The Financial Crime of ZERO-COGS
At the end of the day, the financial crime of ZERO-COGS is a product of the primitive 1960s “bathtub economics” of the New Keynesians. Not coincidentally, their leading light was professor James Tobin, who was not only the architect of the disastrous Kennedy-Johnson fiscal and financial policies that caused the breakdown of Bretton Woods and its serviceably stable global monetary order, but who was also PhD advisor to Janet Yellen. To this day Tobin’s protégé ritually incants all the Keynesian hokum about slack aggregate demand, potential GDP growth shortfalls and central bank monetary “accommodation” designed to guide GDP and jobs toward full capacity.
In more graphic terms, however, the fancy theories of Tobin-Yellen reduce to this: the $17 trillion US economy amounts to a giant bathtub that must be filled to the brim at all times in order to insure full employment and maximum societal bliss. But it is only the deft management of the fiscal and monetary dials by enlightened PhDs that can that can keep the water line snuff with the brim–otherwise known as potential GDP. Indeed, left to its own devices, market capitalism tends in the opposite direction—that is, a circling motion toward the port at the bottom.
For nigh onto fifty years, however, it has been evident that the bathtub economics of the New Keynesians was fundamentally flawed. It incorrectly assumes the US economy is a closed system and that artificial demand induced by the fiscal or monetary authorities will cause idle domestic labor and productive assets to be mobilized. Well, we now have $8 trillion of cumulative and chronic current account deficits that prove the opposite—that is, the relevant labor supply is the 2 billion or so workers who have come out of the EM rice paddies and the relevant industrial capacity is the massive excess supply of steel mills, shipyards, bulk-carriers and iron ore mines that have been built all over the planet based on export demand originating in the borrowed prosperity of the West and ultra-cheap capital flowing from central bank printing presses around the world.
The truth is, pumping up the American “demand” mobilizes lower cost factors of production abroad in a great economic swapping game. Exchange rate-pegging, mercantilist-oriented central banks in the EM swap the sweat of their domestic workers and the resource endowments of their lands for the paper emissions of the US and other DM treasuries. And the $5.7 trillion of USTs held abroad, mostly by central banks, proves that proposition, as well. In any event, it is not Uncle Sam’s fiscal rectitude that has created the EMs’ ginormous appetite for pint-sized yields on America’s swelling debts.
So through all the twists and turns of Keynesian demand management since the days when Tobin and his successors and assigns supplanted the four-square orthodoxy of President Dwight Eisenhower and Chairman William McChesney Martin, what really happened was not the triumph of modern policy science or economic enlightenment in Washington, as Kennedy’s arrogant PhD’s then averred. Instead, “policy” spent nearly a half-century using up the balance sheet of the American economy and all its components on a one-time basis. Total credit market debt—-including business, household, financial and government–went from its historic ratio of 1.5X GDP to 3.5X at the crisis peak in 2007—where it remains until this day.
