Milton Friedman

Suicide by Deflation

Off the keyboard of John Ward

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Published on The Slog on December 16, 2014

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CRASH2: Neoliberalism, murderer of inflation, commits suicide by deflation.

How devious geopolitics and dead-end globalism combined to eat the world economy

You have to hand it to the neoliberal fraternity – perhaps I should say patriarchy – there’s never been a belief system in history capable of breaking all its own rules one by one, and still trying to tell us it’s the best socio-economic development system on the planet.

The world’s Milt-milkers have variously demanded to be nationalised, expected to be saved, opposed any and all reform, used austerity as a form of stimulation, tried Zirp as a means of increasing spending power in a recession, produced endless monopolies of media, banking and energy, used the biggest Government market interventions of all time, and then produced the slump to end all global slumps.

I’ve read most of Friedman’s stuff, and leaving aside for a second its narrow academic inability to take real people into account, I really don’t remember any of the above features being present in his work. However, one thing he did like was the idea of conquering chronic inflation; so whatever else one wants to throw at the neolibs, this you have to grant them: they have indeed wiped out inflation.

Imagine my surprise, therefore, when around five years ago 0% inflation suddenly became a spawn of the Devil. Yes – believe it or not, and frankly it’s an unavoidable conclusion – those who used Milton Friedman as their guiding light for so many years have even decided that this tenet of the Messiah’s gospel is also a false witness. (Or to use the other excuse, “Milt would never have recommended doing this”).

What we have today – and the virus is spreading fast – is deflation. So today I’d like to ignore all the other drivel that MF spewed out over three decades of abject failure in the real world, and focus single-minded on that.

Why did inflation suddenly swap places with deflation as the Great Global Bogeyman?

The answer is threeofold: politicians spending beyond their means, greedy bankers trading with each other beyond human understanding, and bourse-demanded growth insisting on consumer credit.

Succinctly, exposure to dangerous level of debt.

In an inflationary world, debt gets smaller in real terms all the time. So banking and politics have one thing that binds them together above any other: to avoid a deflationary world where debt gets bigger in real terms.

The globalist world today runs, grows, produces, swaps, and demands debt. Whereas real, entrepreneurial capitalism takes calculated risk to produce positive growth, mercantilist monopolism requires unfeasible debt just to function.

So where there is debt, there must not be deflation. And that’s why, after 2008, deflation went, with one mighty bound, from Goal of the Good to Spawn of the Devil. That’s largely why we had QE to erode currency value, Zirp to make repair easier – and specifically now, gold suppression to make it cheaper for sovereign central banks to repair past insanity in their dealings with neoliberal politicians and bonus-obsessed merchant bankers.

But the mixture of geopolitical ego and systemically flawed economic theory is a heady brew, Cynthia. Mercantilism on a global scale replaces war as the new dimension of diplomacy, and fossil-energy monopolism creates an obsession with access to it. So before you know where you are, devious tactics and greedy strategies create a maelstrom in which the urgent overtakes the important.

The circle of contradiction this involves is getting tighter with every week.

The price of oil must fall, the euro must fall, borrowing costs must fall, the Ruble must fall, gold’s value must fall. Even wages and commodity prices must fall. The result of all this is the terrible trio – falling demand, falling costs, and falling prices – followed by the tragic twosome – rising welfare costs and rising taxes.

On and on it goes. For raised taxes reduce demand still further, rising welfare costs increase debt further, and so deficits get bigger and borrowing costs get higher. This is why Osborne is in a corner, and Abenomics veers all over the place while getting nowhere.

When the Ruble falls, however, only higher rates will prop it up. When neoliberal austerity and growing wealth inequality kill economic recovery, borrowing yields spike…and another dimension now sits alongside deflation to raise the real level of debt.

I’ve been saying for three years that you cannot have a world in which everyone wants Zirp all the time: not only does that too reduce the spending power of the wealthiest age demographic, in a world where nations have competing geopolitical, social and economic priorities, it is a preposterous idea built on the hubris of distorted Alpha minds.

The bottom line is this: everything energy monopolism forces sovereigns to do geopolitically negates everything that sovereign banks need to do fiscally and financially.

Reagan and Thatcher championed the neoliberal economics of the smaller State as the way to defeat inflation. Having murdered inflation, the monopolous greed that underlies such economics has created its own murderer – deflation.

There is no way out of the cul-de-sac now, nowhere else to turn, nothing else to try. We are heading unstoppably for the sort of confluential collapse that changes everything. And the ignorant, unthinking nature of this endgame is summed up by a tweet I page-captured this morning:

repubnutGod bless America.

Knarf plays the Doomer Blues

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