“I Truly Believe We Are All Toast”

So commented Marc Faber on CNBC this morning. He went on to comment that the US Federal Reserve would continue printing money in an attempt to save the situation until the whole Capitalist system collapsed!

Faber's views have to be taken seriously. Over the last decade he has put his money where his mouth is, and has made some serious money from his predictions of the global markets. And his opinion stated here was backed up by an announcement from the US Federal Reserve. It has said that when its holdings of Mortgage Backed Securities (MBS) expire, it will use the proceeds to restructure its Balance Sheet by buying some US Treasury Bills. See Fed Mulls Symbolic Shift as Economy Wavers. It had been thought that as these MBS expired, the Fed would just use the proceeds to rebuild its Balance Sheet, as a means of gradually exiting from its policy of intervention. This statement coming on top of recent comments by Fed member James Bullard, signify that the Fed is taking the danger of deflation seriously, as the US economy begins to slow down again. This will be the first time that the Fed will have conducted a policy of QE based on directly buying Government Debt, which was done by the Bank of England, and subsequently by the ECB.

I think Faber's comments are overdone, but his comments amongst similar comments by other Capitalist traders and analysts reflect the fact that there is a growing sense of panic within Capitalist ranks. Another contributor to the CNBC discussion this morning spelled out the real problem. He said that there were so many consequences of the fall-out from the crisis of Autumn 2008, that the ripples were still spreading out with unknown results. Its not possible he said to look back to some other similar scenario to know what to do, because there is no similar scenario, no Capitalist play-book by which to determine strategy. That seems to me to be right. I have been thinking about writing a post about the global situation, which I think is bets described as multiple bifurcations. That is, if you look at Britain, I see the potential for a serious asset price deflation at the same time as significant consumer price inflation. I see the need for high interest rates to deal with the latter, but the need for continued low interest rates to stop the former completely cratering, and the economy along with it. In Europe we see the basis of strong economic growth in the North, in Germany in particular, but Depression in Southern Europe, with similar contradictory policy needs. We see the dominant political forces in Europe pushing for austerity and retrenchment, whilst in the US, we see continued fiscal stimulus, and as set out above the likelihood of further money printing. In part, that is Europe allowing the US to take the strain, and in the process weaken itself economically in the longer-term, to the benefit of European Capital. We see continued huge indebtedness with a consequent lower level of economic vibrancy and growth in the West, with growing economic vibrancy and dynamism in the East, along with the continued build up of financial reserves, but which the East is increasingly concerned about lending to the West, because of the danger of those financial assets being seriously deflated. We see the potential for a long-term decline of Western living standards, and a significant rise in Eastern living standards, and along with all of that a resulting shift in political and military power.

One consequence is a large scale deleveraging in the West. Companies are paying back debt and building up cash on their Balance Sheet, because they as much as Faber and Co have no clarity of vision of what the future holds. That was what a large Capitalist State was supposed to provide for them. But, the scale of the financial crisis was such, and the role of right-wing populism based on illiterate economics about balancing the Budget is undermining that role. Not just companies, but individuals are also paying down debt, and scaling back spending and borrowing, because they too have no clarity of what the future holds. Certainly in the UK, and those other countries of the EU where austerity measures are being introduced with immeediate consequences for jobs, and near-term implications for living standards, no one can feel confident about making anything other than very short-term economic plans, and they are likely to be more of the batten down the hatches variety than any bold plans to spend money on large items, or setting up a business etc. In that sense the Liberal-Tory pleas to the banks to lend more money are ridiculous, the Banks are almost certainly closer to the mark in saying that the reason they are not lending as much as the Government wants is because the demand is reducing, or at least the demand from those likely to be able to pay it back is reducing, people about to go bust always want to borrow money.

In many ways the situation reminds me of a person who is facing so many problems, and conflicting demands upon them that in the end they cannot cope, and have a breakdown. In that sense Faber could be right. The system could face a systemic breakdown. Even Prechter who predicts the worst Deflation and Depression for 300 years could be right. But, Capitalism has come through such breakdowns in the past. Moreover, Capitalism is a global system. As a Global System the Long Wave boom remains intact. The normal working of combined and uneven development would tell us that even within that there will be some economies growing and becoming more dominant and others on the wane. A serious breakdown would simply mean that bifurcation was more sharp than it might otherwise be. Marx said that crises are the means by which Capitalism resolves such contradictions. Such large contradictions, and so many of them might require a larger than normal crisis. But, especially in the context of the Long Wave boom, such a crisis does not at all mean the end of Capitalism, nor does it even mean that such a crisis would necessarily drag on. It could be just what it requires for the next stage of robust dynamic growth to proceed.