Sovereign Debt, Quantitative Easing
and the Vortex Economy
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27th June 2012 (updated
29th Sept. 2012)
Where Has All the Money Gone?
Winter has come; the last leaves have blown from the deciduous
trees; their bare branches are silhouetted against a threatening, grey sky.
There is a chill wind blowing squalls across the property. The chores are done,
it’s time to go inside, stoke up the fire and… ?
So here I am, sitting at my desk, trying to find a reason not to
succumb to the common early winter depression to which human beings so easily
fall prey. And this year that is not as easy as usual.
About Predators, Predictions and Vultures
Bloomberg is providing a background irritant to my thoughts
(what a depressing view of the world they paint!). Apparently George Soros and
one of his former advisors are predicting that Japan will soon default on its
obligations. Its sovereign debt will soon reach 215% of GDP. Why isn’t it
Perhaps George is hoping for another roller-coaster ride as
markets overreact and the Japanese yen finds itself under attack. I hope
not2 . I had thought that
he’d grown a conscience since the 1980s!
Perhaps I'm being overly suspicious of his motives (and perhaps
leopards really can change their spots!). Does he really think that the Euro is
under such dire threat that he also needs to issue a warning about its future?
Why does all this remind me of the dangers of predators' predictions?
Thomas More (1516), in his book Utopia , expressed his opinion of this kind
of predatory behaviour:
…the nobility and gentry, and even those holy men the abbots, not
…thinking it enough that they, living at their ease, do no good to the public,
resolve to do it hurt instead of good.3
The vultures are circling in the skies above Burma – or is it
Myanmar? There’s money to be made if and when they open their borders to
international capitalist exploitation.
When the resources have been exploited and the generated wealth
syphoned into the global fund management pool; will it be just another carcass,
picked clean and left to be reclaimed by the jungle?4
Will its people join the millions in the region already
providing cheap labor for capitalist enterprise?
As that ruthlessly unscrupulous entrepreneur and wheeler-dealer
Cecil Rhodes5 put it in the 1890s:
We must find new lands from which we can easily obtain raw
materials and at the same time exploit the cheap slave labor that is available
from the natives…
(see Capitalism and its Colonies).
As has been said before: the more things change, the more they
stay the same!
Tautologies, Printing Money and Simplistic
So, in the US, ‘The Fed’ has decided not to indulge in ‘QE’ this
time round6 (how easily the acronym rolls
off the tongue now). At least ‘Chairman’ Alan Greenspan calls it for what it
really is – ‘printing money’!
How deferential the interviewer is: treating him like a member
of US royalty. And he was in charge, or asleep at the wheel, when we all drifted
into the current mess. But, of course, that was no great surprise! He has, for
many years, been an Ayn Rand acolyte – a master of tautology! As Rand (1971)
expounded in this delightful pleonasm:
I am not primarily an advocate of capitalism, but of egoism; and
I am not primarily an advocate of egoism, but of reason. If one recognizes the
supremacy of reason and applies it consistently, all the rest follows.7
Even now Greenspan can’t bring himself to admit that the US 'New
Deal' Glass-Steagall Act of 1933 had any merit (see Protectionism for more on this)! No wonder the FDIC was
impotent during his reign.
But he is right about one thing – printing money won't solve the
current sovereign debt crises around the world! An editorial in The New York
Times entitled 'Quantitative Easing' summed it up:
… When times are so dire that banks are reluctant to lend or
borrowers to borrow whatever the cost, interest rate cuts lose their punch… In
those circumstances, central banks turn to what economists call “quantitative
easing’' — unorthodox methods of pumping money into an economy and working to
lower the long-term interest rates that central bankers do not usually
The initial quantitative easing program saw the Fed buy $1.75
trillion in debt held by Fannie Mae and Freddie Mac; mortgage-backed securities
and Treasury notes between November 2008 and May 2010. A second round, dubbed
QE2, involved an additional $600 billion in long-term Treasury securities
purchased between November 2010 and June 2011.
The Fed began “Operation Twist’' in September 2011 with a pledge
to swap $400 billion in securities. The extension announced in June will involve
swapping bonds worth $267 billion more.
(The New York Times, Sunday, June 24, 2012 )
And, this is the tip of the iceberg of quantitative easing debt,
added to the sovereign debt of countries around the world, over the past five
years. No wonder nations are beginning to falter under the weight of the debt
they now carry!
