Sunday, August 11, 2013

It’s “Austro-outrage”ous

What an interesting title, you say.  I will get to that.

Ambrose has delivered a very good commentary, pointing exactly to why two outcomes are certain to be avoided: 1) that any central bank anywhere is going to someday unwind its balance sheet, and 2) that we will ever see price deflation as commonly measured.

We will see neither.

But let me allow Ambrose to do the talking.  The occasion is Japan’s milestone of reaching one trillion quadrillion of public debt ($10 trillion):

Let the Bank of Japan buy a nice fat chunk of this debt, heap the certificates in a pile on Nichigin Dori St in Tokyo, and set fire to it. That part of the debt will simply disappear.

You could do it as an electronic accounting adjustment in ten seconds. Or if you want preserve appearances, you could switch the debt into zero-coupon bonds with a maturity of eternity, and leave them in a drawer for Martians to discover when Mankind is long gone.

Shocking, yes. Depraved, not really.

Exactly.  And any or all of the above mentioned options are available to the central planners.

As long as common measures of price inflation are relatively tame, and public backlash against actual inflation remains muted, why not?

And he lets the cat out of the bag about where we are and where we are headed:

It also doable, and is in fact being done right before our eyes. That is what Abenomics is all about. It is what Takahashi Korekiyo did in the early 1930s, and it is what the Bank of England is likely to do here (while denying it), and the Fed may well do in America.

What? No unwinding?  Et tu, Bernanke (or Yellen/Summers)?

He finds no reason to not do this, not even Austro-outrage:

Japan’s QE will never be fully unwound. Nor should it be. If a country can eliminate a large chunk of unsustainable debt without setting off an inflation spiral, or a currency crash, or the bubonic plague, there has to be a very strong reason not to do it. I have yet [to] hear such a reason. Though I have heard much tut-tutting, Austro-outrage, and a great deal of pedantry.

Austro-outrage?  That can now be the twin to Ambrose’s previous term “Austro-nihilists.”

What is interesting is this: the monetarists have become so discredited that Ambrose does not even bother aiming a tut-tut their way – yet any monetarist still willing to claim the name will have to admit that they never previously would have suggested such a role for a central bank.

He does not find, even in Rome, an example where this ended in disaster:

It is also what the Romans did time and again over the course of the late empire, though less efficiently, since they did indeed inflate. And no, even that was not fatal. The Roman Empire did not collapse because of metal debasement. It revived magnificently under the Antinones. As Gibbon discovered deep into his opus — and too late to change his title — the Decline and Fall of the Roman Empire took an awfully long time, to the point where the concept is meaningless.

Ambrose cites Gibbon, yet ignores authors that have come much later, like Robert LaTouche.

He is quite correct on one point: the fall of Rome took a long time, perhaps two centuries.  There was a period of on-the-surface recovery during the third and fourth centuries.  Any belief of a real recovery is based on what has turned out to be a false history, the “Historia Augusta.”

Major problems include the nature of the sources it used, and how much of the content is pure fiction. Despite these conundrums, it is the only continuous account for much of its period and is thus continually being re-evaluated, since modern historians are unwilling to abandon it as a unique source of possible information, despite its obvious untrustworthiness on many levels.

LaTouche writes of this false (or questionable) history of this period as follows:

…a sinister age, the least known in the whole history of Rome, since the chief historical work devoted to it, the Historia Augusta, is a later fabrication of the fourth century.  After the reign of Severi we seem to plunge into a long tunnel, to emerge only at the beginning of the Late Empire under Diocletian, and when we step out into daylight, unfamiliar country lies all about us.

He is incorrect about the metal debasement, although he could argue technical correctness.  The debasement followed the unsustainable state expense – so one could say that the over-reach of state expenditure (military plus bread) caused the collapse.  But if not supported by debasement, the collapse would have occurred much more quickly and with less calamity for the average Roman citizen.  Ultimately, the on-the-surface-recovery was followed by a spectacular collapse – include a collapse of the silver content in the coinage. 

I have written about this previously, and will cite a few paragraphs:

Latouche describes the last centuries of Roman rule: an economy that showed signs of deterioration as early as the late second century A.D., and, via state intervention, the attempts in the third and fourth century to halt and reverse the deterioration.

Rome took drastic actions to control the markets.  Besides ever-higher taxation and debasement, many well-known practices were employed, for example price controls as solution to debasement:

Diocletian attempted to resolve the inflation problem through price controls, through a detailed scale of prices for commodities and for workman’s wages.  As noted in the preamble to his edict:

They wished to put a stop to the dishonest practices of merchants who were forcing up unduly the price of provisions and other commodities thereby doing serious harm to the entire country, especially in places where troops were garrisoned and wherever soldiers were obliged to buy the necessities of life out of their army pay.

The result was, predictably, to cause price-controlled items to vanish from the market.

There was much more: Rome forced workers (and their offspring) to remain in their trades regardless of changing economic circumstances:

Rome went further, tying farmers to the land, preventing landowners from removing the farmers, eventually binding tradesmen in various trades – from shipper to baker to butcher – to their work, not allowing any change.  As these people were reminded, their lot was directly tied to the public treasury; therefore they were bound to stay put.

Ultimately, to avoid the economic oppression caused by Rome, previously free men voluntarily turned themselves over as slaves to landowners.  Rome even passed a law to outlaw this practice!

In any case, for Ambrose to point longingly to Rome as a model is a false hope of tremendous proportion.

But back to Ambrose. 

Is there a cost to this? Sure. It is an internal redistribution of wealth within Japanese society from creditors to debtors (debtors in this case being the state). It is an inter-generational transfer. Those retiring in five, ten, or fifteen years will be poorer: but the burden on those who are now young children will be less onerous.

I think he is wrong here: this will help those retiring in the next several years because it will delay the default (both direct and indirect) of the state and the state’s promises.  It will hurt the young – as long as mechanisms are in place to transfer wealth from productive institutions (for-profit entities) to non-productive institutions (states), the standard of living will not grow as fast as otherwise.  This can only hurt those who hope to live on this planet for another five or six decades.

In the big picture, though, Ambrose is quite correct.
1)      Central banks will keep buying public debt or anything else they desire as long as commonly measured price inflation (and public backlash against actual price inflation) is benign.
2)      There will be no wind-down of central bank balance sheets.
3)      This could take a very long time.

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