineffective thing (capital expansion) and expect improving results the more times such a policy fails (the liquidity trap). Central bankers in the 21st century practise hoodoo in their work.

History in Revolution

History repeating itself is an age old fact. However, the reasons for the same principles to repeat despite several decades passing is first and foremost to do with macroeconomic policy not changing tact to help society but rather keeping the same routines to benefit the elite levels of society only.

Yesterday's 'real' economists are tomorrow's 'voodoo' economists. George Bush Snr was famous for criticising of Ronald Regan for his 'Reaganomics' and subsequent effects but himself went on to action some of the most devastating economic policy in US history. George Bush Jnr toed the line his father strung and the incumbent Barack Obama is no different. Criticising the Bush government on every viable occasion only to cement those same policies in the form of more defence spending, encroaching on civil liberties and appeasing the large multinationals whose lobbying power is still unfathomed amongst most market participants. To get into power you criticise the previous mob. To stay in power you implement the same policies as the previous mob. When leaving power, you congratulate the old mob for becoming new and the cycle is complete.

The changing of Presidents, central bank Governors or Civil Servants does little to stop the repetition of history because the reality that all policy is set by individuals unknown to the public spotlight is being missed. Policy-makers are steering policy with a definitive goal - to centralise decision making and raise inequality amongst the World's population. The epicentre of the politico-economic game show is the United States due to the US dollar being the most influential currency in the World today.

The Illusion of Truth

The problem is not ignorance, it's the illusion of truth. The mainstream, accepted view is that politicians and policy makers are acting in the best interests of the citizenry whereas in actual fact they are masquerading the fact that the priority for any policy-makers/public servant/politician is to serve the Corporation from whom they derive their intangible (and tangible) benefits.

The current policy structure is set up to assist corporations and large businesses first and foremost. Low interest rates, austerity measures, direct company assistance, tax exemptions, tax havens, turning a blind eye to anti-competitive, collusive behaviours - this occurs in all sectors, not just banking and finance.

The best indicator how macroeconomic policy around the globe is failing all those it is supposed to serve is the constant growth of 'inequality' in all areas of society, especially financial inequality. The fact that in the US alone, over 50 million people (~15%) are claiming food-stamps (a form of social security) each month is another anecdotal piece of evidence to suggest the economic reality of widespread inequality is somewhat different to the perception of improving economic conditions. Unemployment statistics say unemployment is falling but reality says increasing amounts of people are looking for part-time work or leaving the workforce altogether.

Extensive research shows that inequality is the significant causal factor for most negative externalities in society. Nations that have lower inequality (higher equality) of incomes, tend to be healthier, live longer, smarter, happier, less violent, less fraudulent and generally live longer compared to nations that on average have higher inequality. According to the Organisation for Economic Co-operation and Development (OECD), the gap between rich and poor is now at the highest level in 30 years.

A Blinkered Understanding

The problem is not ignorance, it's the illusion of truth. Most people seem to believe the cause for their lack of financial progress is due to their lack of education, experience or simply bad luck. In actual fact, the financial arena is to a large extent rigged to suit those with existing financial resources and disfavour the masses, most of whom dwell at the bottom of the ladder.

The accepted consensus is that inequality occurs as a result of natural market forces whereby smart, hard working, dedicated people tend to achieve higher incomes because of their intelligence, hard work, dedication and perseverance. While those with lower incomes are people who are lazy, stupid, unfortunate and generally people who were not able to take advantage of a fair monetary-economic system that is fair for all. Even the word 'inequality' often inspires fearful rebuttals.

Source: PositiveMoney (UK)
Unfortunately, the harsh reality is that financial inequality is a desired aim and the Financial system has been designed to ensure a disparity. As a simple example, the concept of interest paid on deposits assures that a wealthy individual (or company) can effectively do nothing for the economy but still be generously compensated simply because of the large account balance. The existence of interest allows some agents in the economy to stay perpetually rich without having to take risks while others must perpetually take risks and pay varying rates of interest in order to produce goods and services. Boom and bust cycles are inevitable under such hoodoo.

The illusion that capital is lent out which justifies the return is simply an illusion because fractional reserve banking is how all central banks now operate. Therefore, contrary to popular belief money is never taken from depositors in order to lend to borrowers. In fact, in order to lend money to a borrower, banks simply 'create' the money and lend it at interest to borrowers.

Furthermore, other elements of society such as the Justice, Healthcare and Education systems are all affected because the financial status-quo allows some individuals to reap huge rewards while forcing others into huge risks. In Western societies, wealthy people get more justice, better healthcare and better education compared to poor people despite the propaganda efforts claiming otherwise.

Cause and Effect

The consequences of hoodoo policy-makers practising voodoo economics are grave for all market participants including the very politicians that have sold the idea that central bank independence is pivotal. Central bank independence only serves to insulate incompetent policy markers from scrutiny and criticism. Central bank staff are not accountable to anyone at any time. And yet, their decisions influence everything relating to financial instruments including money, mortgages, loans and all asset classes.

Some of the more egregious consequences have already materialised. Negative interest rates are now commonplace in many parts of the world such as Switzerland, Denmark, Sweden, Germany and just recently the Euro-zone as a whole. The United States yield curve could soon follow the European one into negative territory due to the voodoo being enacted. One of the most erroneous assumptions being parroted with glee is the notion that consumption creates economic growth. Unfortunately for the Keynesian supply-side proponents, this is clearly not true. Giving capital owners an incentive to consume rather than invest their capital will only hasten the negative effects created from previously myopic Keynesian economic policy.

One other likely effect is the continuation of municipal defaults such as the City of Detroit in 2013. Although more defaults have not yet occurred, expanding federal expenditures alongside, falling revenues and growing debt burden is likely to push more municipalities into default, not only in the United States but other countries too. Municipal bond markets take note.

The Final Port

The reigning fiat paper money system is at the centre of the growing income inequality and expanding poverty rates noticeable in many countries today. Nevertheless, governments are growing bulkier and more costly in the name of taming the market and securing prosperity for the citizenry. The fact that prosperity was lost due to inherently unfair mechanisms such as fractional reserve banking and the existence of a Corporotocracy in most countries is being largely ignored.

This ignorance can only have two possible reasons. Either people are largely oblivious to how the world's monetary system truly works, in which case, its important to do one's own research. Or alternatively, they do understand it and are cynically ignoring a major source of poverty and societal despair because they may in fact be benefiting from the paper money system themselves.

Written by George Tchetvertakov