What is significant is that all the additional money pumped into
world economies since 2008 has not yet resulted in massive stagflation
problems8 . So, if it hasn't
produced 1920s boom conditions9 , and it hasn't produced the
stagflation problems of the 1960s and 70s10 , where has all that money
In the simplistic models to which too many politicians and
economists are addicted, pumping money into the economy through financial
institutions should result in increased lending at cheaper interest rates. This
should stimulate both consumption and productive enterprise. That increased
activity should result in:
- job growth,
- consequent reductions in unemployment rates,
- generation of new wealth, itself recycling into the
- resulting in 'a take-off into self-sustained economic
- and consequent communal and individual
It sounds so logical – inevitable even! Yet, it hasn't
Here we are, half way through 2012, and unemployment levels in
Western countries have grown, not shrunk. Investment has stalled. There are
increasing numbers of destitute people thronging the highways and byways of our
cities – and even our country towns.
Nations are teetering on the brink of bankruptcy, and banks are
still under threat! And all this was supposed to have been prevented by the wide
range of 'stimulus packages' devised by our brightest economists and implemented
by compliant governments. What on earth has gone wrong?
It appears that over the past forty years, since the triumph of
neoliberalism in Western nations11 and the elevation of the
Greenspans of this world into positions of power, two interconnected economies
- There is the economy upon which the vast majority of
people in the world depend for economic wellbeing: the mundane economy of
productive enterprise which generates jobs and incomes and has, in the past,
funded community needs12 .
- And, feeding on it and crippling and distorting its
activity, there has emerged another, a vortex economy; one which could not have
emerged in its present form in the age of protectionism and regulation. It is populated by a new breed
of capitalists, dedicated to unregulated internationalized financial
The players in this emergent economy accept no responsibility
for, or commitment to, the stimulation and maintenance of employment and social
welfare. This vortex economy, syphoning wealth from the 'real' economy, produces
a global fund management pool, a largely illusory realm of internationalized
electronic wealth manipulation, relocation, redistribution and aggregation.
The Vortex, the Global Fund Management
and Stalled Economies
In the interface between the mundane economy of material
production and consumption and this new, emergent, internationalized economy,
money is removed from general circulation, accumulating within various
Vast sums are employed in securities, derivatives, currency and
equities trading, entering an illusory realm of internationalized electronic
wealth manipulation, relocation, redistribution and accumulation; decoupled from
the realities of the stimulation and maintenance of both employment and social
welfare; much of it no longer accessible to fund community needs.
As a Wikipedia entry on the Size of the global fund management industry in 2010 explained:
Conventional assets under management of the global fund
management industry increased by 10% in 2010, to $79.3 trillion. Pension assets
accounted for $29.9 trillion of the total, with $24.7 trillion invested in
mutual funds and $24.6 trillion in insurance funds.
Together with alternative assets (sovereign wealth funds, hedge
funds, private equity funds and exchange traded funds) and funds of wealthy
individuals, assets of the global fund management industry totalled around $117
Growth in 2010 followed a 14% increase in the previous year and
was due both to the recovery in equity markets during the year and an inflow of
(Accessed 8 June 2012)
A great deal of that asset accumulation is a consequence of an
inevitable concentration of wealth and stalling of market exchange resulting
from apparently equitable market exchanges14 (see Iglesias and de Almeida (2012)).
Many current models of wealth generation and flow assume a
cyclic process, with created wealth invested to fund new productive growth,
ensuring both employment and social welfare. The emergent unregulated system
however, appears more closely to resemble a spiral than recyclic model.
Wealth injected into the system spirals upward to pool within
global fund management portfolios. The recycling which occurs at this level is,
far-too-often, a process which remains trapped within the global fund management
Wealth exchange and growth become insulated within a
kaleidoscopic virtual realm, creating a world of virtual wealth manipulation
with its own experts, entrepreneurs, risk and profit takers15 , far removed from the
mundane world of productive material enterprise, employment and social welfare.
In most recyclic models of wealth generation and flow, no
distinction is made between the health of such global funds and the health of
productive enterprise. So, it is easy to confuse the two, assuming that, in
order to ensure the health of productive enterprise, one must ensure the health
of global fund management portfolios16 .
This has resulted in massive bailouts of the global fund
management industry, with the funds absorbed into that realm having a marginal
or negative impact on employment and social welfare conditions. Under these
conditions, the injected 'quantitative easing' funds by-pass their intended
targets and move directly into the global fund management pool.
