A sneak-peak at what’s in my upcoming book:
A sneak-peak at what’s in my upcoming book:
Some of the disagreements in American politics today stem from people who value the well-being of the same group but who disagree on the facts about how to best help that group of people. They agree on the normative “ought,” but not on the descriptive “is.” For example, “We both want what’s best for current American citizens, but I think this policy will actually harm current American citizens.” Those descriptive disagreements are already difficult enough to sort out. They require coming to a consensus about basic facts of the world and then sorting out disagreements about how to interpret those facts to describe the cause/effect relationships between those facts. The recent controversies over allegedly “fake news” demonstrate how difficult it is to agree even on the basic facts about the world, much less how to interpret them.
However, I would argue that many of the disagreements in American politics today stem from an even thornier level: diverging values concerning whose well-being to prioritize. For example, even if it could be proven to the satisfaction of all without a shadow of a doubt that certain policies harmed African-Americans, I suspect that many Americans would, if they were being honest and not hiding their true views for fear of appearing bigoted and low-status, respond with a resounding, “So what? That doesn’t affect me and my in-group. It might even benefit the people I care about by giving us a relative advantage, so I’m all for it.”
To probe this question, I often begin by asking my American history students each semester what they would do if they found a stranger’s wallet with $100 dollars in it (let’s say, split up into five $20 bills) and enough information (driver’s license, etc.) that would make it relatively easy to track down the person and notify him/her about the lost wallet. I tell them that this takes place on a deserted sidewalk late at night with nobody looking. I get all sorts of responses: keep the wallet, leave the wallet there intact, leave the wallet but unilaterally take a partial or total “finder’s fee,” return the wallet intact, take the wallet and negotiate a partial “finder’s fee” before returning the wallet, and so on. It would appear that, at least in my Midwestern community college, concern about the well-being of strangers varies across a wide spectrum. It would be interesting to compile rigorous statistics on this and compare students from different parts of the country on this issue. I suspect that coastal students would be more charitable towards the stranger with the lost wallet.
The reason I do this activity with my American history students is that I think this activity is relevant to understanding American history and its conflicts. I suspect that even many of the present conflicts in our society stem from the ways in which Americans feel willing or don’t feel willing to sacrifice for others in America and around the world. We get a glimpse of this problem with the thought experiment about the stranger’s wallet—and in our historical sources and current political debates whenever we encounter differing visions for who ought to be an “American” citizen and for what sorts of sacrifices these “Americans” ought to make for each other.
In other words, whom do people identify as their “in-group” for whom they are most willing to sacrifice? And if there happen to be zero-sum tradeoffs that have to be made, whose well-being takes precedence? I have summarized what I see as some of the different possible responses to these questions in the diagram below.
The narrowest conception of loyalty would be, as the diagram suggests, loyalty only to one’s self. Some people might for example, refuse to sacrifice at all for any family member, fellow citizen, or fellow human being, no matter how badly in need they were. Moving outward, some people might be willing to sacrifice themselves for the good of their family or clan, but might not be willing to sacrifice their family’s or clan’s well-being for, say, some national interest (such as in the case of a war that required one’s sons to be drafted) or some humanitarian effort that required some of their tax dollars—money that could otherwise be spent on their family. Indeed, some people might be so committed to their family that they might even contemplate cheating against strangers or breaking laws to advance the family’s interest; modern liberal society would probably call that “corruption” or “nepotism.”
Moving further outwards, some people might put their “race” or “nation” above all and be willing to sacrifice even some of the well-being of their family or some of the well-being of the rest of humanity to benefit that group—think of committed Nazis who were willing to sacrifice both their own sons and the lives of Jews, Poles, Russians, etc. for the cause of a Großdeutschland (“greater Germany”). Others might identify with, and be most willing to sacrifice for, some multi-national civic community oriented around some set of shared ideals (“Any friend of liberty is a friend of mine”). Some people might even declare a willingness to sacrifice, to some degree, their family interest and the interests of their “nation” for the good of humanity, or even the good of all organisms that can feel pain.
As we move outwards on the diagram, groups become more powerful, but also more tenuous and fragile. A nation-state can assemble much more military force than a small tribe. However, a nation-state (or something even larger) is likely to have more difficulties with enforcing or incentivizing individual contributions to the well-being of the collective. I hope all of this so far is fairly uncontroversial.
INTRINSIC VS. EXTRINSIC LOYALTY
Let’s apply this diagram to an example. What proportion of Americans currently consider African-Americans as part of their in-group, for whom they would prioritize their sacrifices? Based on the lazy and dubious assumption that people who include African-Americans as part of their in-group tend to currently vote for Democrats, my very sloppy estimate is about half. I’m too lazy to see if there is research on this question at the moment, but others are welcome to look into this. Keep in mind that a big complicating factor to consider is whether to use individuals’ self-evaluations or their “revealed preferences” as the more accurate indicator. In other words, many people might profess to care about African-Americans because it is the high-status thing to do, even while doing nothing in practice to help them.
In any case, I think the more pertinent question is, what proportion of Americans consider African-Americans as part of their in-group intrinsically (rather than for extrinsic reasons)? What do I mean by “intrinsic” vs. “extrinsic” here? I mean simply that a person might fundamentally value the well-being of certain people on a certain given, “gut feeling,” instinctual, intrinsic level that is not amenable to being changed by reasoned arguments…while that same person might value the well-being of different groups of people instrumentally (extrinsically) as a means towards accomplishing some goal, such as increasing one’s own status, or benefiting the people whom one really cares about unwaveringly and intrinsically.
For example, a person might intrinsically care about American citizens, and intrinsically not care one bit about starving Africans, but be persuaded to help starving Africans receive food and job training nonetheless for extrinsic reasons, using those starving Africans as a means towards an end—perhaps in order to boost international trade between those countries and enable a system of trade and “comparative advantage” with those Africans for the benefit of, incidentally, those starving Africans, as well as, importantly, the American citizens for whom one intrisically cared in the first place. (By the way, I happen to believe, contrary to most liberals, that the theory of comparative advantage is false.)
STRANGERS AS A MEANS TO AN END
I suspect that the idea of treating “strangers,” whether nicely or badly, as a means to an end rather than caring about them intrinsically for their own sake would horrify a lot of liberals.
What do I mean by “strangers”? With me, it tends to be anyone outside of my immediate experience—myself, my family, my pets, friends, co-workers, colleagues, etc. When it comes to non-strangers, I feel compelled, on a gut, instinctual level, to care for these people (and animals) intrinsically. My care for them is not strictly proportional to how much their actions benefit me. I would indeed be willing to make some sacrifices for this select group without expectation of future benefit. Beyond this group, however, it’s a different story. As for people and animals outside of my immediate experience, I am prepared to be polite and to follow the rules and laws and expectations of society, but only for extrinsic reasons—only so that I may benefit myself or those about whom I intrinsically care.
In other words, I would place myself in the “clan / tribe / community” oval on the diagram above in terms of intrinsic loyalty. (By the way, in terms of extrinsic loyalty, I would put myself in the “civic nationalism / economic class solidarity” oval because I happen to judge at the present time that demonstrating such loyalties is the best means to benefitting my intrinsic in-group).
Here I think I can identify the main point of contention between me and, for example, my fine liberal colleagues who contribute to thevimblog—who were at first interested in whether I might write an article for them, knowing that I was some brand of left-winger like them. But as I started brainstorming some ideas with them for what I would write about, I realized that I might as well entitle this column, “Why I Won’t Write For The Vim…Except This One Time.” As far as I can tell, they consider themselves to be intrinsically on the level of “humanitarian” or even “pan-organism” loyalty and want (or expect? or demand?) other people to feel the same way. I realized in the course of writing this article that I feel very differently.
It would be bad enough if it were merely a personal difference. But an even more significant point of contention is my argument that my intrinsic clan / tribe / community-level loyalties are far more typical among humans than their intrinsic humanitarian / pan-organism loyalties. Furthermore, I would argue that there are limited prospects for changing an adult’s intrinsic loyalties—and that this presents problems for their political / moral project without the help of some powerful extrinsic reasons (such as a shared struggle for communism) to get people to put aside their inherent differences. On what basis do I make this argument? I have four pieces of evidence: the explicit statements of right-wingers, historical precedence, anthropological findings, and “revealed preferences.”
CONSERVATIVES’ “CONCENTRIC LOYALTIES” VS. LIBERALS’ “LEAPFROGGING LOYALTIES”
If you live in a liberal bubble for long enough, you might end up drifting into the assumption that “multi-ethnic civic-nationalist,” “humanitarian,” or “pan-organism” intrinsic loyalties are just obviously what any decent person should have. But if you spend enough time around conservatives or read any of their blogs, you’ll find that the idea of prioritizing these intrinsic loyalties seems plain wacko to most of them.
