The Thrust For Power

 

The Thrust For Power

Economics Without The B.S.**: 

[**  Double entendre intended.]

Jacob Bronowski -- The Ascent of Man --The Thrust For Power

When the United States emerged out of World War II as the preeminent hegemon there was a recognition that world affairs are conducted through the use of the military (force) and commerce, along with diplomacy. The United States originated from the evolution of 18th Century Western Enlightenment, and the American Enlightenment version of that was to understand that a rules-based system provided a democratic society more stability than one based on power relationships – a society of laws, not men. The American Enlightenment, however, is not idealistic but practical, understanding that people, while possessing “goodness”, still tend to act in their own self-interest – so it is a combination of power relationships and a rules-based system. The manner in which the United States attempted to conduct international commerce was through a rules-based system, not a power arrangement – the Bretton Woods Agreement, the General Agreement on Tariffs and Trade (GATT), which later become the World Trade Organization (WTO), the International Monetary Fund (IMF) and World Bank. It has functioned, but not without mistakes, and still needs much improvement. So what we have for world affairs is a rules-based system for commerce, the use of the military force still, and a diplomatic system that is a combination of the two. The expansion caused by globalization, along with the expansion of the international financial system backed by the dollar has not been smooth. Imperfect human beings existing in such a system have created imbalances in those relationships which have resulted in inequalities, growing inequality gaps. If there is a recognition to spread democratic governance for promoting a broad-based general welfare, then it is imperative that a rules-based system prevail that is perceived to be fair to all so that it fosters engagement by all the participants.

 

Flood of New Debt Tests Bond Market and our National Security and Leadership 

Economics Without The B.S.**: 

[**  Double entendre intended.]

Wall Street Journal article -- 

https://www.wsj.com/articles/flood-of-new-debt-tests-bond-market-11615372201?reflink=desktopwebshare_facebook&fbclid=IwAR2UK7sJw3AMwRMgdLIpGyZ9iTv92CWcNmc0w9lMmfFmzWIMrhqtSgE8jJc

The increasing debt load of the U.S. is changing the composition of our debt -- and will likely result in its being of longer duration than the average of five or six years as it has been for about twenty years now.

We used to have longer duration on our debt prior to Bill Clinton's Administration -- more of our debt was held in 30-year bonds. Back then as we had budgets that were more in balance, we converted some of that long-term debt (30-year bonds) for shorter-term debt (2-year, 5-year, 10-year notes) when we turned over our debt for refinancing. The shorter term of our debt composition makes it less subject to risk for investors -- and that has made it attractive to investors to take on that debt.

With an average duration of five to six years for our debt composition/portfolio -- we turn over about half of our debt every two or three years. If we lengthen that duration past six years, it will add more risk for investors -- and we could wind up financing our debt at higher rates of interest, and become more of an expense in our annual budget.

The way to avoid this additional cost is for the U.S. to raise its level of productivity -- which has been at historically low levels for about twenty years now. Something to watch in the news over the next several years. Our ability to sell our debt to investors (domestic and foreign) depends on how competitive we are with other investment opportunities in the international marketplace.

Also note the chart with the Fed taking more our debt onto their balance sheet. This is what is giving the Fed leverage in the international markets during times when it intervenes at times when the international markets are not functioning well. The Fed uses these treasuries to swap with foreign central banks (the Fed gives them our treasuries, highly valued, for their currency, less valued) and the foreign central banks make loans to their businesses, during times when credit/funding/liquidity is tight. [It is illegal for our Fed to loan to foreign businesses; but this is how our Fed gets around this. This is an indication of how screwed up our international market system has become, and what the U.S. has to do to stabilize the system we created and take responsibility for since WWII.]

So our Fed bails out the rest of the world during periods of instability -- in order to avoid downward deflationary spirals, which are bad for investment, growth, and lead to long periods of panic/depressions like we had in the 19th Century.  We had frequent deflationary periods during our history through the 19th Century right on up to the Great Depression. We have only had three deflationary years since WWII -- 1949, 1955, 2009.

These continued bailouts are an indication our reliance on markets to self-correct are not working. Some think (me included) this instability causes imbalances in our globalized economic system and contributes to inequality.

And the consequences for the United States, since this is a system we created and take responsibility for maintaining, is that this inequality, both globally as well as domestically, hinders our ability to spread our democratic values, highlighting the contradictions in our stated objectives of trade/commerce and pursuing our foreign policy, and therefore is a major obstacle in our national security strategy.

Human progress depends on economic development, which is furthered by broad-based growth and a democratic system of governance.

A Proposal during the Pandemic to help small businesses asked to perform a social-welfare function

 

A Proposal during the Pandemic to help small businesses asked to perform a social-welfare function.

Economics Without The B.S.**: 
[**  Double entendre intended.]

So far, restaurants not recovering in the usual March to August time period -- data is only up to June.

If we are asking restaurants to operate at half capacity while we deal with the pandemic, are we asking them to perform a public welfare function? Should localities be paying for/reimbursing businesses for performing a public health function?

Can we do this by floating (selling) a bond issue by the local government, and the bondholders would be paid by the localities raising the sales tax? Can we float the bond on the public market, like other municipal bonds? Or, can the federal government/state government subsidize the bond's issuance? Or better yet (?) can our Fed be the buyer of the bonds, to subsidize the issuance, keep the bonds on their balance sheet as inactive reserves (like they did with mortgage pools from the Financial Crisis of 2008), not part of the money supply, somwhat similar to what any central bank does when a nation goes to war? -- this is sort of a national emergency.

https://fred.stlouisfed.org/graph/?g=uD5x

What's wrong with this picture?

 What's wrong with this picture?

Economics Without The B.S.**: 

[**  Double entendre intended.]

Notice a problem? What does it take to keep our economy going?

[The Monetary Base is not our Money Supply, it is the money kept among the Federal Reserve Central Bank and its member banks. It also includes money in circulation.]

  

[My answer] Short-term financing of long-term projects -- our capital markets, which are used to provide funding of capital projects, relies on international markets that are dominated by wealth funds/private equity/hedge funds/shadow banking since the 1990s that can easily transfer their funding.  This is a source of instability for projects that need constant funding of long-term projects; it means their operational costs are not fixed for the long-term but quite variable.

So the Fed steps in as a moderating force/counter-weight to keep markets "calm", stability.  A policy of economic stability that keeps interest rates low and one of moderation that keeps an economy "humming" at an optimum level that is below peak performance.

Peak performance:  The best performing economy we had was from the mid-1950s to around 1974, with the peak performance at 1965/1966 -- in addition to high rates of economic growth we also had the least income inequality, it was a period where our productivity gains were broadly shared in society and among the various business sectors.

 

https://fred.stlouisfed.org/graph/?g=uhJ8

The problem is the Fed role has become that of a market-maker/market-participant and not just a market-regulator, an expansion of its role as the lender of last resort, now a buyer (of international assets, like mortgage pools/CDOs, etc.) of last resort.

[Problem?] If democratic societies need a vibrant political climate to accommodate change, does an economic policy of stability impede political progress?  And if the United States is the world leader in advancing democratic values, does this economic policy get in the way of that effort?