The Consequences of Deliberate Deregulation in Anglo Economies
The swift and massive shock of the coronavirus pandemic and shutdown measures to contain it have plunged the global economy into a severe contraction. According to World Bank forecasts, the global economy will shrink by 5.2% in 2020, representing the deepest recession since the Second World War, although there are predictions that this figure will be larger. The largest fraction of economies are likely to experience declines in per capita output not seen since 1870, according to the World Bank in its June 2020 Global Economic Prospects (Ref. 11).
There was much excitement recently “Another sign of economic resilience amid the pandemic”: Wall St. Journal over the Dow Jones Industrial Average (Ref. 10) rising above 30,000 for the first time ever (Ref. 13). This beg an important question: Why do Stock/Share values keep rising when the World is in the midst of this nightmare? Some “answers” may be found in an article (Ref. 1) which describes a “Long Divorce” between economies and financial markets. Ken Hou Lin & Neely’s book (Ref. 9), provide some answers to this conundrum, which might be framed by the following:
“This is the essence of modern money. Advanced-country central banks can engage in quantitative easing to bail out banks that are losing money, because their banks are too big to fail. The difference between quantitative easing and a Ponzi scheme is that the interest rate promised in the former is near zero to negative, but the escalation of scale is the same. I call these Qonzi schemes. Countries whose currencies depreciate gain by passing “losses” to others, because they gain a competitive trade advantage. But if everyone depreciates at the same rate, the whole world ends up with more deflation. Remember, when the Ponzi music stops, all losses are realised. As Warren Buffett said, when the tide goes out, you know who has been swimming naked”. — Andrew Sheng.
The financial QUONZI (Ref. 4) “Bazookas” simply keep on coming (Ref. 2). Imagine doing the same thing over and over again with little progress and no relief. That sounds like most people’s vision of hell, or the Central Bank current predicament. Most people have no real idea about what QE-Bazookas are, probably because no-one tells them. They have other things on their minds. The subject is not arithmetically all that complicated in reality, but the process been kept fairly low key and deliberately obfuscated by silly finance language such as “Quantitative Easing”. Several enquiring minds continue to wonder why this was repeated when it did not really appear to work well previously.
The answer is simple: There Is No Alternative [TINA]. It is as though the situation at some point in time became trapped by and within itself and things just had to be kept going. Lin & Neely (Refs 1, 8 & 9) describe this steady decades long march perfectly and succinctly:
“The divorce between the economy and financial markets did not start in 2020 but in the 1990s. While the two were loosely linked between 1950 and 1990, financial markets began to decouple from the real economy during the Clinton administration, because of financial deregulation. Shareholder value became the corporate doctrine, mass layoffs become common practice, and economic inequality soared.”
“But no one can deny that the widely held belief in financial markets as a reflection of the economy’s strength is mere fiction. Stock prices do not measure the value that firms can create from producing but the profits they can distribute from extracting. A shrinking economy hurts only the former and not necessarily the latter”.
This is the result of regular and successive deregulation of financial systems predominantly in the Anglo-Saxon finance world, led primarily by Wall St. and City of London, to deliberately “free up” the finance industry. In 1986 the US Federal Reserve reinterpreted the Glass-Steagall Act and decided that 5% of a commercial bank’s revenue could be from investment banking activity, increased to 25% in 1996, with the Fed ruling in 1997 that commercial banks could engage in underwriting, the method by which corporations and governments raise capital in debt and equity markets. In 1994 the Riegle-Neal Interstate Banking and Branching Efficiency Act was passed, amending the Bank Holding Company Act of 1956 and the Federal Deposit Insurance Act, to allow interstate banking and branching. In 1999, the Financial Services Modernization Act, or Gramm-Leach-Bliley Act, was passed, overturning the Glass-Steagall Act completely. In 2000 the Commodity Futures Modernization Act prohibited the Commodity Futures Trading Committee from regulating credit default swaps and other over-the-counter derivative contracts. In 2004 the SEC made changes that reduced the proportion of capital that investment banks have to hold in reserves (Ref. 6).