This results in a number of problems:
- the global fund management pool grows rapidly, giving
an illusion of economic stimulus and consequent 'health';
- productive enterprises, the intended targets of the
'stimulus packages', find themselves scrabbling for crumbs from the table of
vortex economic activity17 ;
- sovereign debt, the putative original cause of all the
problems, rapidly expands;
- social welfare rapidly deteriorates as governments are
pressured into 'reducing costs' in order to reduce sovereign debt (resulting as
much from 'quantitative easing' costs as from social welfare and government
administration costs – which, themselves, are all-too-often a result of an
exclusion of community costs from basic production costs18 );
- and, with rapidly diminishing purchasing power,
communities and individuals rein in their spending, retail activity contracts
and market activity stalls.
Far from addressing the problems of the mundane economy,
quantitative easing has magnified them.
We need to ensure a true recycling of funds from the global fund
management industry back into the real-world realms of employment and social
welfare19 . To do this, it is
essential that the pooling of wealth within the vortex economy is
short-circuited, that processes are established through which wealth can be
redirected back into both employment and community needs20 .
As Iglesias and de Almeida (2012) suggest: "To avoid
condensation and the thermal death of markets some regulation, or some minimum
allowance is necessary…"21 . Their explanation:
…in a large class of exchange models, the system converges to a
very unequal condensed state, where one or a few agents concentrate all the
wealth of the society while the wide majority of agents shares zero or almost
zero fraction of the wealth. So, in those economic systems a minimum entropy
state is attained..…
Numerical results…, as well as some analytical calculations…,
indicate that a frequent outcome in these models is condensation, i.e.
concentration of all available wealth in just one or a few agents. This final
state corresponds to a kind of equipartition of poverty: all agents (except for
a set of zero measure) possess zero wealth while one, or a few ones, concentrate
all available resources. In any case the final configuration is a stationary
state of “equilibrium”, since agents with zero wealth cannot participate in
…Making a parallel between physics and markets, if the second law
of thermodynamics, when applied to the whole universe, has as a corollary the
“thermal death of the universe”, the concentration – or condensation – of wealth
leads to a “thermal death of markets”, since markets need exchanges, or flux of
capital, to survive.
If all agents, with a few exceptions, have zero wealth, there are
no exchanges.… What seems to be a fair exchange rule has the implication of
To avoid condensation and the thermal death of markets some
regulation, or some minimum allowance is necessary to favor the poorer agents.
Even the introduction of a risk-aversion factor, as discussed in the
introduction does not impede the condensation. When there are no regulations
and/or when no one can win more than he has, the dynamics leads to a condensed
state and to a frozen economy.
(2012, pp. 85, 87, 90-93)
Ah, the sun has struggled through the clouds. It's time to turn
that intellectual irritant off (Bloomberg I mean); to meander through the
gardens with the dogs! Life can be pleasant if you don't examine its flaws too
closely or take them too seriously!
See, the depression has lifted, the sun is shining!
What a pity that Japan is following the well-trodden post-1970s path of
Western governments: increasing retail taxation rather than building sovereign
debt funding into its base economy.
(For more on all this, see ‘A comparison of holders of sovereign debt in various countries
’, also ‘Japan’s apparent ability to ignore its deficits ’.)
2 See ‘Speculators Tell The Story Of Their Attack Against The Baht ’
for the kind of activity this sort of speculative prediction can trigger.
See The consequences of the disenfranchising of the peasantry of
England in the early 16th century for more on this.
Isolation Ends, Myanmar Faces New Ecological Risks (Charles Schmidt,
Science 17 August 2012: Vol. 337 no. 6096 pp. 796-797) for more on
this, as the author says:
Myanmar's environment is at a crossroads, its fate hinging on
how recent reforms reshape the country.
How well he would have fitted in to this 21st century! I'm
certain that Bloomberg commentators would have treated him with deference and
canvassed his views on what should be done about the current difficulties around
Twelve weeks later (14th Sept. 2012) and, as Robin Harding,
writing for the Financial Times, put it:
The US Federal Reserve has launched
an open-ended effort to spark recovery by injecting an extra $40bn into the
economy each month through purchases of mortgage-backed securities.
Unlike previous programmes, the Fed’s third round of
quantitative easing – nicknamed QE3 – does not have a defined limit and will
continue until the labour market improves.
