2nd August 2012
To make his point Waldman uses the metaphor of the Titanic with too few lifeboats for the number of passengers. In the example seats for the lifeboats are to be auctioned off to the highest bidder in the case of an emergency.
This means that despite their access to capital the wealthy on board the ship refrain from indulging in its various delights such as "fancy meals and full-body spa massages". To an extent their fear is perverse – they are already rich enough relative to most of the other passengers to be confident of a place on a lifeboat – but in the auction every available coin counts so the value of holding cash as insurance is high.
For Waldman this is similar to the situation that the US is currently experiencing:
"Our lives are much more like this cruise ship than most of us care to admit. No, we don't face the risk of drowning in the North Atlantic. But our habits and expectations are constantly under threat because the prerequisites to satisfying them may at any time become rationed by price. Just living in America you (or at least I) feel this palpably. So many of us are fighting for the right to live the kind of life we always thought was "normal". When there is a drought, the ability to eat what you want becomes rationed by price. If there is drought terrible so terrible that there simply isn't enough for everyone, the right to live at all may be rationed by price, survival of the wealthiest. Whenever there is risk of overall scarcity, of systemic rather than idiosyncratic catastrophe, there is no possibility of positive-sum mutual-gain insurance. There is only a zero-sum competition for the right to be insured. The very rich live on the very same cruise ship as the very poor, and they understandably want to keep their lifeboat tickets."
The consequence of this hoarding, however, is to starve the middle-class and ultimately the rich themselves of the means to produce additional wealth. As such, Waldman claims, while it is both a self-feeding and self-destructive strategy, "from the perspective of those near the top of the pecking order, it is better and it is fairer that potential abundance be withheld than that old claims be destroyed or devalued".
At the heart of the post is the problem of distribution. While the middle-classes were spending (and borrowing) those in control of the means of production were happy to supply them with cheap, efficiently produced goods. Now that the indebted masses have to pay off this debt, however, these same producers have no reason to continue to supply this abundance.
But is he right?
On an individual level it might be reasonable to suggest that the rich would respond to demand shortfalls by withholding capital – as money spent would yield little positive result.
The problem is whether this model can be blown out to a corporate level.
There is reason to doubt whether the model of distribution can continue functioning as Waldman suggests. As he points out, monetary policy can be (and has been) used to transfer wealth from creditors to debtors through ultra-low interest rates.
In a zero-sum game those that are wealthy and wish to preserve their position might well decide to hold off spending. The problem is that they would also have to assume that all the other wealthy individuals would act likewise, or else risk ceding their standing relative to their peers.
For companies the problems are magnified. Failure to put cash reserves to use is value destroying for shareholders, particularly in the current low interest rate environment. In order to maintain their position relative to the competition and maintain shareholder loyalty they need to get this cash working. Only something approaching an existential threat can justify sustained cash hoarding.
Unfortunately such financial icebergs are growing in number. From the US fiscal cliff, to fears of a Euro zone collapse and a slowing Chinese economy risks to macroeconomic stability have been multiplying. If any one of these can be overcome, however, the boost to confidence could be substantial enough to shake loose a few corporate piggy banks.
Waldman instead proposes policymakers attempt something akin to a "Modern Jubilee" as suggested by Steve Keen. This would entail launching a quantitative easing-type policy but with the money being channelled into the bank accounts of the public to pay down existing debt.
At present such an unorthodox measure may not be warranted, but Waldman has provided a valuable insight into alternative ways to tackle the aftermath of the financial crisis. Policymakers should heed his warning that allowing the current situation to become entrenched may have dire consequences.
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