The dead hand of the state
I wish I was saying it’s going to happen soon… this is the longest running crisis in which people have been giving false dates, people turning up for summits saying it has to be resolved, nothing happens and people go away and the sky doesn’t fall in… sooner or later the sky will fall in, I’m just not clever enough to know when it’s going to be.
— Anthony Fry, UK Chairman of Espirito Santo Investment Bank (to CNBC)
Europe will adopt the American solution. The ECB will not allow large banks to default. It will inflate to buy the bad assets or else buy the bonds of the governments, so they can make payments. Then the bankers will put this money into excess reserves. New lending to businesses will cease. The West will go into permanent recession or no-growth stasis. The governments will absorb an ever-larger percentage of the region’s capital: bond sales. Private firms will not be able to borrow at low rates. Capital development will crease.
— Gary North (here)
The new millennium is teaching us vastly more about zombies than anybody could have anticipated. Long gone are the virile, predatory vampires that once populated horror stories about capitalism, sucking out the vital essence of the proletariat in gothic fortresses of ‘dead labor’. Instead, shambling worm-eaten wrecks mill about aimlessly, whilst augmenting their numbers in obscure cannibalistic circuits that defy rational comprehension and which are, in any case, too hideous to steadily contemplate. Fiends have degenerated into ghouls, who do not hunt and feed to strengthen themselves, but only to carry on, prolonging their putrescent decrepitude.
A 2002 Guardian story about “Japan’s zombie economy” prefigures a number of later, and more general, revelations. In particular, it identifies the spreading zombie apocalypse with the slow-motion collapse of Keynesianism, as ‘stimulative’ monetary and fiscal policies (zero interest rates combined with massive government deficit spending) lose their magical powers of revitalization, and instead merely perpetuate an interminable state of undeath. Hyper-stimulation is required just to hang on to the flatline.
Of course, being the Guardian, the solution is obvious: “what the economy needs now is a good dose of inflation.” For undead Keynesians, there’s no malaise too deep for an invigorating wave of currency destruction to solve. This is where the zombie metabolism really gets interesting. By the end of the decade, America had gone full zombie itself, and begun to realize that this wasn’t just some weird Japanese thing it didn’t understand, but an altogether more general and radically mysterious phenomenon. Ben Bernanke’s Federal Reserve pushed US interest rates to the floor (ZIRP) and began to incontinently monetize public debt (QE) whilst nationalizing private debt (TARP), using every available policy instrument to direct the economy in an inflationary direction, at maximum velocity. Nothing much happened. Zombies don’t do fever.
At this point, the questions come flooding in. For instance: why is anybody still buying Japanese or American government bonds? Isn’t it obvious that this paper represents nothing except a slice of unredeemable debt, promising an insulting return, ‘guaranteed’ by a structurally insolvent entity, and associated with policies more-or-less explicitly oriented towards deliberate currency destruction? What are people thinking? To answer that, it’s necessary to venture a little deeper into the zombie world.
The idea of the US Dollar (or Japanese Yen) as a ‘safe haven’ might sound like a joke, and you’ve probably heard it before:
Joe Dollar and Jacques Euro are camping in the woods, when they suddenly hear the terrifying snuffles of a famished carnivore, getting closer. Joe begins hastily pulling on his running shoes. “What are you doing?” asks Jacques. “You can’t out-run a bear market.”
“I don’t need to outrun the market,” Joe replies. “I just need to outrun you.”
At Asia Times Online, Martin Hutchinson envisages a financial crisis endgame that “eliminat[es] the government debt markets that have formed the centerpiece of the last three centuries,” returning the world to the market-based money and free banking regime of 1693, before the creation of the Bank of England. Paradoxically, however, the prospect of collapse raises the financial potency of the state to an unprecedented level, as the ‘safety’ it promises disconnects from questions of economic competence and reverts to something far more atavistic and Hobbesian. Once everything starts to buckle, credibility attaches to the biggest, meanest, and most ruthless provider of mafia-style ‘protection’. Relativistic (zero- or negative-sum) power politics takes center stage.
