17: The Quick and the Dead

The polarity in our title is rooted in ancestral tongues. "Quick" in old English means "alive" in obvious kinship with the Latin "vivus." Advice is embedded there as well: in the jungle from which humans emerged and into which we are rapidly sinking again, one has to respond "quickly" to stay alive. Then, too, to thrive under the current dispensation you must be more than a little "vivo," which in Spanish has overtones of roguery.

But it is the contrasting ways in which economists apply these two concepts to key statistics that should ring an alarm bell. A few key statistics are condemned to being "dead," i.e. immobile,—notably the price index, wage rates (except downward), unemployment figures (except upwards) whereas others, interest rates, and hot money, are the "quick" that simply must be free to move around, up and down, 24 hours a day.

Such an arrangement was not heaven-ordained. Inmost of the great religions usury is a sin. Such agreement must sum up traumatic social experiences over aeons.

"Quick" interest rate hikes are supposed to keep prices "dead" and bestow a monopoly as stabiliser on mobile money. All rival ways of "fighting inflation" that had been successful in financing WWII and a couple of post-war decades of improved living standards were ruled out, one by one. The Bank of Canada had played a brilliant part in financing the war at quite nominal rates. This was not funny-money—since 1938 the BoC had a single shareholder, the Government of Canada, and by virtue of that all interest paid on government debt held by the Bank came back substantially to it as dividends. In the mid-seventies the BoC held well over 20% of the federal debt. Ceilings were in place on the interest chartered banks could pay or charge.

The banks too, were required to deposit with the BoC non-interest-bearing reserves ("statutory" reserves) that for years had been 10% of their deposits in non-interest-bearing money, plus "secondary reserves" in interest-bearing securities that amounted to another 10%. When too much demand was pushing up prices remedy was available in a variety of ways other then raising interest rates. The statutory and/or the secondary reserves could be increased. This would restrict the volume of bank credit without increasing interest rates.

In short there are disturbing indications that the beneficiaries of the "quick" statistics have conspired to render the proscribed statistics "dead." That amounted to a double-header. Not only did money-lenders increase their revenue from the higher rates, but they were also guaranteed flat prices for everything they buy even though prices may have risen because of the increase in public services. Pushed high enough, interest rates can move beyond usury. By bankrupting viable businesses, they empower moneyed interests to create their own flea-marker bargains. There is an obvious conflict of interest there that has been kept under wraps.

There has been a similar lack of curiosity as to whether prices can or should be required to lie "dead." It is widely recognised that our present price system ignores the damage inflicted on the environment, on households, and on our public services, and on subsistence economies. But mainstream economists don’t allow such concerns to disturb their faith in "controlling inflation" by raising interest rates.

There is in fact no more destabilising instrument than raising interest rates. Higher interest rates do more than transfer money from those who have less of it to those who already have much more. In all developed countries ofthe West the sixties were a period when institutions for bringing in a greater measure of social justice were being put in place. World War II had been won in part by the promise of such measures. Since these delivered higher education at nominal prices to those who qualified, and health insurance, unemployment insurance, and old age security to almost everybody, this inevitably entailed a higher price level. Their costs were paid largely from taxation which showed up as a deeper layer of price.

Making no distinction between such "structural" price increases that reflected the vast investment of the public sector in physical and human capital, and responding to the misdiagnosed problem by raising interest rates was a fail-safe method for undermining the welfare state. Use of the central bank to help finance government needs was declared inflationary. Instead government borrowing was directed to the chartered banks at mounting rates that had been elevated to the sole remedy in the official policy kit.

All this gave rise to the Mother Hubbard syndrome: the old lady’s cupboard was guaranteed always to be as bare as a newborn babe’s bottom, and she would always have more children than she knew what to do with. Indeed, unemployment, too, was declared a weapon against inflation. It was an ingenious plan for circumventing democratic process—especially since less and less dialogue on such subjects was being allowed. Economists aspiring to tenure in our universities, to lucrative positions with brokerage houses or the government, fell into line.

High interest rates not only deprive the less privileged portions of the population of current income, but of the possibility of ever accumulating the reserves essential for bettering their lot—either through education or by enough saving for investment.

On the international arena it thwarts any possibility of the former colonial countries from amassing the capital that would allow them to undertake a peaceful redistribution of lands taken from the natives at the time of their conquest. Democratic constitutions without such land reform are doomed to fail and to give way to violent confrontations.

In recent years various factors have hastened the crisis of the "leave-it-all-to-the-market" model. The end of the Cold War and the declassification of key documents on covert operations of the CIA have led to some startling disclosures on how the world was run during the past half-century. The subversion of legitimate governments by the Western powers, the fostering of civil war, of terrorist activities attributed to local Communists were all directed to deepening the subservience of the raw-material producing countries. If we collate the timing of these cloak-and-dagger activities with the landmarks of the counter-revolution that wiped out much of the achievement of the Keynesian revolution, a close correlation emerges.

The preparatory moves in reversing the Keynesian revolution are usually dated from the Federal Reserve-Treasury Agreement of 1951. By that time the School of the Americas had already been set up in the Panama Canal Zone to teach Latin American army officers high-tech methods of murder, torture and subversion. The sixties were not only the high point in setting up the social institutions of the welfare state, but saw the Americans bogged down in Vietnam. They had been led to that disaster by their too facile successes against democratically elected regimes in Iran, Guatemala, the Dominican Republic, Brazil, Chile, and elsewhere. So determined a plan of world domination could hardly have overlooked the need to secure a grip on the world’s public treasuries and central banks.

A couple of decades ago it would have appeared ungentlemanly to suggest that the suppression of the ideas that lifted the world out of the Depression, financed the war and gave us two very positive decades of peace, might have been anything other than the outcome of scholarly dialogue. Today, however, the only scholars who count seem to be economists who work for banks and financial firms. Valuation in academia has converged strikingly with the valuations of the stock market.

Recently I read the proofs of a remarkable book by J.W. Smith that will shortly be published by ME. Sharpe: Economic Democracy: The Political Struggle of the 21st Century. It sees in the current deregulation and globalisation a continuation of the conquest of their hinterlands by the cities of Renaissance Italy. Their purpose was to destroy the industries that had begun springing up outside the city walls, and annexation of the surrounding territory as sources of cheap raw materials. In this way they strengthened their own monopoly of lucrative manufacturing that could provide the high "value-added" multipliers that allowed capital accumulation.

Such capital accumulation for its part was the path to power. Smith tracks the process to later centuries Britain’s conquest and destruction of the superior textile industries of India; to the Napoleonic wars in which France excluded Britain’s industrial exports under its continental system. He sees a reflection of their own interest and little else in both Britain’s advocacy of free trade and in the protectionism of the United States and Germany during the 19th century. That also explains the frantic empire-building of the great industrial nations in the same period.

These disclosures blow the very method of statistical regression of econometrics our of the water. If economic history has been shaped essentially by a hyperactive interventionist policy posing as a free market, how could the future possibly be foretold from the best fit for the coefficients of the free market model to the statistics of this manipulated past? The leaves in a teacup would provide as good clues to our future.

—from Economic Reform, June 2000