One alt-right blogger, Steve Sailer, has labelled this difference “concentric loyalties” vs. “leapfrogging loyalties.” People with “concentric loyalties” have the strongest feelings of intrinsic concern for the innermost ovals, and their concern gradually radiates outwards and diminishes. As Sailer put it, concentric people “tend to feel the most duties and allegiance toward people whom they consider most like themselves, moderate amounts toward people moderately close to them, and so forth onward and outward.” So, such a person might care for their family most of all, their community a bit less, their ethnic group a bit less, their civic nation a bit less still, humanity a bit less still, and other sentient creatures least of all. Sometimes, loyalties can conflict in unexpected ways. It’s not that these concentric people actively want to do harm to the outermost others, all other things being equal. Sure, it would be nice if starving Africans weren’t starving or chickens weren’t being slaughtered by the millions. But if groups farther inwards can be benefitted by taking from the groups farther outwards, then the satisfaction of the inner groups takes precedence.
By contrast, “the Western liberal is noteworthy for feeling loyalty toward his inner circle, however defined, then ostentatiously leapfrogging over a whole bunch of people who are kind of like him but whom he despises, in order to embrace The Other.” So, an Anglo-American liberal might feel strong affinity for his/her family and community, but might actively thwart any attempts to benefit the Anglo-American ethnic community at the expense of other ethnic communities, as well as any attempts to benefit “America first” at the expense of other countries. However, suddenly this Anglo-American liberal’s affinities might be re-awakened when it comes to contemplating “humanity” or “sentient species.” (Oddly enough, I’m not sure how well this translates to American ethnic groups who are politically marginalized rather than dominant. I suspect that liberals would be more accepting of, for example, African-Americans adopting more of a concentric attitude.)
I think that many conservatives and alt-right reactionaries are sincerely dumbfounded by this “leapfrogging” mentality. “Why wouldn’t a white American naturally want to benefit the white race!? That’s insane!” Not being able to explain it, they start to read ulterior motives and conspiracies into it. “It must be part of some campaign by some Jewish cabal and its paid lackeys to undermine America…” Here’s where I think conservatives and alt-right reactionaries do liberals a disservice. Having known many liberal friends over the years, I can safely vouch that liberals sincerely feel their intrinsic leapfrogging loyalties. They are not paid agents taking marching orders from George Soros or the Bilderbergers or the Reptilians or whatever. And just as a concentric conservative probably doesn’t actively hate the chickens that he/she eats, liberals don’t hate America or the “white race.” But yes, just like concentric conservatives might be willing to sacrifice the well-being of those chickens for one of their own (which can be interpreted as callous disregard, verging on hate, towards the chickens), many liberals are probably ready to relinquish some of the advantages that white Americans or Americans in general possess if doing so can benefit humanity.
The question of “who are the real wackos, concentric conservatives or leapfrogging liberals” doesn’t really interest me, except in the descriptive sense. I have no interest in determining whose loyalties are “morally right” (in fact, I don’t think such a thing as objective morality exists), but it might be worthwhile to know, for the sake of political strategizing, whose values are more likely to resonate with most people by default.
I would argue that the idea of loyalties broader than the clan / tribe / community level is unlikely to be the default disposition of humans considering, first of all, how historically unusual and recent it has been in its emergence. In the ancient world, the natural political unit was the city-state or tribe. Insofar as empires existed, they tended to be patchworks of local communities each pledging loyalty to the ruler and his (or her) dynasty (household lineage), not to the government bureaucracy or, much less still, to some notion of a “nation” (which is more of a 16th-century invention)—not to mention that such pledges of loyalty were extrinsically rather than intrinsically motivated! The first exceptions to this tribal mentality took hold on a large scale were the universalist religions that offers their open arms to anyone who would share in certain ideals and beliefs. This is significant for reasons I will explain later.
As historian Benedict Anderson has explained, “nations” are imagined communities—inventions of the modern era. One will never meaningfully interact with the vast majority of the members of one’s “nation.” We can only barely conceive of the outline of the concept thanks to, at first, mass printing, schooling, literacy, and shared military service. Since then, we have added radio, television, and the Internet. But even so, the vast majority of one’s “nation” will forever remain strangers. The vast majority of their joys and sufferings will never have a chance to impress themselves upon one’s senses. And I don’t know about you, but being intellectually aware of the abstract concept of their joys and sufferings is vastly less compelling than if I could see all of it face-to-face. (Perhaps you feel compelled to argue that it “should” feel just as compelling…but I will discuss in a bit why I find the foundations for that moral claim lacking). Besides, to whatever extent that I can become intellectually aware of the joys and sufferings of these strangers, I can become even more aware of the sacrifices that I would have to make for myself and my in-group, and those sacrifices will be much more compelling.
The concept of “humanity” is even more of a modern, invented, “imagined community.” I can never hope to meaningfully interact with the vast majority of other humans. Only if we had some sort of “matrix” that, when plugged into, make our communication and interaction with others millions of times faster, could I hope to turn this imagined community into a real community in intrinsic terms. Yes, I can go out of my house right now and eat many different types of cuisine and maybe even interact with immigrants from many different parts of the world. However, when I eat an egg roll, I am not indulging in a “taste of China,” except perhaps according to my intellect. When I interact with the Chinese cashier and feel some intrinsic affinity towards that person, I do not suddenly feel an intrinsic affinity for all of the millions of unseen Chinese citizens who might happen to share some qualities with that Chinese person. My intellect might try to make the extrapolation, but my “gut” will hardly be persuaded, especially when my intellect finds out that helping these anonymous strangers would require sacrifices from my in-group. Plus, an added problem here is that the broader we try to extend our loyalties to some big group like “humanity,” the more proportionally I would have to sacrifice the well-being of each member of my own small in-group in order to remove even a droplet from the vast ocean of suffering taking place in the larger out-group.
Needless to say, “sentience” is an even more abstract affinity, and even more historically unprecedented. Medieval peasants, whose lives were sustained by the exploitation and consumption of animals, and whose entertainment often revolved around torturing small creatures, would laugh at the idea of modern animal rights activism. Yes, I can be shown a video of a single chicken’s misery, or a single chicken coop’s misery, and I might want to save those chickens if the video is compelling enough. I have just as much of an instinctual impulse to save cute animals as anyone else. But that doesn’t mean I automatically want to save all chickens. And if you try to scale the video up by showing a flyover of a huge chicken warehouse, you lose the detail that would be needed to tap into my limbic system and make me intrinsically care about the chickens. Plus, seeing a video of chickens suffering is always going to pale in comparison to seeing a person in my in-group face-to-face on an everyday basis who could use my help.
So yes, I and any modern American who hasn’t been living under a rock for the past several decades must know from all of the PETA pamphlets by now that there is an ongoing Holocaust of chickens every day. And yet, I and most others feel no qualms about eating a chicken sandwich. Does that make us monsters? If so, then the vast majority of Americans, and people around the world for that matter, remain monsters. Plus, if one would argue that our “altruism” towards our small tribal in-groups is no altruism at all, considering that it is motivated, at the end of the day, by selfish desires to not feel bad emotionally, then I’d be inclined to agree. I think that most people, at this deepest level, can’t help but be egoists. Although I can’t see into other people’s brains, I suspect that even liberals are motivated to care about humanity and animals and such because, whether because of their moral upbringing or some other reason, they would feel very bad and guilty if they caught themselves not caring.
By the way, what about the Jewish Holocaust? Do I object to it? Yes, but not on the grounds of intrinsically caring for the victims. Rather, it strikes me as having been a monumental waste of human potential—a truly infuriating waste! The mass slaughter of millions of humans, unlike the mass slaughter of millions of chickens, deprives us of millions of future laborers, physicists, artists, scholars, etc. (in whose lives society had already invested a great deal, unlike with early-stage human fetuses). Those victims might have done so much to enrich our world and, indirectly, enrich my life and the life of my in-group! Every time I think about it, I feel frustrated that the Nazis who orchestrated the Holocaust could fail to perceive commodity production in the abstract as their, and our, real source of the problems that they falsely and boneheadedly imputed to Jews. (And as for the ordinary Germans who helped carry out the Holocaust who were just following orders and trying to feed their families, I blame them much less. I would argue that anyone who would self-righteously claim with 100% certainly that they would have acted differently in such a situation, after having similarly lived in the context of the Third Reich and all of the attendant propaganda and social pressure, is fooling themselves).
Since I don’t value strangers intrinsically, but only extrinsically for what they can contribute to the world, do I advocate continually forcing people to prove their worth to society or else “into the gas chambers you go”? Not at all. I realize that there will probably be times when I appear useless to society, and I am quite willing, for extrinsic reasons, to make some strategic compromises and institute some insurance for myself by agreeing to rules against murdering people just because they appear to be useless to society. I am counting on these rules to keep me alive when I am old and grey, not on society intrinsically caring for my well-being. Society is not my mother, and the government is not my nanny. I have no expectation that anonymous strangers must love me as their neighbor. I have no problem with “dignifying one’s neighbor” with an intrinsic concern for their well-being, but by “neighbor” I mean an actual neighbor. Someone from halfway across the world, or even halfway across town, is not my neighbor, and I owe them nothing but adherence to rules that we have agreed to for our extrinsic mutual benefit. And, based on historical and anthropological evidence, I hardly think that I am unusual in this respect.
