Friday, May 27, 2005

A New Paradigm 

Dear Richard,

I haven't heard of your activities lately but I imagine that, whether right within the scenes or behind them, you continue to play a part in the major questions of the day.
You might be interested in the exchange below. Richard Werner has written a distinguished book on world economic policies, with special reference to Japan (where he was living until recently).
You will recall that, more than thirty years ago, I tried to have our government adopt more enlightened economic policies. I published "The Indigent Rich" in 1971 and other books later. To no avail, of course. Successive governments became enmeshed ever more deeply in policies that have led to what I have described in my message to Werner.
Our present government has done no better - and indeed thinks the Australian economy is in splendid shape and that the prospects are bright, while it may in fact, along with others, be on the edge of an economic, political and strategic abyss.
I hope you're doing well.
Best wishes to you, both personally and professionally.

James Cumes


A New Paradigm

Dear Richard,

As I understand the general thrust of your argument, I think you are right. (Like most of us, I tend to believe that "right" is what accords with my own thinking!)
The conduct of central banks is unbelievably simplistic - but still we have to believe the evidence. They lie in wait for a sign that "inflation" might be impending and then they leap on "it" and raise interest rates. If and when they think "inflation" has been beaten or no longer threatens, they lower interest rates.
In carrying out this extraordinarily facile procedure, the central banks have acquired a mystique of omniscience to which most of us customarily, habitually, almost reflexively bow.
Governments have passed over their sovereign power to the central banks in these matters. In practice, governments have instructed central banks to do what they have now been doing for decades: to stand guard and, at the slightest sign of "inflation", to hike interest rates - something that governments have in effect admitted that they haven't the wit or the stomach to do.
Perhaps that's because - though this is unwarranted speculation - governments know in their hearts that there's something crazy about the whole mainstream concept of how to control inflation - and growth and employment and all the rest of it.
But they don't know - and haven't the wit to find out - what is the right way to go about macro-management of the economy. Instead, they heap praise on the diligence and judgement of the central banks when they act with "discipline" to "fight inflation" and "slow" the economy by hiking interest rates - or holding them too high. There is an attitude that we are right - or central banks are right - to act like a penny-pinching Scrooge by raising the cost of money for the most slender of reasons - and indeed when such action flies in the face of any reason at all to which we can accord respect.
None of this is new. As I've said so many times before, the basic "policy" goes back to Nixon and Burns in 1969, when they hiked interest rates to "fight inflation". As blind Freddie should have been able to tell them - and as I did tell them as early as 1970 and 1971 - inflation did not go down. Instead it went up and we entered the era of stagflation.
That didn't deter governments or central banks in the United States and around the world. Interest rates - and their raising or lowering - became a persistent obsession with everyone and almost the only significant instrument of economic management for the world's greatest economies and, if they wanted to be acknowledged as wise and worthy, by the world's middling and smallest economies too.
Of course, "evidence" did emerge that these wise and worthy policies were working. The record of the 'seventies wasn't good; but the 'eighties brought more comfort to those mainstream economists, analysts, central banks and governments who believed that a simple yo-yo manipulation of interest rates was what was needed to give us stability - and "sustainable" growth, high rates of employment, "free" trade and all the rest of it. (Of course, we've had few of those things in reality but we've gone on believing that, with "discipline" by the central banks and our sturdy concurrence in that, we've been doing rather, fairly or very well, depending on where your particular economy stands at a particular moment.)
What has really happened is that inflation in the United States and several other countries has not been "beaten" but only shifted from domestic consumer price rises to deficits in the balance of trade and payments - and the gutting of industry in the United States and in those countries that have adopted the United States "model".
This shift is crucial to our understanding of the present national and world economic situation. It is also crucial to our assessment of shifts in the political and strategic power balance.
Over the last few years and even more in the last few months, the United States Administration has been preoccupied with the massive trade deficit with China and as always the tendency has been to blame the other party: it is for China to take remedial action and, in particular, to loosen the peg between the Chinese currency and the US dollar.
However, the situation vis a vis China is not new, except in its magnitude and implications. It goes back more than thirty years to the monetary policies of Nixon and Burns in 1969 and the collapse of the US dollar - and the IMF - in 1971. Those policies, persisted in over the years, created the Asian Tigers and, gradually, awoke the giant China. The China miracle began around 1979, after more appropriately opportunistic policies were adopted by Beijing. Progress was relatively slow at first but momentum steadily built up.
Recent growth has been unprecedented in speed and scale. The policies of the Beijing Government have been conducive but, above all, United States policies - policies that, in their essence, go back to 1969 but which have been intensified in the years since - have been essential to the creation of the Tigers and, more recently, to the rousing of the slumbering giant, China, as well as indeed the other slumbering giant, India.
Fixed-capital investment - and with it, real productivity and production - have suffered. As Kurt Richeb├Ącher recently put it, there has been a "serial massacre of the [American] manufacturing sector through the growing trade deficit." This massacre has not been confined to the United States but has engulfed a number of countries, including Australia, whose policies have taken the United States as a "model."
These are developments of the most awesome significance. They go far beyond the economic. They go deep into the area of the world political and strategic balance. Whatever the "shock and awe" that the American military can deliver, the political and strategic balance has shifted against the United States. It has shifted because of the policies that a succession of United States governments has adopted. The present Bush Administration has intensified the American embrace of policies of self-destruction; but it cannot be accused of initiating them.
At the same time, it is hard to imagine that the Bush Administration can frame and adopt policies which will reverse the rush to self-destruction. Much the same can be said of other governments, although there are some stirrings of unease within, for example, the European Union. Britain seems still more complacently assured that it is on the right track than, for example, France and Germany.
Even though there might be these "stirrings", the chances must be that there will be a major collapse of the United States and other leading economies before the imperative for wiser, more balanced macroeconomic, central-bank, monetary and interest-rate polices can come into effect.
Such a collapse will, of course, be extremely dangerous in the interstice between the reign of one superpower - the United States - and the secure inauguration of its successor.
It is sobering to reflect on how the cause of these monumental changes can be traced to such an apparently simple and almost trivial error as failure to understand the role of interest rates and, of course, to persistence in that error. At the same time, we have to acknowledge that, over the millenia, great societies and economies have flourished and then, sometimes quite suddenly, have died - or at least faded in economic, social, political and strategic significance. China slipped from being a "global" power some centuries ago because of the erroneous policies of its administration then. It is now being re-born, partly because its administration now has had the wit to see an opportunity and grasp it; and crucially because another powerful administration in another country has, through its policy errors, passed the baton back to where, in the reasonable Chinese view, it rightly belongs.James Cumes
----- Original Message -----
From: Richard Werner
To: James Cumes ; gang8@yahoogroups.com
Cc: Wray, L ; Arestis, Philip
Sent: Thursday, May 26, 2005 5:09 PM
Subject: Re: [gang8] A New Paradigm
Dear James,

