Monday, October 18, 2010

A Nominal World

By Dan Weintraub from The Automatic Earth

I am a nominal man living in a real world. Yesterday, I spent $16 on a bag of whole-grain rice, a bag of beans and a hunk of cheese.

One goal of the Federal Reserve’s quantitative easing policies is debasement of the dollar. It is often argued that a weak dollar – relative to other currencies – promotes our supposed export-based economy. Lest we forget, however, our $14-trillion-plus economy is 70-percent consumer-dependent. The most productive capital in the U.S. was shipped overseas long ago. Economic growth over the past three decades has been predicated not on the creation of productive capital, but on access to cheap credit, and thus on consumer spending. The United States, despite beliefs to the contrary, is no longer an export-driven economy. And I remain a nominal man living in a real world.

While the world operates on numbers, I subsist on the relative value of those numbers. For several months now, commodity prices have been rising – and not just those of precious metals. The price of wheat, of cotton, of coffee, of cocoa: all rising sharply. But why would the price of commodities rise when a contracting global economy should equate to a decrease in overall demand (and thus to falling prices)? Commodity prices are rising because investors increasingly believe that the relative value of their financial assets is no longer assured. In a global financial system rife with fraud, in a system teetering precariously close to the brink of an all-out currency conflagration, investors and speculators are abandoning financial assets in lieu of commodities because these same investors believe that the world’s central banks are bent upon destroying the purchasing power of their money. And still I remain a nominal man living in a real world.

I am a middle-class citizen. I make a modest wage teaching history at a local independent school. Like many in the middle class, my nominal monthly income purchases less of the real goods and services that I need in order to get by. I understand that the federal government ultimately must increase its tax revenues in order to subsidize its growing debt-service obligations and to pay for an ever-expanding pool of necessary social services (unemployment insurance, food stamps, etc.), but the real impact of these tax burdens hits those of us in the middle class the hardest. For members of the shrinking American middle class, a seemingly modest nominal tax increase of perhaps $100 a month is, in real terms, far more expensive than the numbers convey.

I understand why economists like Paul Krugman are calling for trillions more in government spending. Fiscal austerity disproportionately hurts the middle class and working poor, and political extremists and opportunists are famous for promoting their nativistic and self-aggrandizing agendas while skyrocketing unemployment hurls millions of citizens toward the abyss. But in our credit- and debt-subsidized economy, virtually all stimulus monies are created, either directly or indirectly, by the Federal Reserve through its open-market operations – in this case, through the monthly purchase of billions of dollars in government securities.

And while such actions may increase systemic liquidity in the near term, these policies of debt monetization also further destabilize the world’s already shaky currency markets. As more people lose trust in the long-term viability of the world’s currencies, more people “buy” commodities. In other words, you may not be able to trust the value of the dollar from one day to the next, but you can always rely upon the hard value of such assets as food and energy. And so, one by one, investors abandon financial assets and move toward commodities, and as they do the price of commodities goes vertical. In nominal terms, this is disastrous for the majority of Americans who subsist on fixed incomes. In real terms, it is far worse. This is but one of the unspoken impacts of our government’s stimulus policies.

I am a nominal man living in a real world. In the real world, trillions more in government stimulus has no substantively positive impact upon my life. In the real world, a 2-percent cost-of-living (wage) increase for someone earning $40,000 per year, in terms of cost inflation, more closely resembles a 2-percent reduction in pay than it does a “raise.” In the real world, the majority of government stimulus monies are used by the largest and most powerful financial institutions to drive up the cost of those very commodities that the majority of us find increasingly difficult to afford. In the real world, as access to credit contracts (real deflation) and as the prices of food and energy increase, austerity arrives regardless of the Federal Reserve’s policy decisions.
I am a nominal man living in a real world, and in my world the numbers just don’t add up.

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