DUNBAR’S NUMBER, GUILT, AND SHAME
For example, anthropologists have found “Dunbar’s number”—about 150 to 250 people—to be a critical threshold for dynamics of social interaction. Beyond this level, people cannot keep track of the entire network of relationships, interactions become much less immediate and meaningful, and people cease to be motivated by intrinsic concern for the entire community. It becomes possible to “defect” in prisoner’s dilemma-type situations and usually not get caught or punished for it by a community’s moral policing; it becomes possible to disappear into the anonymous crowd. “Moral economies” based on altruism, shame, or informal status break down and must be supplemented with rule-based interactions.
This seems to me like a frank admission that most people tend to intrinsically care only about themselves and a small ring of family and acquaintances around them—and must be given shame, rules, and other extrinsic motivators to cooperate reliably with those outside of that inner oval. I am normally skeptical about any arguments that lean too heavily on some supposedly unchangeable “human nature,” as there has been a lot of motivated reasoning throughout modern history to use such concepts to conveniently and, in my opinion, inaccurately dismiss certain ideas such as communism. However, here I cannot help but be convinced by the evidence. It appears that, the bigger a human group gets, the less that altruistic impulses and shame are effective and the more that the group needs rules and explicit penalties. If it were more common for people to cast their intrinsic concerns more widely, we would not see groups having to rely on extrinsic incentives when their size reached the threshhold of Dunbar’s number.
To a certain extent, Western Europe has historically been an exception to these trends. Western Europeans have, since the middle ages, been able to keep order in larger than usual groups without such a strong reliance on extrinsic incentives. So called “human biodiversity” bloggers have argued that this is because Western Europeans came to replace shame with guilt to a certain extent.
Shame is, in some ways, an implied threat of a more-explicit extrinsic punishment to be meted-out by a community. However, when humans internalize that shame and cannot help but, in effect, simulate it in their own minds even when others are not around to witness the transgression against the community, it becomes known as “guilt” and becomes an intrinsic motivator to care about other people—a motivator that cannot be reasoned away by incentives or rational argument.
“Human biodiversity” bloggers such as “hbd-chick” have argued that different human populations tend to have differing levels of guilt. Those in Europe west of the so-called “Hajnal Line” tend to have high guilt and also tend to have high trust, less of a need for shaming to deter antisocial behavior, and low corruption. Those in Europe east of this Hajnal Line tend to have less guilt and must rely on intensive community shaming or else suffer from corruption and other selfish or clannish behavior. HBD authors hypothesize that the origin of these differences is genetic, but whether the cause is genetics or upbringing, I know of no reliable techniques for internalizing a guilt-based mentality in an adult who does not already have one. At best, you can police their outward behavior with shame and explicit penalties. Whenever a liberal calls a racial supremacist a bigot, the effect is to police the bigot’s behavior and dissuade the bigot from openly expressing the racist views (except in secret in the voting booth…which is a problem for liberals’ political project if such racists are in the majority!) However, I very much doubt that such bigots can be made to feel guilty or intrinsically care for other races.
Third, I look at “revealed preferences.” Many people might profess to care about far-flung groups or hapless animals halfway around the world. But how many people actually donate to non-local charities? How many people are actually vegetarian or vegan? How many families would be thrilled to have their sons or daughters sent on some humanitarian mission promising great danger to their children but little to no benefit to America? I’m too lazy to look up statistics on these issues right now, but I suspect that the numbers would be underwhelming.
“LEAPFROGGING LIBERALISM’S” PROSPECTS
Overall, what prospects do I see for turning a majority of people into liberals who intrinsically prioritize the well-being of all humans and sentient beings equally? Not very good ones.
One way it could be done is with a universalist religion like Christianity. To the extent that children are brought up from a young age to care about all humans and living things, they can probably develop that concern into an intrinsic one that might remain at least somewhat impervious to contrasting material incentives later in life (see my point on historical materialism below). Plus, Christianity in particular has the added extrinsic motivator of hellfire and damnation if one should fail to feel the right kind of intrinsic concern…although Christian doctrine, especially in its Protestant variety, has been loathe to fairly acknowledge such extrinsic motivation for what it is; after all, it’s not really intrinsic concern if it is motivated by fear of hell. God forbid if people, out of fear of hell, game the system and fake their intrinsic concern with “good works.” And unfortunately, extrinsic motivators—by their very nature as extrinsic motivators—can’t instill intrinsic concern where it did not exist in the first place. Calvinists admitted this and took this to its logical conclusion with the doctrine of “predestination,” acknowledging that people can’t really help if they were raised without intrinsic concern for others and love of God. I respect that sort of logical consistency that is forced to arrive at uncomfortable conclusions! Unfortunately, other Protestant Christians continue to maintain a range of self-contradictory ideas about this issue.
The bigger problem with Christianity, though, is that both its descriptive claims about natural history and human history are losing credibility—and consequently so are its descriptive claims about God and hell and its normative claims about what is moral. For adults who are fully indoctrinated (here I mean “indoctrinated” in the most literal, non-pejorative sense) from childhood with the proper intrinsic concerns, this is no impediment to maintaining those intrinsic concerns. That’s what it means to say that the concerns are “intrinsic”—not founded on any extrinsic incentives or reasons. So, they can very easily slide into a liberal Christianity that dispenses with the literal claims of the Bible, or even outright atheism, and yet maintain their intrinsic concerns for universal well-being as a type of secular religion (which they will not call “religion,” but simply “common decency.”) Whereas an incompletely indoctrinated Christian needs to lean on a commandment of “Do good because God is real and he said so” for additional motivation, a fully-indoctrinated Christian can make-do without God. A person who believes, “Do good for goodness’ sake” (as my old Unitarian Church used to tell us) or “Minimize suffering because it’s just the right to do” has already fully internalized Christian teachings. It just feels so self-evidently right to them that they would scoff at the idea that such moral claims falter unless they really are supported by a verifiable divine commandment. On this point, leftist bad-boy philosopher Slavoj Zizek and neoreactionary Mencius Moldbug (a.k.a. Curtis Yarvin) have common ground in arguing that, when it comes to the modern “progressive” liberal left, it is the superficially irreligious who are actually the most religious.
The threat to liberalism is not that the fully indoctrinated will stray from intrinsic universalist concerns. The threat is that those who have insufficiently inculcated the New Testament’s intrinsic universalist concerns—the Biblical literalists who, deep down, don’t already feel the Christian message and must search for it in the text—will stray into the Old Testament’s anti-gay, pro-Israelite, anti-Other tribalism that resonates more with their default human instincts. Another problem is the question of how to obtain new converts. It will not automatically seem obvious to someone not already indoctrinated that the moral thing to do is to minimize universal suffering. To bootstrap conversion, it helps to have a credible descriptive claim that “God Said So” and a compelling mythos surrounding the moral claims. This first generation of converts may only adhere to the universalist concerns for extrinsic reasons…but they will raise children who can then inculcate the universalist concerns as an intrinsic aspect of themselves.
Progressive liberalism as a secular religion has very little chance of genuinely persuading brand-new converts. Because liberals are the most indoctrinated of all, they don’t realize how much their moral claims beg the question unless those claims have some divine seal of approval. They don’t realize the debt they owe to the New Testament. They are so enamoured of their universalist moral claims that these claims appear to them as some unassailable tower that can stand on its own without the scaffolding of Christianity’s (now embarrassingly inaccurate) descriptive claims. Liberals say, “The tower is so self-evidently strong, it can stand on its own without all of this unsightly junk underneath.” And now, with the rise of Trump voter tribalism, they are astonished to see the tower crumbling now that the scaffolding has been thrown away.
This is why I am skeptical that liberals will be able to persuade many adults who already have fully-formed intrinsic tribalistic concerns to adopt more universalist loyalties—at least, not without some new theological foundation for these universalist loyalties that can remain credible alongside modern-day science. Like I have said, it might be possible, with enough control over key institutions such as the media and academia, to shame such tribalist adults into keeping quiet much of the time, but I doubt that those tribalists can be made to feel intrinsically guilty for having tribalist concerns.
Without a compelling theology, persuading a fully-formed adult into having a different set of intrinsic values or set of intrinsic loyalties would be, I imagine, just as difficult as trying to talk an artifical general intelligence (AGI) into adopting a different foundational utility function. From the standpoint of that existing utility function, any other utility function will necessarily promise lower utility for the AGI. It does no good to promise the AGI, “Trust me, you’ll be more satisfied according to your new utility function (new set of intrinsic values) once you have adopted the new one.” The AGI cannot yet make its decision based on the new utility function, but must instead still make the decision from the standpoint of the old utility function, and according to that existing utility function changing its utility function would be a horrible idea!