If I may interject with my opinion on this matter: one of the main thrusts of argument in my book is to show that interest rates are not the crucial variable that central banks make it out to be. Thus it is not the level of interest rates that is responsible for boom or bust (interest rates follow growth; they are the result. The result cannot at the same time be the cause).

Instead, as Geoffrey points out too, it is bank credit creation. Since we do not have perfect information, markets do not clear. In that case it is not prices but quantities that are key. Rationed markets operate according to the 'short side principle' which gives allocation power to the short side which determines the outcome. Thus it is not the price of money (interest) which is key, but its quantity.

This answers your question about the direction of funds: with the credit market rationed and supply-determined, banks are thus the allocators who can pick and choose where to put their money. If they lend for productive investments, you get non-inflationary growth. If they choose to lend to the real estate sector we will get real estate price inflation (as seen in the US, UK, Australia, Spain at the moment). If they lend to the consumer, we will see consumer price inflation.

Thanks and regards,
----- Original Message -----
From: James Cumes
To: gang8@yahoogroups.com
Cc: Werner, Richard ; Wray, L ; Arestis, Philip
Sent: Thursday, May 26, 2005 7:49 AM
Subject: Re: [gang8] A New Paradigm

As always, your analysis is splendidly learned and wise - and at the same time practical and down to earth.
If you have time, I would especially like to see how you apply the United States position of the last couple of years, to what you say in your final paragraph -

One of Richard's pre-occupations in the book is of course the question of why low interest rates did not create a boom. I wonder if one of the possible answers is the that low interest rates drive money abroad, chasing higher returns. This thought goes back, I believe, as far as Thornton (1803?) and Tooke (1832?), and it is also implicit in Gibson (1923). Gibson says when interest rates on long term gilts are low, investors will look for higher yielding equity investment - he does not say where - but what if such yields are only available in foreign countries? Was the Japanese stagnation caused by the fact that better returns were available in Thailand or China or even in Britain or the US? One reason which might have made companies in Japan reluctant to invest in Japan may have been the high tax charged on fixed investment. It is difficult to imagine a more silly tax than that. Like Land Value Tax it is effectively nationalisation without compensation. What investor is going to buy new assets in order to have them partially nationalised immediately? What drove the Japanese to adopt such a lunatic tax? And to make things worse they followed it up with a small LVT on private property. They have since had the sense to suspend the latter tax, but the lesson has not been learned in Britain.