Those few men knew what they were doing and although they may not have known the full extent of the consequences, most did not care much about that and what might be called a Bifurcation Divorce between the financial stock/share numbers and asset values and the real world or economies resulted. An excellent Forbes article (Ref. 3) describes what has happened post-2009 (“Blue Chip Debt Junkies” table) with regard to corporate debt.
An example of a company stock price rise which illustrates the results of modern business models, which must generate quick, regular short term profits with a very low cost/asset base is the McDonald’s product-leveraging franchise model (Ref. 7). This is illustrative of the sort of extraction and stock-gambler “model” we have seen growing rapidly over the last 10 years.
Every month Yardeni Research produce a set of central bank monthly balance sheets (Ref. 12). Figure 6 is really quite striking. Figure 2 in the Yardeni report for October 2020 is also worth considering, which shows that the 4 major central bank total assets are about ~ USD 20 Trillion, which has leaped in 2020 by 2.3 Trillion with the latest act of money creation. This figure may be compared to a huge volume of money sitting in offshore Tax Havens estimated by Tax Justice Network at USD 22 to 32 Trillion in 2012.
There is therefore more nominal cash sitting beyond government control than in all four main central banks combined, which should give food for thought. Those with access to those substantial funds via electronically transferred numbers could be described as now having the same “purchasing power” as the world’s 4 main Central Banks combined. Think of who that may be. The vast majority of what we used to think of as money was is now simply “credit”, much of it in some bad, dark hands. That is quite something. Forty years ago those numbers were different. There has been a “Bifurcation” in global inequality ((Ref. 5) and in parallel, global organised crime and their “financier” facilitators have quite a lot more clout to wield.
References
1. Economic Sociology & Political Economy (2020), “The Long Divorce Between the Economy and Financial Markets”, 14th July 2020
economicsociology.org/2020/07/14/the-long-divorce-between-the-economy-and-financial-markets/
2. Financial Times (2020), “While Real Rates are Low, the Bazooka is Here to Stay”, 13th June 2020.
www.ft.com/content/b3df25e0-8dd4-11e9-a1c1-51bf8f989972
3. Forbes (2020), “Inside the 25 Trillion Debt Binge that has Taken SP500 Titans Including Boeing-and AT&T from Blue Chips to Near Junk”, 21st May 2020.
4. Gallowglaich (2019), “Ponzi Quantitative Easing [QE] Scheme — Quonzi”, 13th October 2019.
k-gallowglaich.medium.com/the-quantitative-easing-qe-ponzi-scheme-591af430391
5. Gallowglaich (2019), “Rising Wealth Inequality and the Growth of an Ecosystem of Fake”, 2nd December 2019.
6. Investopedia “Deregulation”: www.investopedia.com/terms/d/deregulate.asp
7. Investopedia “How McDonald’s Makes Money: www.investopedia.com/articles/markets/032015/how-mcdonalds-makes-its-money-mcd.asp
8. Ken-Hou Lin (2020), “Why the Great Recession Made Inequality Worse”, 10th February 2020.
medium.com/@kenhou.lin/why-the-great-recession-made-inequality-worse-oupblog-48163ab4a3bc
9. Ken-Hou Lin and Megan Tobias Neely (2020), “Divested: Inequality in the Age of Finance”, Oxford University Press, 6th January 6, 2020.
global.oup.com/academic/product/divested-9780190638313?cc=fr&lang=en&#
10. Markets Insider: DOW 30 Market Capitalization: markets.businessinsider.com/index/market-capitalization/dow_jones
11. World Bank (2020), “COVID-19 to Plunge Global Economy into Worst Recession since World War II”, 8th June 2020.
12. Yardeni Research Inc. (2020), “Central Banks: Monthly Balance Sheets”, 26th November 2020.
www.yardeni.com/pub/peacockfedecbassets.pdf
13. Wall Street Journal (2020), “The Dow Hits 30,000”, 24th November 2020.