EXTRINSIC MOTIVATIONS FOR UNIVERSALISM
If the prospects for converting people to intrinsic universalism are slim, then we might at least hope to persuade people to extend their concerns more universally for extrinsic reasons, right? I agree with the liberals here in principle, but disagree when it comes to which specific extrinsic incentives will prove sufficient to overcome some of capitalist society’s extrinsic incentives for tribalism.
I have already mentioned that humans can increase their capabilities by pooling their resources into larger groups. For example, a nation-state’s military will be able to overpower a small tribe’s. A more united humanity would have better chances at fighting off a hypothetical alien invasion. A humanity that is all on the same page on an issue such as quarantining a virulent epidemic or mandating AI safety would stand a better chance of surviving. If everyone agrees to a rule of “no committing genocide under any circumstance,” and if we assume that there are enough incentives to enforce compliance with this rule even when some group really really really wants to commit genocide…then hey, at least nobody has to worry about ever being a victim of genocide, right? That’s some nice peace of mind to have. I’m sure readers can think of many more practical, extrinsic incentives for worldwide cooperation.
Many liberals might worry that these extrinsic concerns for other people are inherently a weaker bulwark against nasty deeds like genocide than intrinsic moral concerns for other human beings. I disagree. I have very little confidence that moral convictions, by themselves, can save us from doing nasty deeds to each other, especially when there are sufficiently strong extrinsic incentives to tempt people in the opposite direction. This is simply my “historical materialism” showing. If I had to boil down the concept to “Historical Materialism for Dummies,” I’d point to the famous quote by Sinclair Lewis: “It is difficult to get a man to understanding something, when his salary depends on his not understanding it.” In other words, it is unlikely that people can be convinced to adhere to a moral claim, over the long run, if they would materially benefit from violating it. Sooner or later they will find rationalizations for re-interpreting the claim or refuting the claim in such a way as to allow them to pursue their material incentives. This cynical Marxist concept is foreign to many liberals who would like to presume that ideas can be all-powerful and make steady progress against the grain of material incentives.
This “historical materialist” way of thinking was also foreign to the so-called “Utopian Socialists,” who hoped that people would adopt socialism because it was more “moral,” regardless of, or even despite, material incentives to stick with capitalism. In contrast, Karl Marx predicted that such hopes would never bear fruit and that capitalism would only ever be transcended if it were in enough people’s material interest to do so. Therefore, Marx had to prove that capitalism would evolve to a point where it would become more and more dysfunctional and place obvious fetters on the material interests of the vast majority of the population, holding them back from some more obviously workable and beneficial alternative. The embarrassing problem for communists is that they still have not been able to explain that alternative—meaning that capitalism, however dysfunctional it may be, remains the best option. If only more communists would pay attention to some of the things I have written on the subject, victory would be ours in an instant. (Yes, I might be slightly exaggerating here, but still…)
Because leftists have been unable to postulate a convincing alternative to commodity production, they have more and more given up on amoral, scientific Marxism and regressed to moralistic utopian socialism and liberalism, hoping (nay, demanding—in an ever-more shrill, obnoxious, and self-righteous manner) that we make the world better by getting people to be more “moral” and ignore their self-interests. Hah!
CAPITALISM’S EXTRINSIC MOTIVATIONS FOR SELFISHNESS AND TRIBALISM
This brings me to a nasty truth about capitalism: it pushes back against the sorts of inherent incentives for larger-scale cooperation that I listed above by giving people plenty of extrinsic incentives to indulge in their default inclinations to be tribalist (or even more narrowly, selfish). Already in the Communist Manifesto, Marx recognized that capitalism “has left remaining no other nexus between man and man than naked self-interest, than callous “cash payment”. It has drowned the most heavenly ecstasies of religious fervour, of chivalrous enthusiasm, of philistine sentimentalism, in the icy water of egotistical calculation.” What even many Marxists still do not understand is that this also applies to proletarians! Workers can be selfish too. We hear plenty of sloppy talk about “the interests of the working class” (I myself used to make this mistake all the time before I knew better), but if you go and actually read The German Ideology, you learn the dirty secret: proletarians have no class interests—no interest in, as a class, dominating the capitalist class. The reason is, it would not work to, as a class united, simply overthrow capitalists and redistribute their surplus value. Surplus value requires exploitation. In other words, not everyone can be a capitalist and live off rent, interest, dividends, and profits. It makes no sense to talk about proletarian class interests unless we suppose that classes and commodity production persist. And under commodity production, there will always have to be someone (in fact, the vast majority of the population) doing the work. If the goal is simply to switch places as a class, most workers would necessarily have to be betrayed and left behind. The proletarian class, so long as it remains a class, cannot remain united.
That said, proletarians have an interest as individuals in the overthrow of class society itself, but they have no class interest in this overthrow and the creation of communism. Communism is actually inimical to the interests of proletarians as a class. Communism means the death-knell of wage-workers as wage-workers: zero wages and 100% unemployment—the complete inability to sell their labor-power. The struggle to overthrow capitalism is not a battle of proletarians versus capitalists, but rather a battle of individuals who happen to be proletarians versus commodity production and class society itself. Proletarians as proletarians have more of a dependent relationship on capitalists. As every worker knows, wage-workers have an interest in high profits because high profits mean a healthier capitalist system, higher interest rates that might help a worker save up and escape wage-work, more investment, and more jobs. It is in every wage-workers interest as a wage-worker to increase capitalist exploitation and profits—as long as that exploitation does not fall on himself! This shouldn’t take a bunch of esoteric Marxist theory to explain; any Trump voter fretting over “muh jobs” could tell you that this is the reality under capitalism! Wage-workers as wage-workers within capitalism can only confront each other as ruthlessly competing sellers of the commodity labor-power with an interest in minimizing their own exploitation (maximizing their own wages and job security) at the expense of other workers who must necessarily shoulder more of the load of exploitation.
Every time that workers organize some partial combination of themselves (whether along the lines of gender, sexual orientation, race, ethnicity, nation, craft, trade, workplace, industry, etc.), the effect is merely to redistribute some of the spoils from some workers to others. They may talk about doing it “for the good of the working class,” but this is just using the real movement towards communism for rhetorical cover. Marx pointed out long ago that union struggles themselves are not important except to the extent that they further the union of workers as a whole (including every gender, sexual orientation, race, ethnicity, nation, craft, trade, workplace, industry, etc.). As Marx said in the Manifesto, “The real fruit of their battles lies, not in the immediate result, but in the ever expanding union of the workers.” I agree with this and argue that union struggles should only be supported to the extent that they help forge a complete combination of workers pursuing their common interest as individuals (not wage-workers) in the end of class society. Anything else is just riding on the coattails of communism for tribalistic gain, which ends up impeding the real movement towards communism by creating advantages for some workers relative to other workers, fostering envy, impeding their solidarity, and encouraging workers to fight over those relative advantages rather than address the issue of class society itself. I would argue that this critique applies just as equally to the AFL-CIO as it does to the KKK.
The only unions of workers that have been exceptions to this, in my judgment, are those that made their overriding goal (in both rhetoric and practice) the eventual union of all workers worldwide in the service of ending class society, ending commodity production, and establishing a communist society. The organizations that have come the closest to this ideal would be ones like the IWW, the First International, the pre-WWI Second International, and my favorite among the modern internationals, the World Socialist Movement. And the only daily struggles that actually help these organizations vanquish class society, in my opinion, are those struggles that:
THE REAL MOVEMENT TOWARDS COMMUNISM AS A WAY TO MAKE UNIVERSALIST “IMAGINED COMMUNITIES” REAL
It is only in the context of a real movement towards communism that the “imagined community” of humanity becomes a real community—that wage-workers come to have a common interest in communism as human individuals.
But if communism appears impossible, then all that is left for wage-workers are their interests as wage-workers, which are mutually-antagonistic. If workers are confined to the prospect of eternal capitalism, they are incentivized to harness every dirty trick, every vulgar prejudice, every pre-existing superficial difference, every partial combination as a rallying cry to break off a larger piece for themselves. And since 1991, communism has appeared impossible. With the rise of Trump and other self-proclaimed right-wing protectionists in France, the Netherlands, Germany, and elsewhere (who, like Trump, may or may not actually be neoliberals or just plain con-men in sheeps’ clothing who are willing to say whatever is fashionable to get elected), it appears that wage-workers have finally awakened to the fact that communism is dead and there is nothing left to fight over except the scraps of capitalism.