(Robin Harding, Financial
Times, September 14, 2012, Bernanke takes plunge with QE3)
(Rand, Ayn, "Brief Summary", The Objectivist 1971 Vol. 10 No. 9
p. 1) The flaw in all this, of course, is that since reason flows from one's
ideological understandings, it inevitably reflects those and we're trapped in a
tautology (similar logic to that underpinning the monetarist policies Greenspan
advocated and pursued).
Though there are worrying indications that if it is continued this might
be around the corner – as an increasing number of commentators are now
See Quantitative Easing, Financial Collapse and Protectionism for
more on this.
See Neoliberalism: A Cure for Economic Stagnation for more on
See The Triumph of Neoliberalism for more on this.
I think they call it 'Main Street' in the US; in contrast to that other
thoroughfare, 'Wall Street', that increasing numbers of people are seeing as
part of the problem rather than the solution.
13 See these Bloomberg reports for some of the
bizarre consequences of kaleidoscopic, unregulated or poorly regulated vortex
Editorial (Aug 7, 2012), Knight Blowup Shows How High-Speed Traders Outrace Rules; and
Whitney Kisling and Nina Mehta (Aug 7, 2012), Joyce Puts Knight Survival Over Shares in Rescue Deal
See A serious concentration of wealth in the hands of a small number
of companies for more on this.
When those involved in this activity speak amongst themselves they tend to
distinguish their activities as 'trading' in contradistinction to 'investment'
activity. It is commonplace to hear 'traders' speak of 'trading and investing'
as separate realms, each with its own resources, experts, and raison
Since potential profits (and, of course, losses)
from trading are often much higher, and more immediate, than those from
investment activity there tends to be a disproportionate emphasis on trading
over investment, with lower levels of wealth funding being available for
'investment' than for 'trading'. When trading results in significant losses,
'investment' funds are all-too-often tapped to cover them.
A great deal of what is classified as 'investment'
funding is directed not into mundane economic activity but into various
corporate acquisition/takeover/raiding activity which has marginal to negative
impact on employment and social welfare.
(See Peter Lattman and Eric
Lichtblau, New York Times, October 10, 2012, E-Mails Cited to Back Lawsuit’s Claim That Equity Firms Colluded
on Big Deals for an example of this kind of activity).
16 Of course, pension assets and mutual
funds do need to be protected – at present they are all-too-often poorly
differentiated from other global fund management activities – but this is best
done through similar guarantees to those provided to bank deposits under US FDIC
regulations, not by providing a blanket stimulus package to the global fund
management sector. (See Federal
Deposit Insurance for an example of this kind of insurance, also A History
of the FDIC 1933-1983 for a historical contextualization.)
17 Productive enterprise funding, classified as
'investment' activity, is provided from the 'investment' resources of the global
fund management pool. Such investment usually provides lower and slower
potential profit margins than the various 'trading' activities of the vortex
economy and funding costs reflect this difference.
The recent Libor (London Interbank Offered Rate)
scandal of 2012, through which banks subverted the intent of various stimulus
packages by manipulating interest rates, all-too-often resulted in increased
costs to borrowers. This rate manipulation scandal, while serious, is, however,
a diversion from the far more important problem of unequal competition for funds
between longer term 'Main Street' investment needs and shorter term 'Wall
Street' vortex economic activity.
See New York Fed Knew of False
Barclays Reports on Rates, (Michael J. de la Merced and Ben Protess, New
York Times, 14 Jul 2012) for some of the consequences of Libor manipulation
in the post-2008 era. As the authors report,
"As much as $800 trillion in financial products are pegged to
Libor, so any manipulation of this rate is of serious concern," said
Representative Randy Neugebauer, the chairman of the House Financial Services
Subcommittee on Oversight and Investigations, which initially requested the
documents from the New York Fed. "We'll continue looking into this matter to
determine who was involved in this practice and whether it could have been
prevented by regulators."
For a relatively straightforward explanation of
all this, see Breakingviews: Guide for the perplexed: Libor litigation
(Reuters Breakingviews, July 12, 2012) This manipulation, of course,
directly influenced the effectiveness of quantitative easing activity, since it
controlled interest rates to the advantage of the banks.
Such deliberate manipulation might well be shown
to be illegal. However, the major problems of inflated costs of financing for
'Main Street' are due to legitimate competition for funding between vortex
economic activity and economic activity in the mundane economy of productive
enterprise which generates jobs and incomes and has, in the past, funded
Paul Krugman has spelt out some of the problems facing people in countries
being required to 'reduce costs':
Why, then, are there demands for ever more pain?
