Skip to comments.Five Things You Need to Know: U.S. Declares Economic War
Posted on 01/22/2009 3:49:16 PM PST by BGHater
1. Beyond the Zero Bound
Beyond the zero bound. Although that title refers to economics, it sounds vaguely related to science fiction, doesn't it? Then again, perhaps science fiction is precisely where it belongs.
Yesterday Swiss National Bank (the Swiss central bank) Vice President Philipp Hildebrand delivered a speech outlining the central bank's options for acting in the current financial crisis. With interest rates virtually at zero, the central bank is no longer able to utilize policy options that target short term rates. So, what can they do?
One additional step would be for the central bank to purchase government bonds outright. A more extreme step the central bank could take would be to directly purchase longer-term corporate bonds. But the most interesting step, from this seat, is the one where the central bank intervenes in the currency markets.
"Measures to bring the franc under control - or even to devaluate the currency should the need arise - include a sale of Swiss francs against foreign currencies," Hildebrand said. "In an extreme case, the SNB can pledge to buy foreign currency infinitely at a fixed exchange rate," he added.
2. Why Currency Intervention Matters
Why is this talk from a Swiss central banker important to us? Two reasons.
First, Hildebrand, according to the Reuters translation of his speech, outlined explicitly something U.S. central bankers (global central bankers for that matter) are each thinking: "Real deflation has to be avoided at all costs."
Second, the intervention into currency markets parallels the newly-minted (yes, a pun) Obama administration's own shot across the global foreign exchange bow. According to Bloomberg, this morning presumed Treasury Secretary Tim Geithner said "OBAMA 'BELIEVES CHINA 'MANIPULATING' CURRENCY' and "OBAMA TO 'AGGRESSIVELY' TRY TO CHANGE YUAN POLICY."
3. Economic War
The term "manipulator" relative to currency is a serious one and not just one more piece of hot campaign rhetoric. "Currency manipulator" is a formal designation set by the Treasury Department that paves the way for explicit sanctions. (Five Things first looked at this issue relative to China in 2006 here.)
Far from being simple rhetoric, and it is guaranteed China will take these Geithner soundbites seriously, the charge of "currency manipulator" will be viewed by China as a strong signal the incoming administration is determined to end the present mercantilist policies where the U.S. takes on increasing debt to consume the good that China manufactures, with the proceeds of the current account surplus recycled back into the U.S. financial markets through purchases of U.S. Treasuries.
This is a fundamental shift but not for the reasons most analysts and media outlets will state; namely, that it means China will non longer purchase U.S. Treasuries, interest rates will soar and/or the dollar will collapse. No, that is wrong. First, the most important purchaser of U.S. Treasuries at present are U.S. banks, not foreign governments. Second, this shift, rather than kick starting an inflationary spiral, will actually exacerbate the deflationary debt unwind by increasing volatility, reducing liquidity and reinforcing risk aversion and balance sheet repair. Eventually this will translate into higher cost of capital, but that is a longer-term issue, not the present one, which is rebuilding or maintaining solvency for corporations and individuals.
It would not be an understatement to consider this a serious step toward economic war. For why, read up on the Smoot Hawley Tariff Act.
4. The Worm Has Turned
This morning I ran across a mini-blurb in the Wall Street Journal about a new book by Dalton Conley, titled, "Elsewhere, USA: How we got from the company man, family dinners, and the affluent society to the home office, Blackberry Moms and Economic Anxiety."
From the publisher's description via Amazon:
"Cheap and easy credit, he writes, has been a major reason why the United States recently dipped into negative savings for the first time since the great depression. Conley examines how, technology has altered how Americans earn and spend money, playing out the behaviors characteristic of late capitalism, or simply an evolving economic system that, by attaching a price to virtually everything from child rearing to dating, has helped devalue people, the work they do and the material goods they desire."
Man, there's a lot packed into that description, from blaming cheap and easy credit, to wondering about the devaluation of people with subtle allusion to Marx and "late capitalism."
Of course, it makes sense from a Socionomic perspective. A mere 10 years ago the company man was someone to be vilified, affluence was highly sought after and a blackberry for mom a supremely helpful technology tool. It is safe to say that the worm has now turned.
5. The Worm Has Turned II: Arise Non-VIP's!
A blog on Slate caught my today as well. From the Kausfiles.com came this command: Arise, Non-VIPs! You Have Nothing to Lose But Your Wristbands.
On this blog Mickey Kaus writes, "I was surprised to learn that there were special VIP areas at several otherwise extremely enjoyable pre-inaugural parties. Talk about a violation of social equality: how can a party claim to want all Americans treated equally if, you know, the party doesn't treat them equally? Why aren't these things stigmatized like skyboxes at ballparks?"
We already know that a darkening social mood has profound personal security and social implications for those who may be viewed as elites, whether that perception is based on status or income. But let's take a closer look at a statement Kaus makes: "Why aren't these things stigmatized like skyboxes at ballparks?"
This statement about skyboxes is what one might call socionomic reflexive apperception, or, the process by which an object (in this case the ballpark skybox) is (re)assimilated within a shifting psychological framework to adhere to part of a new codified belief system. In English, the process is this: Ballpark skyboxes are neutral objects. So what disturbs them from their neutrality? Social mood.
During periods of positive social mood, ballpark skyboxes become signifiers of luxury, wealth and exclusivity. These signified attributes are viewed in the aggregate as desirable, worthy of attainment. However, during periods of negative social mood, the skybox remains stable as a signifier, but shifts to occupy a new space in our perception of those signified attributes. Thus, the subtle movement for the skybox from a neutral space of perceived luxury and enjoyment, to outright ridicule and, as the author of the statement above asserts, an object that is now "stigmatized."
The word "stigmatized" here is important, for it foreshadows the violence that is a core component of negative social mood. Stigmatized is from the Latin, stigmatizare, literally, to brand; an act intended to permanently mark an object for ridicule and, in some cases, outright expulsion from the community. the stigmata is a brand, a scar, a mark of shame and discredit, that is often diagnostic of a disease.
As the intensity of negative social mood increases, the stigmata of (dis)credit, of disease - in this case, quite literally, suffering from the disease of credit - and of being marked by the signifiers of wealth and luxury could take on a more explicit form.
This is silly. Its not cheap credit. It is inflated dollars. Once the currency begins to lose value, all sorts of strange behaviors take place. Savings stops, gambling becomes the norm in all types of areas, hedonistic activity flourishes, a live for today mentality takes over. Welcome to the Obama era.
LOL - Too true.
When life is cheap, it gets expensive.
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