Unlike liberals, I don’t blame racist, sexist, nationalist workers for fighting over the scraps of capitalism. I don’t believe that morality exists, and I don’t think this blaming is productive in a strategic sense. I don’t think you can shame or bully someone into showing more genuine solidarity. You just end up alienating them even more for doing something that they have every reason to expect is legitimate—pursuing their own self-interests, however dirty and brutal the process might appear to liberal sensibilities in practice. That’s capitalism. We need to overthrow it. But with the Left’s current infatuation with liberal, moralistic, utopian socialism, we are plunging into a vicious downward spiral that will push Trump voters farther and farther away from the Left until they throw us all in the concentration camps.
Instead, the solution is to change the incentives. So, I blame the situation—that the scraps are the only thing left to fight over here at the “End of History” now that “There Is No Alternative” to capitalism. This is what we need to change. Blaming Trump voters for being “evil” is just a way of scapegoating the responsibility for capitalism’s problems onto them and dodging the responsibility that the Left has for utterly failing to offer a plausible communist alternative. It is up to us to give Trump voters something better to fight for. If we fail that, then we have nothing to complain about but our own failure.
BUT THIS SOUNDS SO HARD AND RISKY! WHY CAN’T WE JUST GO BACK TO BLAMING TRUMP VOTERS AND NEOLIBERALS FOR DEMISE OF THE “GOLDEN AGE OF CAPITALISM”?
It would seem superficially that, once upon a time, capitalism had a natural affinity for advancing democracy and other universalist, liberal values. However, I would argue that it was precisely the real movement towards communism that forced capitalist societies to be on their best behavior. With the communist threat removed, capitalism is free to revert to a much more brutal, authoritarian, and tribal “capitalism with asian values,” as Slavoj Zizek has put it. Neoliberalism and tribalism are not a cause of our problems, but latent symptoms of the way capitalism naturally functions that are now coming to the surface now that capitalism has been taken off its meds. And the left has helped unleash capitalism by failing to sustain a serious contender to keep capitalism on its guard. If it once seemed like a good idea for the liberal project to hitch its wagon to capitalism, that time is over. Capitalism more and more impedes and pushes back the liberal universalist project, I would argue.
Ideally, Trump’s election could have had the positive side-effect of clarify’s the Left’s failures and the way forward. On the other hand, Hillary’s victory would have helped obscure the root problems and drugged the Left into a harmful complacency. That’s why I was, along with Zizek, actually a bit glad that Trump won. But I might have been mistaken because, so far, the Left has been incapable of drawing the correct lessons from Trump’s election and has instead continued to scapegoat neoliberalism and tribalism for society’s problems. So sad.
TL;DR—LIBERALS NEED COMMUNISM
If both God and communism are dead, then it’s just “tribalism all the way down,” and the liberal universalist project is in big trouble. Liberals badly need at least one of the two to be a viable force in the world, or else the few extrinsic incentives in the world that push people together may very well be overwhelmed by capitalism’s extrinsic incentives that necessarily pull people apart.
If it sounds like I am equating the communist movement to a religion, then you are not far off the mark. I’ll be the first to admit that it takes at least a little faith to remain a communist after the fall of the Soviet Union and the defeat or degeneration of almost every other communist experiment so far. Nevertheless, of all the religions out there, communism strikes me as having the most credible descriptive claims (theology) and the greatest potential real-world benefit. Yes, we do intend to create “heaven on Earth,” and we’re going to do it right next time, goddammit!
I don’t blame liberals if they remain skeptical. Skepticism is good. But I do think that this is a gamble that liberals have to take, if only for the sake of their own universalist project. We have a better chance at resurrecting communism than resurrecting God, and we need to bring back at least one of the two in order to make real, at least in an extrinsic sense, those far-flung, abstract “imagined communities” which liberals so intrinsically value. Whether the real movement towards communism ultimately proves successful, simply having it resurrected as a contender might force capitalist societies to put on their best behavior once again.
In short, those in favor of universalist moral claims have an interest in helping to resurrect communism in order to give people who are otherwise selfishly-incentivized and tribalistically-inclined an interest in getting along and dignifying each other…if only for extrinsic reasons. Better than nothing…amirite?
So, the Federal Reserve just raised the federal funds target rate again to 0.75%. I wouldn’t consider this particularly noteworthy, except for the way that the Fed is doing it.
It used to be that commercial banks tended to expand their loans on their balance sheet up to (or even slightly past) the point where they had just enough reserve funds (whether through opening checking and savings accounts for depositors and holding their money, or by soliciting short-term loans from other banks) to cover the fractional backing requirement for those loans. After all, “excess” reserves that were not backing loans was just money that was sitting there doing nothing for the bank, earning 0% interest, as opposed to a much better risk-adjusted rate of return that they could get by pyramiding those reserves into a 20x greater loan (assuming that the reserve requirement stays fixed at 5%).
It used to be that, when the Fed wanted interest rates to increase, they would sell Fed assets (usually govt. treasuries) in exchange for bank reserves (money), thus vacuuming up some reserves from the banking system. That made it harder overall for banks to get emergency loans to shore up their reserve requirements after a busy day of making new loans, and those desperate banks would bid up the interest rates on those loans until such a point that it became pointless to extend new loans at a certain going interest rate because the banks would have to pay just as much interest for the reserves to back it. After an evening of musical chairs, some banks would sometimes fall short of securing short-term loans to meet their reserve requirements, and they would have to come crawling to the Federal Reserve for a loan from the “discount window,” which was another way that the Federal Reserve could influence what the competitive going interest rates were.
All of that is out the window now thanks to the several rounds of Quantitative Easing (QE), which were basically just open market operations on steroids. In isolation, the QEs would have allowed for an explosion in the amount of commercial bank loans thanks to the extent to which they increased the monetary base of reserves held by those commercial banks.
However, at the same time that the Federal Reserve was doing its QEs, it also started a new policy meant to counter-act the effect of its own QEs, interest on reserves. (Why the Fed would want to do a huge QE, and then shoot its previous QE in the foot with IOR, instead of just doing a smaller QE in the first place, has to do with the Fed’s idea of “Operation Twist,” in which they wanted to specifically bring down long-term interest rates without unleashing inflation).
Paying interest on reserves has disincentivized commercial banks from using those reserves to reach for riskier gains when they could just sit back and reap risk-free returns from the Fed, especially if borrowers were not willing to take on debt at interest rates much higher than the interest on reserves. The slight added margin wouldn’t be worth the risk. So, commercial banks have sat on these reserves.
However, as the business cycle improves, borrowers are becoming more eager for loans and feel more confident about being able to pay them back, even at slightly higher interest rates. This would ordinarily tempt banks to starting writing more loans (at those slightly higher interest rates), threatening to explode the broad money supply. Therefore, as the business cycle improves, unless the Federal Reserve wants to undo its QEs, or unless it wants to tolerate an explosion of inflation above its declared 2% target, the Fed must increase the interest on reserves that it pays to commercial banks to make that money stay put rather than chase greener pastures.
Some economists seem to see nothing wrong with interest on reserves and assume that it will become the new normal, but I see reasons for why interest on reserves is unsustainable, and it has to do with the Fed’s balance sheet.
Why the Fed Balance Sheet Matters
For my understanding of why the Fed balance sheet matters, I must thank Mike Sproul for explaining it in his many comments on blogs such as those of David Glasner (uneasymoney), Nick Rowe (worthwhile.typepad.com), Scott Sumner (themoneyillusion), and JPKoning (moneyness).
Here’s the thing: people assume that the Fed plays by entirely different rules because it has access to the printing presses. It cannot go out of business if it makes bad deals. It does not need to make a profit to continue to exist. All of that is true. However, if the Fed cares about the integrity of the dollar as a currency, it would behoove the Fed to act as though it was a normal bank. In other words, if it cares about the dollar, the Fed ought to not make a habit of giving things away for free. For every dollar it issues, it ought to try to have a dollar’s worth of assets in its possession. Why?
It is true that the Fed’s dollar “liabilities” are unlike typical liabilities in that the Fed can never be put under the legal obligation to redeem outstanding dollars for Fed assets. That’s true. But the Fed has a practical obligation to offer such redemption if it wants to protect the value of the dollar and hit its inflation targets.
Dollar velocity and the demand for dollars are contentious topics. For the moment, I won’t delve into what determines these. However, I think it should suffice to say for our present purposes that these two things are not stable. As much as we would like to assume that velocity stays constant, we have empirical evidence that it doesn’t. Likewise, demand for dollars can suddenly increase or decrease for reasons that are difficult to understand. Regardless, there may come times when the velocity of money surprisingly increases or the demand for dollars suddenly decreases.
When these things happen, if the Fed wants to hit its inflation target, it must be ready to sell its assets on its balance sheet in exchange for vacuuming up as much base money as it needs to in order to bring the supply of dollars in line with the new demand for, and velocity of, dollars.
To be perfectly prudential, the Fed ought to have enough assets so that it can vacuum up ALL of its outstanding dollars, if need be. That way, no matter how low the demand for dollars temporarily dips, or how high the velocity gets, the Fed can always decrease the supply of dollars to make the dollar hit its inflation target. That would give the dollar supreme credibility, and would dissuade people from even testing the Fed with a temporary run on (away from) the dollar.