Low interest rates in the United States have stimulated a boom/bubble in housing - and one that seems still to persist quite robustly. The stock market has not exactly boomed but has moved up and down within a fairly narrow range.
What seems NOT to have benefitted is fixed capital investment - the crucial element in creating and maintaining solid, sustainable growth. Is there convincing evidence that the low interest rates - at times negative - have discouraged domestic fixed capital investment but robustly encouraged fixed capital investment overseas, for example, in China?
Have investors - and companies themselves - found it more profitable perhaps to borrow in the United States but to build their factories or whatever in China etc?
Your comments would be appreciated because you see these issues with a clarity and good sense that few other "analysts" ever seem to do.

James Cumes.

Sunday, May 15, 2005

Cannes: Where are the Aussies? 

Cannes: Where are the Aussies?

by Christopher James

I'm here at the Cannes Film Festival where the celluloid heart of the film world throbs with the hot blood of passion, anticipation and ambition. The stars shine bright, the hoardings scream their news about smash hits from around the world, the film brokers do their billion-dollar deals...
But I hear not a word about an Australian story, a great Australian drama, a smash hit from down under. Any Aussie brokers are paying top dollar for someone else's product.
We're not really surprised.
The Head of Drama even of Australia's leading Channel Seven, John Holmes, deplores the dearth of dramatic Australian material. So does Australia's Channel Nine, as well as the ABC and SBS.
None of them are doing much that's dramatically memorable. Mostly they whine and bewail their ill fortune. Some bewail that they're stuck with reality series - a reality that's too real to do anything but bore the pants off their ever-diminishing audiences.
Working with Channel Nine, Bryan Brown is busy with a second "Twisted" series of entertaining stories with a sense of mystery, intrigue or unease. They should be a great change from what viewers have recently had to suffer. One of those productions just might make it to next year's Cannes Festival, to be announced on a very small hoarding along the famous Boulevard de la Croisette.
But Two Twisted is unlikely to produce a great Australian drama, with great Australian stars, to be heralded with glamour and passion and presented proudly to the cognoscenti as well as the swooning public.
Why not?
In fact, it could happen.
The material is there. The actors are there. Australian stars are waiting for a great vehicle to exhibit their talents. Producers, directors, technicians - they're all there waiting.
All they need is a great Australian story.
And that's there too - just waiting to be translated to the screen.
Let's take one example. It's called Haverleigh and it's about the most dramatic period in Australia's history - when a bunch of hungry, half-trained, poorly-armed kids turned back the enemy in the jungles of the Owen Stanleys and at Milne Bay.
It's about how they fought and died and also how they lived and loved. Some readers have compared it to Gone with the Wind and War and Peace. Another suggests that the Haverleigh story is reality at its finest and most dramatic: the author "takes you there in his words, through his characters and offers you the gift of seeing first-hand what happens to people in the dredges of war."
Who are "his characters"?
There are such memorable women as the tough Jenny Graham who refuses to confess the love that dominates her life; the sophisticated Misty Cavell-Smith, with her Packard roadster, who loses her Romeo but never her style; and the plucky Cathy Lester who is ostracised for bearing her soldier's illegitimate son. Among the memorable men is Peter Brent who loses his virginity in the story's opening scene; Richard Brownley and David Strang who fight alongside Peter on the Kokoda Track; and Arthur Green, the nervous boy who becomes an ace fighter pilot. Frank Brand and Tony Murray are terribly wounded but help to throw the Japanese back into the sea at Milne Bay. So does bushman Jimmy Griffin who fights the enemy as he'd defend his land from marauding dingoes.
Haverleigh paints a picture of the rich adventure of Australian life during the most momentous years of the twentieth century.
Why aren't we telling stories like this? If we did, we'd be up on those hoardings along the length and breadth of the Croisette next year and every year. Our star actors and producers, directors and technicians would be strolling down every red carpet, to the applause of the fans - fans from all around the world - and Australia would be back, occupying the high points on the film-industry ladder we have sometimes risen to in the past.
What about that famous bottom line - the money sum? Investors would make millions out of it. If it joined in the venture, the Australian Film Commission would find that its money was again being well spent. The entertainment industry in Australia would have a great product to offer; and we would even have an export product that would help reduce that troublesome external trade deficit.
So perhaps there's reason for some optimism. At least I can hope that when I mingle with the cinema-industry's great and glamourous at Cannes next year, I will not feel that Australia has vanished into some terrible, film-making black hole. I can hope to see colourful hoardings along the Croisette and everywhere else in Cannes proclaiming our brilliant return to stardom. I can dream that people everywhere will be seeking us out and hoping to jump on to our unstoppable bandwagon.
It's not entirely a dream.If we open our eyes and get off our bums, it could be reality!

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