The crisis of the global economy. Was it a planned disintegration?

“The biggest propaganda story this decade is the fiction of the Japanese and now Chinese workers are thrifty folks who want to desperately save money and they want this so badly, they will happily toil away in order to hand over this loot to the American consumer who will then spend it for them! And everyone lives happily after living off the blood and sweat of those foolish Asian workers who don't know how to have fun, hahaha."

So penned Elaine Meinel Supkis in her 2007 article exploring the reasons for the existence of the global money glut. [1]

Russian writers Vasily Koltashov, Boris Kagarlitsky, Yuri Romanenko and Igor Gerasimov provide a wider (and clearer) context for the imbalance between the world's monetary base and its real economy. "The world economic crisis ... is systemic in nature" they wrote and comes about through the "contradictions of the neoliberal model of capitalism" - an economic model, they say, that is based on the "exploitation of cheap labor power in the Third world", the systematic lowering of real wages whilst stimulating consumption in the rich nations.

"...The scope for intensifying this exploitation has been almost exhausted."[2]

Not surprisingly, given the way that consumption was expanded by whatever means available, including through the ballooning of debt and the stepped up, extremely modern, efficient (and mostly institutional) environmental pillage.

John Bellamy Foster provides his own elaboration of the contradictions in today's global capitalist economy:

"Three critical contradictions make up the contemporary world crisis emanating from capitalist development: (1) the current Great Financial Crisis and stagnation/depression; (2) the growing threat of planetary ecological collapse; and (3) the emergence of global imperial instability associated with shifting world hegemony and the struggle for resources. Such structural weaknesses of the system, as Joseph Schumpeter might have said, are the product of capitalism’s past successes, but they raise catastrophic problems and failures in the present nonetheless."[3]

It certainly feels to me like we're all now (metaphorically) standing at the pinnacle of a 'contradiction mountain' built up over the last two hundred years; with a cliff edge descent into some oddly familiar future existence.

The historical evolution to present day seems to have gone something like this:

What lies behind the debt ceiling 'crisis'?

Below I have posted some brief comments made recently by Diane Warth (our Econospeak administrator) on the recent US debt ceiling 'crisis'. "

I don’t believe the recent debt ceiling “crisis” was anything but a media circus designed to usher in the “necessary” dismantling of Social Security – Obama is a Wall St. puppet and the outcome was his intent. It’s a distraction.

The real story, in my opinion, is the bubble of arrogance the players insist on floating – encouraging the public to invest blindly in the virility of the US econ engine which prevents them seeing the fiat can they keep kicking down the road has hit a dead end. The financial elite do realise it and are hedging their bets on it. When the can hit the wall the elite created derivatives. Stiglitz challenged any economist to define derivatives. Not only did Wall St. create a catastrophically obscene amount of its own fake money, the Fed printed money to bail them out when the bubble burst. The scenario will repeat – what will stop it. The Indian economist Jayati Ghosh sees it happening in commodities.

The US is waging 7 wars and whilst its main exports are war-toys a manufacturer’s primary customer should not be itself, no? The “wars” are not going well. War is insanely expensive – robotics, PTSD, the medical costs alone would be injurious to the healthiest of economies let alone an unimaginably impaired one that has no real change in the works. The govt. can’t privatise the military quickly enough. Then there are the long-term health costs of new age weaponry, as well, not only does Japan have to deal with rebuilding infrastructure, but medical fallout for years to come – as would any country that experiences such a disaster, double the trouble here in the US where the nuclear industry is entirely subsidised by the public.

Trade policy remains moored in oppressive tactics – China now seems no more or less menacing a partner - the US emperor is naked but no one in Murdoch world notices. The kooky US left believes marching in DC will affect change? It’s pathetic. The crisis for capitalism will happen when China’s working class revolts. If that doesn’t happen, China will become what the US is today, as the US simultaneously bottoms out. I prefer the death blow to capitalism inflicted by a worker revolution but history is not a promising indicator.

" Hmmm...national 'trade policy'? Or is it the regulatory cartelisation of the global economy by state capitalist policies of the wealthy nations?

It’s the Political Economy, Stupid!

Sometimes living in the world of ideas makes it harder to understand the real one. If you happen to be an economist, and the time is now, that is true in spades. Take Paul Krugman, for instance. After bemoaning the terrible policy choices of the last two years, he writes, “I’m still trying to make sense of this global intellectual failure.” It’s as if the core problem is that political leaders didn’t learn their macroeconomics well enough.

But Keynes was wrong about the power of “academic scribblers”. Idea-smiths provide language, narratives and tools for those in control, but the broad contours of policy depend on who the controllers happen to be. We are not living through an epoch of intellectual failure, but one in which there is no available mechanism to oust a political-economic elite whose interests have become incompatible with ours.

This is not some sudden development, much less a coup d’etat as is sometimes claimed. No, the accretion of power by the rentiers has been systematic, structural and the outcome of a decades-long process. It is deeply rooted in modern capitalist economies due to the transformation of corporations into tradable, recombinant portfolios of assets, increasing concentration of and returns to ownership, and the failure of regulation to keep pace with technology and transnational scale. Those who sit at the pinnacle of wealth for the most part no longer think about production, nor do they worry very much about who the ultimate consumers will be; they take financial positions and demand policies that will see to it that these positions are profitable.