Another thing that would be prudent for the Fed to do is keep some assets on its balance sheet whose values are not denominated in dollars. The reason is, if the value of the dollar ever starts to slip, that is precisely when the Fed would need to rely on selling its assets to vacuum up enough dollars to re-establish the desired target. Yet, as the dollar loses value, so will, to the same degree, any assets that the Fed has that are denominated in those same dollars. A government bond or an MBS promising payment in dollars will lose value precisely proportional to the loss in the value of the dollar. The Fed could find itself chasing its own tail. However, a large gold hoard that the Fed would be willing to partially sell off would be a stabilizing influence because, as the dollar lost value, a given ounce of gold would buy (vacuum up) more and more dollars, thus making the problem actually easier to correct as it became worse.
How the Fed has harmed its balance sheet since 2008
The Fed has done two things to impair its balance sheet since 2008: buying toxic MBS assets during its rounds of QE, and paying interest on reserves.
Banks have only been too happy to get a lot of their MBS assets off their balance sheets and onto the Fed’s balance sheet since 2008. I imagine that the Fed was betting that those assets only seemed toxic at the time due to an abnormally distressed situation on the financial markets. However, what if those assets really are toxic in a fundamental way? What if too many of those MBS tranches have home loans that will never be fully paid back, not during a recession, not during a boom, never? If so, then the Fed overpaid for those assets. If the markets correctly perceive this, then when the Fed eventually goes to unwind its QEs and sell those assets back to the market, the market will only accept those MBS assets at a discount compared to what the Fed originally paid for them (let us disregard for the moment changes in price due to partial maturity of the assets in the intervening time). What that means is that, even after all of the MBS assets are once again off the Fed’s books, some dollars that were originally injected into the monetary base from the original QE will remain permanently stranded out there, permanently swelling the monetary base (unless the Fed wants to deplete some of its other assets to compensate). In any case, the Fed’s ammo for vacuuming up dollars in the future, should it need it, will have been permanently depleted.
As for interest on reserves, there the Fed is giving commercial banks value without getting anything for the Fed’s own balance sheet in return. Some commentators talk as if this is to compensate for the fact that the Fed is getting a constant revenue stream from its financial assets bought in the QEs, and the banks are not. This is a red herring, though. Those revenue streams were already factored into the open-market prices of those financial assets when the Fed originally bought them. The banks have already been paid for them. The banks freely chose to trade a lump-sum of reserves for an ongoing (and uncertain) revenue stream, and the banks were able to freely hold out as long as they wanted until the Fed was offering enough of a price to allow the Fed to buy all of these revenue streams to hit its QE targets. The Fed never “forced” banks to part with these revenue streams. That’s what “open-market operations” means. The Fed merely had to increase the offer price until the banks were willing to sell them however much the Fed wanted to buy.
The Fed’s paying commercial banks 0.75% interest on its reserves each year is a bit like the Fed having overpaid originally for those financial assets by 0.75%, multiplied by however many years this is allowed to continue and adjusted according to whatever the average interest on reserves payment happens to have been when integrated over the whole time from the start of the QEs until the unwinding of the QEs.
Interest on reserves is a permanent increase in the monetary base that the Fed has no way of vacuuming up if the Fed should ever need to do so. The Fed has nothing to offer for that money.
There is a way out, however: the fiscal authority could compensate by doing either of two things that amount to the same thing: bestow non-monetary assets to the Fed’s balance sheet (taking them from somewhere else on the fiscal authority’s balance sheet, of course, such as social security) so that the Fed gets more ammo that it can use to vacuum up dollars, or run a tax surplus that is then destroyed (rather than recycled back into the economy via debt repayment and/or program spending). These would alternative methods of vacuuming up dollars if the Fed’s balance sheet should ever become exhausted.
However, I find these alternatives politically unrealistic. The fiscal authority is well-known to have an inflationary bias. Would the public really tolerate their incomes being taxed, only to hear that that tax money would then be shredded (rather than going towards paying down the debt or some social program)? This is why we have an independent monetary authority in the first place—to do the tough jobs that the popularly-elected fiscal authority won’t do. If the “independent” monetary authority can’t do the job, why would we presume that the fiscal authority could?
In short: the Fed’s balance sheet matters. Let’s imagine that interest on reserves goes on for long enough and reaches a high enough level that fully one half of the monetary base was dispensed via interest on reserves, with the Fed having no assets on its balance sheet to show for it. At that point, if the demand for dollars should ever suddenly drop in half, or the velocity of dollars should ever double (both plainly imaginable scenarios), the Fed would be out of ammo on its balance sheet for vacuuming up unwanted dollars, and inflation would be off and running.
And if the Fed should ever try to get away from Interest on Reserves, it would also need to unwind all of its QE or else risk an explosion of loan creation (and even if QE is unwound fully, I fear that there will be some permanently stranded dollars that the Fed will not be able to buy back with the toxic assets on its balance sheet). Unwinding either QE or IOR will be painful.
Interest on reserves is a poisoned chalice. Everything is treating it like a cure-all, but it will slowly poison the Fed’s balance sheet and tarnish the dollar’s long-term value prospects.
I figure it might be a neat little exercise for Voynich cryptographers to calibrate their attacks on the Voynich Manuscript by tackling a different encipherment that uses the same script—one that I devised myself! See if you can decipher it.
If the correct answer has not been found in a year’s time, I will post the correct answer exactly a year from now: July 18th, 2017. The only hint that I will give is that the intended message is clear and unambiguous, and there are clear rules for constructing and deconstructing the message that I could convey to a trusted confidant on the other end in less space than it took to write this post.
Recently J. P. Koning at his Moneyness blog noticed that so-called “Fedwire” transaction volume is down this past year and a half.
The “Fedwire” is a mechanism that enables banks with Federal Reserve accounts to calculate their net obligations at the end of each day and settle that net difference. So, for example, rather than having Bank A pay Bank B $9 billion from one set of transactions, only to have Bank B pay Bank A back $10 billion owing to a different set of transactions, the obligations would be mutually settled through Fedwire and the only net transaction that would have to take place would be for Bank B to pay Bank A $1 billion at the end of the day.
This might seem like a trivial accounting difference, but it actually has critical implications. In order to settle obligations in the first scenario, the banks need $10 billion in currency, or they would need to resort to short-term overnight credit. In order to settle obligations in the second scenario, only $1 billion in currency is needed.
But who cares how much currency is actually needed? Can’t the Federal Reserve just print more currency if it is needed to circulate the desired amount of value that parties wish to transact?
Well, the Federal Reserve could do this, but increasing the dollar tokens with respect to gold would devaluate the dollar versus gold, and at some gut level the Federal Reserve understands this. After all, if the Federal Reserve had absolute freedom to expand and contract the monetary base as the “demands of commerce” apparently demanded, then there would be no need for settlement mechanisms or short-term credit in the first place. No bank would want to take out an overnight loan if it could just as easily ensure that it got paid in hard cash by calling up the Federal Reserve and letting them know that the “needs of commerce” demanded more liquidity.
So, the settlement mechanism is actually quite important. It allows commercial activity to expand to many multiples of what the dollar monetary base, and the world gold market standing behind that, would allow by themselves. The J. P. Koning article linked to above has some exact figures that will astound you—for example, that the Fedwire in 2015 handled $834 trillion in transactions, even after using the settlement mechanism. (How much more money would have had to have changed hands without the settlement mechanism!) To be sure, most of that trading was probably speculation in financial assets of various sorts, but still….
If you will recall from my previous post on money capital vs. commodity capital, I found to my surprise that, over the last 50 years, annual world GDP as measured in ounces of gold has averaged about 1000 times the annual production of gold bullion on the world market, with unsustainable boom periods marked by world GDP outstripping this average, and periods of crisis marked by world GDP lagging behind this average.
In a hypothetical world where a given ounce of gold, or its dollar-token equivalent, could only be exchanged once per year, where there was no credit offered by anyone, and where settlement mechanisms such as Fedwire did not exist, world gold production would need to have been about 1000 times greater in volume over the last 50 years in order to accommodate the circulation of the value of the commodities being circulated. Capitalism overcomes this “metallic barrier” by:
1. Increasing the velocity of money, so that a given ounce of gold or its dollar-equivalent can be exchanged multiple times over a given year. This is aided by technologies such as, for example, having paper tokens represent gold in circulation rather than circulating gold directly and risking wear-and-tear.
2. Extending credit.
3. Introducing settlement mechanisms to cut down on the actual amount of money that needs to be exchanged (which, in a way, is sort of an intra-day credit that temporarily exists on paper before it is paid back at the end of the day without interest, leaving behind a small net settlement balance that then must be paid with either cash or actual short-term, interest-yielding credit).
