Bill Gross, the investment-firm manager who pioneered the speculative bond-trading market of the 1980s and was dubbed the “Bond King” by Fortune magazine, once described debt as the “mighty lubricant of capitalism’s engine, allowing its pistons to accelerate at an increasing pace as financial innovation mixed with our own animal spirits produced more and more profits, more and more jobs, more and more everything.” That mighty lubricant has been cheap most of this century, but that has changed recently, if perhaps only temporarily.
The Federal Reserve Bank’s deep interventions in the 21st century’s economy have included providing a river of liquidity to shore up the banking system during the Great Recession and purchasing massive quantities of government and institutional debt through quantitative easing. It also created a low-interest-rate regime that fueled asset prices on everything from urban and suburban homes to tech stocks. We are seeing what happens when the lubricant of cheap debt runs dry: Stocks nosedive and borrowing costs rise.
Stefan Eich’s The Currency of Politics tracks central bank power. Central banks are charged with ensuring the functioning of capitalism, but their role has been depoliticized, thus shielding them from the “burden of democratic justification for the distributive consequences of their actions.” Quantitative easing, debt interest rates and asset-price valuations lend a technocratic air to the Federal Reserve. MAGA chuds can slap Joe Biden “I did that” stickers on gas pumps and deny the impact of Russian military aggression, Western economic sanctions, and oil-company price-gouging. Biden takes the blame for the triple-digit cost of filling up vehicles nearly the size of Sherman tanks, not the leaders of the Federal Reserve’s 12 regional banks.
Money in The Currency of Politics is not just legal tender exchanged for goods and services, taxes, or debt and equity, but a “political project suspended between trust and violence.” In other words, dollars are the de facto global currency, because the United States currently is the leading capitalist power that spends unfathomable money on its war machine and can dictate world economic and social relations.
Thus far the redistributive consequences of higher interest rates have mainly been Wall Street bankers seeing their stock portfolios shed value and the proverbial “pain at the pump” for Main Street commuters. But there could be darker clouds on the horizon. During the 1970s inflationary period, unionized workers could shield themselves from price increases by bargaining for bigger raises — but while the COVID-19 pandemic’s labor shortages have temporarily given employees more bargaining power, wage increases have not kept pace with inflation. Developing countries could also get walloped by rising interest rates on sovereign and private debt, dwindling dollar reserves, and currency destabilization, thus triggering cascading defaults and social upheaval like that in Sri Lanka this summer.
Eich summons a long philosophical tradition from Aristotle to Edmund Burke and F.A. Hayek versus John Maynard Keynes on the politics of money, though his book acknowledges few countervailing forces to central bank power. However, Federal Reserve Chair Jerome Powell has vowed to bring inflation down even if the blunt instrument of rising interest rates results in significant job losses. The redistributive consequences would then be in plain sight.
Is hiking interest rates the only weapon to fight price increases? The Biden administration has largely ceded political and economic ground to the Fed, although it has floated the idea of tax hikes for the wealthy, which could free up cash for large governmental investments in key job-producing sectors such as green energy.
Elements of this approach were included in the Inflation Reduction Act. A key component of inflation is fossil-fuel prices. The job market is tight, yet the country only recently fully recovered all the lost jobs from the COVID shutdown and supply and labor disruptions. If the economy produced more goods and services to meet demand, this could cool price increases.
Prolific writer Adam Tooze’s Shutdown: How COVID Shook the World’s Economy and Eich’s The Currency of Politics urge progressive readers to consider money and the inner workings of capitalism. Shutdown documents the massive fiscal stimulus unleashed to combat the global economic downturn precipitated by COVID-19. In Tooze’s book, the lesson is that brash left-inspired spending plans filled the intellectual void created by unpopular neoliberal austerity. The left should remember that their ideas won that policy fight and were also adopted by more conservative governments around the globe.
I would like to suggest that people on the left read more economics and business media. A good place to start is Mary Child’s fantastic The Bond King.
The Bond King follows the rise and demise of Bill Gross, who ran what was once the world’s largest bond fund. It’s worth a peek into the paranoia, greed and double-dealing at his asset-management firm. Gross made billions trading bonds — government and corporate debt obligations — and used his firm’s market share to convince the U.S. government to intervene in mortgage and debt markets during the Great Recession. The Bond King puts in plain terms how large asset-management firms’ interests influenced the government and Federal Reserve.
Another crisis, climate change, threatens asset management, even as passive funds, algorithmically pegged to stock indexes, continue to pump money into fossil-fuel companies. While some pension funds have waged activist battles to compel corporations to address environmental concerns, they have borne little fruit until recently. But big asset management has a fiduciary duty to maintain their investments over a longer period. You cannot invest in Miami if it is going to be under water.
If climate change is “the greatest market failure the world has ever seen,” then we cannot count on capitalism to solve global warming, but we should demand that private capital be used to fund the transition, in tandem with sorely needed major government investments. Much of the economic establishment is still in the thrall of austerity economics. They will wield the specter of inflation and rising interest rates as an argument against the much-needed green transition and long-overdue expenditures on a more robust social safety net. The broad left will need to counter that.
The Currency of Politics: The Political Theory of Money from Aristotle to Keynes
By Stefan Eich
Princeton University Press, 2022
The Bond King
By Mary Childs
Flatiron Press, 2022
Shutdown: How COVID Shook the World’s Economy
By Adam Tooze
Penguin Random House, 2021
Please support independent media today! Now celebrating its 22nd year publishing, The Indypendent is still standing but it’s not easy. Make a recurring or one-time donation today or subscribe to our monthly print edition and get every copy sent straight to your home.