A pedestrian but informative financial report from Bloomberg sets it out clearly:
Jim Chanos, founder of the Kynikos Associates Ltd. hedge fund, said that while the chances of a recession may be increasing, the U.S. economy is the “best house in a bad neighborhood”
The US Dollar might be nothing more than the “best looking horse in the glue factory,” but once the financial logic of zombie apocalypse takes over, the implications can be far-reaching. Bloomberg continues:
Ten-year Treasuries erased losses after the U.S. sold $29 billion of seven-year securities at a record low yield of 1.415 percent, wrapping up $99 billion of note sales this week. Ten- year yields fell four basis points to 1.88 percent after climbing as much as four points earlier. The rate is up from a record low of 1.67 percent on Sept. 23.
U.S. Treasuries maturing in seven to 10-years have returned 14 percent this year, outperforming a 9.3 percent return for the broader Treasury market, according to Bank of America Merrill Lynch indexes, as of yesterday [Nov. 23].
It’s worth taking a moment to digest these numbers. Nobody expects average US inflation over the next seven years to come in under 1.415% p.a., or under 1.88% over the next ten, so the yield is sheer racketeering. Yet this blatant assault on the lower colon of savers has been compatible with a one-year return of 14% (!) — they’re begging for it. Seriously, who cares if Bernanke is lighting up a fat Cuban with a large bill lifted straight out of their pocket? It just makes him look badder, and that’s what they’re paying for. Gold sounds good in theory, but it doesn’t come with its own attached gangster organization, so hanging onto it through the zombie interlude could be difficult. It’s safer, by far, to invest in the alpha state.
Because this Hobbesian zombinomics is political and relativisitic, there are epsilon states at the other end of the trade, as well as a beta state caught in the middle. Europe isn’t a state at all, of course, which is how the (interminable) final phase of zombinomics got started. Before it changed, however, the EU conjuring act seemed to be going pretty well. Every Eurozone member state issuing government debt in the common currency paid yields that were broadly harmonized, as if Europe was a financially sovereign entity, standing united behind its paper. The realization that economic sovereignty remained national, even after the alienation of monetary sovereignty to the European Central Bank, came as something of a shock, and bond spreads gaped accordingly.
The hallucination of ‘Europe’ as a united, honorary alpha state, rapidly degenerated to reality, recoding government bonds as zombie apocalypse security scrip. Suddenly, Greek bonds stopped having anything much to do with the ECB, and started to mumble promises in Greek – ultimately, that the Greek state would do whatever it took to secure redemption, whilst mobilizing its Olympian powers to maintain social discipline if necessary. A flight for the exits immediately ensued. Ditto, with variations of speed and intensity, for all the epsilons (= PIIGS).
Where to flee? That’s the zombinomic question par excellence (searching for the best looking horse in the glue factory). First choice, for the keenest Hobbes readers, was to head straight to Mr. Big, a.k.a. Benny the Yank, wait politely whilst he finished smoking a mirved nuke, and then beg for protection (that’s your 14% one year jump in the value of a 10-year US Treasury bond, right there). The second choice — more appealing to old-fashioned types who thought economics still counted for something – was to look for comparative financial responsibility closer to home.
Briefly, this route led to genuine quality, but zombinomics quickly resumed its grip:
Switzerland sparked fears of a new currency war on Tuesday [Sept. 6] after it pegged the Swiss franc against the euro in an attempt to protect its economy from the European debt crisis.
The Swiss National Bank in effect devalued the franc, pledging to buy “unlimited quantities” of foreign currencies to force down its value. The SNB warned that it would no longer allow one Swiss franc to be worth more than €0.83 – equivalent to SFr1.20 to the euro – having watched the two currencies move closer to parity as Switzerland became a “safe haven” from the ravages of the eurozone crisis.
… which brings us to Germany, and the latest chapter in the zombie saga — comic or tragic, and probably both, ironic to the point of absurdity in any case. Ruined, shrunken, divided, and traumatized by guilt, post-war Germany sought above all to bury its nationalistic aspirations in Europe. What became the EU was for Germany – as Algeria was for the French foreign legionnaires – a place in which to forget. Now the bond ‘market’, in its increasingly desperate search for a big, tough, disciplinary state (a global beta will do fine), is determined to dig the Teutonic Leviathan from its grave.
With twin memories of Weimar hyper-inflation and statist hyper-assertion still vivid, Germany is stubbornly holding out against the full-zombie option of (monetary and fiscal) financial debauchery counter-balanced by Hobbesian security politics. This reluctance to throw itself into the spirit of the age has, naturally enough, exposed it to relentless international vilification, and the pressure will only increase. It could all get unpleasantly interesting.