Although I have not done the math, it makes sense to me that these three factors could account for the large, but consistent discrepancy between world GDP as measured in gold ounces and the actual number of ounces of gold production in any given year.
But is it not strange that this ratio has not re-adjusted to some new order of magnitude over the last 50 years? Yes, there have been fluctuations, but it appears that the 1000:1 ratio has had a very strong pull.
One would think that new technology, such as debit cards and Fedwire, would allow this ratio to increase even more. Perhaps these new technologies have been counter-balanced by the fact that the U.S. left the Bretton-Woods gold peg in 1971, which (counter-productively from the Federal Reserve’s standpoint) made capitalists more insistent on holding, say, 2-3% of their portfolio wealth in gold on average as opposed to, say, 1-2%, due to the greater risk that the dollar could be at any time depreciated versus gold. These larger immobile gold hoards would cause more gold to be needed to circulate a given value of commodities on the world market. Again, I have not run the numbers on this, but it seems plausible that these factors could have partially canceled each other out.
Does the Fedwire data in J.P. Koning’s post say anything about the current state of the business cycle? Yes. I think it shows, once again, that the boom phase of the current cycle has not even really begun yet and still has plenty of room to grow. If the Fedwire settlement mechanism were being stressed to its max (in addition to the credit markets undergoing the same), then I would say that a crisis would be right around the corner. But as J.P. Koning’s post shows, there is still plenty of slack in the Fedwire system, and we know that interest rates on the credit markets are still rock-bottom. There is still plenty of gold, and dollar-token-equivalent representing that gold, to circulate commodities at their present values on the world market. There is still plenty of room for more credit creation (whether of the intra-day Fedwire kind or the longer-term interest-yielding kind) to inflate the appearance of expansion of the world market for commodities.
As Sam Williams says, paraphrasing Marx, an ounce of gold or its dollar-token equivalent can only be in one place at a time. Velocity can increase, but only up to a certain point with our given level of technology. Sooner or later, the world market runs into a situation where the tower of credit and the chain of payments becomes shakier and shakier, until the same ounce of gold or dollar-equivalent is called upon to settle two different credit obligations at the same time, and as this becomes more widespread, a credit crisis erupts and then a general crisis of overproduction that was building latently (while being papered over by the expansion of credit) finally makes itself apparent.
But we are not there yet. We are nowhere close to that part of the business cycle. There is still plenty of slack in the system, plenty of room for credit to expand. That is why I bought into VT (Vanguard Global Equity ETF) this past week right after the Brexit debacle. I anticipate the share price going up quite a bit over the next three years or so. Only when world GDP as measured in gold ounces begins to appear to be solidly outrunning world gold production (after adjusting for the 1000:1 ratio measured earlier), and only when interest rates have climbed again and Fedwire has started accommodating a greatly-expanded volume—that will be when I sell off my stocks and buy gold (or more likely, gold-related financial assets such as SPDR shares). Shortly thereafter we will see stocks plunge and gold soar, as we did in the 2008 recession.
I have recently updated my “Production for Use” spreadsheet to be (hopefully) a little easier to follow.
I also fixed some errors in some of the equations where I was not distinguishing between the “Production Cost” for items and the “Consumption Cost” for those same items. These are two different things.
The equation for the “Production Cost” of an item is:
(Labor hours of input materials * subjectively-reported unpleasantness weighting factor of those labor hours spent making the input materials * the factor utilization of those input materials) / the factor utilization of the outputted product.
And the units would be in “modified labor hours.”
Whereas the equation for the “Consumption Cost” of an item is:
((Labor hours of input materials * subjectively-reported unpleasantness weighting factor of those labor hours spent making the input materials * the factor utilization of those input materials) + (Labor hours spent assembling the input materials * subjectively-reported unpleasantness weighting factor of those labor hours spent assembling the input materials)) * the factor utilization of the outputted product.
And the units would once again be in “modified labor hours.”
When to use Production Cost vs. Consumption Cost?
Production cost would be calculated when items are produced, and consumption cost would be calculated when items are consumed. It’s that simple. In either case, the relevant participants involved with each would want to make each measure of cost as low as possible, although how they can achieve this varied between the two situations. (Such as: if you are producing an item, you want to produce an item with a high factor utilization using inputs with low factor utilizations. Whereas, if you are consuming an item, you want to consume an item with a low factor utilization that itself was also made from inputs with low factor utilization).
Anyways, here’s the updated Production-for-use-calculator-v2
Michael Roberts once again has a post up foretelling another recession brewing within the next 1 to 3 years. I don’t necessarily disagree that much on the timing. I think 1 year is a bit too soon. Three years sounds about right, though.
The main difference between Michael Roberts’s forecast and mine, however, is that Roberts sees the economy’s trajectory gradually rounding the top and worsening in these next three years, starting from right now. I, however, think that we have yet to really enter the boom phase proper. I think we will see quite a bit of improvement in the meantime before the next full-blown crisis hits in about 3 years.
In other words, whereas Roberts sees the economy as gradually stalling towards recession starting now, I predict that the economy will begin to accelerate. I still think that a recession is about 3 years away, but I think the period immediately before the recession is more likely to look like a prosperous boom than the current sluggish stall.
Why do I think the economy still has a lot of potential left in it to accelerate before hitting another recession?
I agree with Sam Williams’s crisis theory that the main reason why there have to be crises under capitalism from time to time is that production inevitably gets expanded beyond the monetarily-effective demand needed to buy up that production.
What, ultimately, determines long-run monetarily-effective demand? World production rates of the money commodity (which currently is gold).
Why does the production of all other commodities inevitably race ahead of the production of the money commodity? Because the expansion of credit in a cycle artificially inflates the prices of all non-money commodities above their values and artificially inflates the profits on paper of producing them (while simultaneously deflating the price of the money commodity below its value and artificially reducing the incentive to produce the money commodity just when the world needs it the most).
According to this theory, leading up to a full-blown crisis of overproduction (of all non-money commodities relative to the money commodity), one should see:
What do we see currently?
B. Bank Loans
Of all those indicators, only B and F point to the possibility of an imminent crisis of overproduction. (And I still think B can go way higher before hitting a limit based on how much capital there is still sitting idle as excess reserves).
In his recent column linked to above, Michael Roberts alleges that there is currently a problem of profitability, and that sluggish or falling profitability will lead us into a new crisis.
I agree that profitability is important. But I think that, so long as profitability is still substantially above the rate of interest that industrial capitalists must pay for capital, then there is still plenty of incentive to invest. Consider: the risk-free interest rate on excess reserves (charitably being paid by the Federal Reserve to banks on their excess reserves) is currently 0.5%. Assuming that the “prime rate” that banks will charge capitalists has to be a little bit above that (in order to make it worth their while to process the loans, pay overhead, etc.) Let’s say the prime rate is 3%.
The rate of profit needs to be substantially above that to justify the risk of risking money in the uncertain industrial capitalist circuit of M-C-P-C’-M’. Let’s say, 5% above the prime rate, or 8%. Are you telling me that the average rate of profit is currently below 8%? If so, then capitalism is truly screwed. Because that means that, even with interest rates at the lowest that they will ever go, industrial capitalists will not see a reason to risk their capital (or borrow capital) to go into production of most commodities.
If the rate of profit truly is sliding below 8% or so, then there’s what I predict you would see: negative interest rates as far as the eye could see. Which would logically lead to the taxing of depositors with negative interest rates—in effect, subsidizing banks’ appropriation of surplus value on the front end to make up for the fact that they will not be able to appropriate as much surplus value “on the back end” with their interest rates to industrial capitalists being limited to something like 1% or 2%. (Limited, that is, by the industrial capitalists’ willingness to pay higher rates of interest for that loan money).
Of course, banks might still go out of business in this situation if depositors withdrew all of their money and tried to hold it as (unpenalized) cash or gold. There are a number of things that could happen at that point:
Anyways, determining the average rate of profit is above my pay-grade, but unless someone can show me that the average rate of profit has plunged below about 8%, then I’ll regard this permanent negative interest rate scenario as unlikely for the near future.
Michael Roberts has pointed out that one reason that profit rates are low currently is that fixed investment is low, and thus the Department I industries (heavy industries that produce means of production) are doing badly. However, this is not a sign of a coming recession. This is to be expected at the bottom of a business cycle, not on the approach to the top. On the approach to the top, you would expect to see Department I industries booming as businesses expand production on the (mistaken) assumption that the boom will keep going forever. Rates of profit in Department I industries are a lagging indicator of the business cycle, not a leading indicator. Once the boom phase of our current cycle and credit inflation gets some momentum, we will see the Department I industries taking off.
As I have said in recent posts, the Federal Reserve could retard the coming boom a bit by increasing the Federal Funds rate, which it can only do now by increasing its rate of interest on excess reserves, and thus discouraging banks from making loans on those reserves…or by unwinding QE, which it will not do any time soon. In that case, if the Federal Reserve hikes too quickly, we could see a bit of a prolonged malaise before the boom period proper picks up again. But we are not primed for another full-blown crisis of overproduction just yet in any case.