Part of the explanation is that in Europe, as in America, far
too many Very Serious People have been taken in by the cult of austerity, by the
belief that budget deficits, not mass unemployment, are the clear and present
danger, and that deficit reduction will somehow solve a problem brought on by
private sector excess.
Beyond that, a significant part of public opinion in Europe's
core - above all, in Germany - is deeply committed to a false view of the
situation. Talk to German officials and they will portray the euro crisis as a
morality play, a tale of countries that lived high and now face the inevitable
reckoning. Never mind the fact that this isn't at all what happened - and the
equally inconvenient fact that German banks played a large role in inflating
Spain's housing bubble. Sin and its consequences is their story, and they're
sticking to it.
Worse yet, this is also what many German voters believe, largely
because it's what politicians have told them. And fear of a backlash from voters
who believe, wrongly, that they're being put on the hook for the consequences of
southern European irresponsibility leaves German politicians unwilling to
approve essential emergency lending to Spain and other troubled nations unless
the borrowers are punished first.
Of course, that's not the way these demands are portrayed. But
that's what it really comes down to. And it's long past time to put an end to
this cruel nonsense.
If Germany really wants to save the euro, it should let the
European Central Bank do what's necessary to rescue the debtor nations - and it
should do so without demanding more pointless pain.
( Paul Krugman, New York Times, September 27, 2012,
Europe’s Austerity Madness) 40
There is, all-too-often, an apparently
ideologically induced blindness to the logical absurdity of attempting to
address the problems of unmanageable sovereign debt by expanding sovereign debt
through quantitative easing! This results in an equally ideologically driven
insistence on eroding social welfare and government activity in order to 'lower
sovereign debt'. (See Public-Private Partnership: We need to 'Stimulate' Private
enterprise for more on this.)
As in Greece, the necessary reductions in social
welfare and government costs, required to cover the quantitative easing driven
growth in sovereign debt, result in social chaos and governmental paralysis. And
this, all-too-often, merely reduces sovereign debt to pre-quantitative easing
levels. As Michael Birnbaum (Deal reached on $170 billion Greek bailout, Washington
Post, February 21 2012) explained:
…unemployment has already spiked to 21 percent — 49 percent for
those younger than 25 — and the economy contracted by 7 percent in the third
quarter of 2011.
Europe has demanded that the public sector shrink by 150,000
people, that the minimum wage be lowered by 22 percent, that pensions be cut and
that Greece do more to sell off its publicly owned companies, among other
measures that filled a 50-page booklet.
See Economic Efficiency and the Virtues of De-Regulation and Businesses have always seen social costs as externally imposed,
avoidable costs for more on this.
19 See Sarah Anderson (Institute for Policy
Studies June 21, 2012) Letter From Financial Industry Professionals in Support of
Financial Transaction Taxes for a letter addressed to G20 and European
leaders from 52 financial industry professionals recommending financial
transaction taxes be instituted. As the letter says,
Dear G20 and European leaders,
As individuals with first-hand knowledge and significant
experience in the financial industry, we urge you to introduce small financial
transaction taxes (FTTs). These taxes will rebalance financial markets away from
a short-term trading mentality that has contributed to instability in our
financial markets. They also have the potential to raise significant
The most direct and certain ways in which wealth investment redirection
might be achieved are modified and adapted versions of those spelt out by Roosevelt and his team in the 1930s.
Of course, any attempt at such re-regulation would
directly challenge some of the most powerful financial corporations in this
brave new world. Any government which attempted such re-regulation would face
powerful opposition. This would require very determined and coordinated 'bloc
politics'. See Capitalism: global restructuring, sovereign debt, benign bloc
politics, safety nets for more on this.
See Iglesias and de Almeida Entropy and equilibrium state of free market models, The
European Physical Journal B – Condensed Matter and Complex Systems, Volume
85 (2012), Number 3, 85-95
40 (A word of caution on Krugman's position:
Krugman believes in the virtues of free trade and globalization, however, he
wants to mitigate the effects of the consequences. So, he writes as a person
concerned for mitigating effects, while still supporting the fundamental
causative policies. Rather like a Climate Change Denier who, while believing
that climate change isn't happening, sees the consequences and wants to mitigate
their impacts in people's lives.
Much of the confusion which people often feel in
trying to come to grips with economic solutions to social problems stems from
similar mismatches between basic economic presumptions and massaged
explanations/mitigations of social outcomes. The consequence is that for many,
economics seems to be just too difficult to get one's head around: "The
confusion I feel must be because I am missing something!!")