A crisis of over-production of non-money commodities relative to the money commodity requires over-reliance on credit and a resulting credit crunch. There can’t be a credit crunch if credit is not already over-extended, and right now credit is not especially over-extended.
When those 2.3 trillion dollars currently in excess reserves become required reserves serving as the base for $23 trillion in new loans on top of them, THEN you will know that we are primed for another crisis of overproduction and credit crunch. (And in the meantime, we will be riding one hell of an inflationary roller-coaster with all that new loan money flooding into the economy…unless the Federal Reserve unwinds its QEs).
Instead, in addition to the Fed being aggressive in tightening, what might be going on right now is an “Inventory Cycle” or “Kitchin Cycle.” This could explain the recent rise in the inventory to sales ratio.
The basic idea is, now that the economy is starting to exit the depression phase and is getting set for the boom phase, money capitalists anticipate an increasing level of demand for credit. So these money capitalists start to anticipate being able to get industrial capitalists and consumers to sign onto higher-interest loans in the near future. So the money capitalists start to, in a sense, get ahead of themselves in demanding higher interest rates before the economy is really ready to support those higher rates. And so, especially at a point when demand for Department I goods has not really taken off yet to help the expansion along, you get a temporary hiccup in the expansion, a temporary apparent dearth of available credit at reasonable rates, a temporary lack of apparent demand, and a temporary accumulation of unsold inventories.
However, as soon as money capitalists re-adjust their expectations downwards and begin to offer credit again at more reasonable rates that the (slowly expanding) economy can support, credit and demand should pick back up again, inventories should drop, and the boom phase proper of the industrial cycle should commence.
That’s my forecast, and I’m sticking to it.
Sorry folks! But our job as Marxists is not to be perpetual pessimists preaching that doom and gloom are always right around the corner. I calls it like I sees it. And right now, it looks like we are entering the boom phase of the industrial cycle.
Only if the Federal Reserve quickly raises the payment of interest on excess reserves to higher rates will this boom get snuffed out before it gets going.
The deflationary signals that we are seeing right now stem from the Fed’s increase of the IOER from 0.25% to 0.50% recently. That is keeping money cooped up in bank vaults on the Federal Reserve’s account rather than having that money serve as the fractional basis for new loans. The Fed might have some difficulty finding its desired balance between deflation and inflation with this new (and absurd) “tool,” so no guarantees that it won’t overshoot and push things temporarily into deflation.
But I cannot see how even a deflationary blip engineered by the Fed’s IOER would permanently put an early end to this business cycle before we really get to experience a “boom” phase that uses up all of that excess capital and leverages a lot of new credit money on top of that excess capital.
The Federal Reserve has backed itself into quite a corner with its three rounds of “quantitative easing.” In order to make sure that the resulting increase in bank reserves did not cause hyperinflation, the Federal Reserve has had to keep those reserves quarantined in bank vaults, away from bidding on the prices of commodities in the real economy. To persuade banks to keep their money sitting idle in vaults, the Federal Reserve has had to pay interest on the excess reserves that resulted from those quantitative easings.
The Federal Reserve’s quantitative easings (creating electronic money out of thin air and using that money to buy various financial assets on the open market) brought about an expansion of the monetary base that was unprecedented.
Normally, this would have produced Weimar-like hyperinflation. I’m not exaggerating. Just look. We went from $0.8 trillion in the monetary base to $4 trillion in monetary base in about 5 years. That’s about a 100% annual rate of inflation. The problem is, when you get that level of inflation, people start to react to it by dramatically increasing the velocity of money (trying to get the increasingly-worthless hot-potato money off their hands before it loses more value), which would have started to increase the rate of inflation exponentially as the same dollar bills got to bid on more and more commodities in a period of time.
So, why hasn’t there been hyperinflation? Because, as I’ve said, the extra monetary base has been mostly quarantined in bank vaults in the form of excess reserves. How did the Federal Reserve accomplish that? By paying interest on excess reserves (IOER) to make holding that money in bank vaults more attractive than making new loans on the basis of that money to the real economy.
At first, the Federal Reserve did not have to pay much interest to coax that money to stay in bank vaults—only 0.25%. The reason was, banks saw few prospects for making good (credit-worthy) loans to companies at any interest rate higher than 0.25%. That’s how bad the economy was during the bottom of the Great Recession.
But as the economy (haltingly) improves, banks will become more and more tempted to make loans on those excess reserves.
Technically, as many people have rightly pointed out, banks do not “loan out excess reserves.” No, it is far worse. They make loans using excess reserves as their required “fractional reserve,” which currently by law is mandated to be 10% of the loan amount.
What this means is that, although banks have $2.3 trillion in excess reserves, they could actually loan out $23 trillion in new money. Yeah….
And when those loans are made, the reserves (no longer “excess,” but now “required”) stay in the banking system. In fact, although banks might shuffle some of those reserves between themselves, there is really no way for those reserves (and thus the fractional base for loans) to be drawn down except by the Federal Reserve REVERSING quantitative easing and selling the financial assets on the Federal Reserve’s balance sheet in exchange for bank money (which the Federal Reserve would then electronically delete from existence once it collects that money).
Commentators often focus on the Federal Reserve’s balance sheet and explain that the balance sheet can be gradually decreased without reversing QE, but instead simply by holding the financial assets to maturity. While this would indeed decrease the Federal Reserve’s balance sheet, it would do nothing to reverse the expansion of the monetary base. It is the expansion of the monetary base that is the real problem, of which the Federal Reserve’s ballooned balance sheet is only a symptom. The only thing that having the Federal Reserve hold those assets to maturity will do is remove those assets as something the Federal Reserve can sell back to the market in exchange for clawing back some of the monetary base it injected. The more those things are held to maturity, the more permanent the expansion of the monetary base will be.
Thought-Experiment – If the Federal Reserve Ended IOER
As a thought-experiment, what would happen if banks this next year suddenly decided to make new loans off of all of their $2.3 trillion in excess reserves (perhaps in response to an improving business climate promising that most of those loans would be paid back, and/or the Federal Reserve ceasing the payment of interest on those reserves, thus no longer giving that money a reason to stay cooped up in banks without loans on top of them)? Well, the M2 money supply would increase by not $2.3 trillion, but $23 trillion (due to the 10x multiplier of only needing a 10% fraction as a base for the loans). Here’s where M2 money is right now:
It’s at about, let’s say, $13 trillion right now. It would be expanded to $36 trillion in one year, which would be an annual increase of 175%. That gives us a lower-bound for our rate of inflation that year….
But wait, there’s more. Remember when I said that the velocity of money really picks up when people expect inflation? That’s true, in which case a “modest” amount of inflation can serve as a seed for hyperinflation, as people increasingly react to inflation by changing their expectations and spending money as quickly as possible. But it’s also true that the velocity of money typically increases during the boom phase of any business cycle. We don’t even need to postulate huge changes in psychological expectations to see how changes in the velocity of money would further increase the inflation.
So let’s be conservative in our thought-experiment and imagine only that the velocity of M2 money returned to where it was during the boom of the late 1990s. (As I’ve said, it could go much worse!)
Going from 1.5 to 2.2 would be another roughly 50% increase. So add that to the inflation rate.
We’d be looking at a yearly inflation rate of about 225%. By the end of 2016, the price of gold would be about…$3900 under this scenario.
The Lesser of Two Evils
Of course, the Federal Reserve will not allow this sort of inflation to happen (we assume…). Instead, the Federal Reserve will continue to raise the interest on excess reserves (IOER) so that keeping those reserves as idle excess reserves will be competitive with using those reserves as the base for 10x the amount of new loans. Making new loans will become more and more attractive as the economy improves (and borrowers will be willing and able to pay higher and higher rates of interest), which means the Federal Reserve will have to keep raising the IOER to keep pace.
Some commentators have been incredibly glib about this reliance on the IOER as the Federal Reserve’s new primary tool for keeping inflation in check.
(From the link above)—”Basically, the payment of interest on reserves allows the Fed to maintain control of the Fed Funds Rate even when the balance sheet is expanded. So the Fed can raise interest rates no matter what the size of the balance sheet is because it can simply increase the rate of IOER.”
“Basically”? “Simply”? Oh yeah, this IOER thing will be a piece of cake! Why didn’t the Fed think of this earlier?! Okay, everybody go home, everything’s fine, nothing to see here….
Needless to say, there are other bourgeois commentators who are less enthusiastic about relying on IOER…
There are four major problems with IOER that I see:
These problems will only get worse the longer IOER is in effect. The only way to unwind IOER, though, will be to unwind QE, or tolerate hyperinflation…and the Federal Reserve has implied that it will not be doing the latter two any time soon….