The rapid and robust global restoration of profits post-2008 was not an accident. Public funds were used to bail out exposed creditors and shore up asset values, while the crisis was used to suppress wages and postpone meaningful regulatory reform. Indeed, I can predict with some confidence that many of the profits, particularly in the financial sector, that have been reported in official filings and blessed by the accounting firms will later be found to be illusory—but not before those who have claims on the revenues have cashed in to their own personal advantage. The institutions will be decimated, but those who owned, lent to or bet on them will be rich. This is not a failure, at least not for them.

You could make a case that, collectively, the interests of the financially endowed ultimately require a rescue of the real, nonfinancial global economy. Surely, when we take our painful plunge into the second dip of the Great Recession, their wealth will be at risk. But the ability to see it at a system level presupposes either a system-level organization of the class or the existence of individual interests that are transparently systemic. Neither appears to be the case today. From what we (you and me) can see from our vantage point, the ruling demands are to make sure my bonds are serviced, my counterparties pony up, the markets I invest in stay liquid, and expenditures for public welfare (i.e. the losers and chiselers) are slashed.

The first principle of political economy is that the scope of democracy depends on the range of views and interests (typically tightly linked) of the owning and controlling class. Genuine public debate and decision-making extends only to those issues on which the elites are divided. In what country today is there a significant division among political-economic elites over core economic questions? How would our situation be different if Obama, Cameron, Merkel, Sarkozy et al. had been on the losing side of their elections?

So, the current mess is not the result of a failure by intellectuals—although clearer, less ideologically-driven thinking by economists would certainly be a good thing and might make a small dent at the margin. As long as there are even a few economists who proclaim the virtues of austerity and deregulation, however, their views will dominate. They haven’t won a battle of ideas; they are simply the ones who have been handed the microphone.

The real problem is political, and it is profound. Unless we can unseat the class that sees the world only through its portfolios, they may well take us all the way down. Unfortunately, no one seems to have a clue how such a revolution can be engineered in a modern, complex, transnational economy.

A Calamitous Response to Calamity

I grew up 18 miles from Youngstown, Ohio, the nearest thing to a "big city." The town was the epicenter of the Rust Belt because of his heavy dependence on steel. As the economy disintegrated, arson became the major industry because housing values had declined so much. Recently, the town was in the news because it pioneered in the deliberate shrinkage of a city.

Now, the Wall Street Journal reports that a new steel mill is under construction, which might seem to be a reason for celebration. Unfortunately, the purpose of the mill is to produce million tons of seamless steel tubes used in "fracking," which has become a major source of income in the area, but a serious threat to the water supply.

Ansberry, Clare. 2011. "A Steel Plant Rises in Ohio." Wall Street Journal (2 August): p. B 1.
http://online.wsj.com/article/SB10001424053111904233404576462562705511704.html?mod=ITP_marketplace_0

Manufacturing Discontent: A Prelude to the Phony Debt Crisis

I just posted a short video clip discussing my 2005 book, Manufacturing Discontent and its relevance to the phony debt crisis.

http://www.youtube.com/watch?v=tmYWMV-PJ-M

Unions vs. the Good Guys at Delta Airlines

The FAA was shut down because of a partisan dispute. The basic issue was supposed to be the Republican demand that the agency save $16 million by ceasing to subsidize 13 airports with relatively little demand. Yes, the airports were in Democratic strongholds.

NPR's Brian Naylor reported that the airports were a bargaining chip. The real issue was the threat that union power posed for Delta. The National Mediation Board rejected a practice that counted required a union to win more than half the eligible votes rather than half of the votes cast.

Delta, the only non-union airline, got the Republican bill to include language overturning the National Mediation Board decision. Since the House leadership refused to budge, the FAA shut down, leaving the government unable to collect $30 million per day in taxes. Patriotically, most of the airlines continued to collect the tax in the form of higher fares. However, these "job creators" kept the money so that they could help the economy. Besides, the government could make up the lost taxes with still more tax cuts.

This brings us back to Delta, which graciously agreed to refund the "taxes" that it collected. Hopefully, we will reward Delta for this good behavior by supporting the House repeal of the union election rule.

The Tea Party Destroys The "Full Faith And Credit" Of The United States

No, in the end they did not actually block a debt ceiling increase, so we avoided a formal default, and the ratings agencies may even yet let us off the hook for an official downgrade. But that does not matter. Since our one-only-in-the-world debt ceiling was unified in 1939, it has had 89 "clean" increases up until this year, despite some noise and huffing on some, and even a delay in 1979 great enough to cost taxpayers something like $10 billion due to a one month technical delay in paying $120 million in interest.

But now we are in a new world. The master of this increase, Sen. Mitch McConnell (R-KY), has made it clear that this is the "new normal." There will be no clean increases in the future, and the tea party has made it clear that Grover Norquist is our dictator; there will be no tax increases to help in meeting the demands to reduce deficits, even though these efforts look to push us back into another recession, 1937-style, all over again. Chinese and other foreign commentators have gotten the message, just as did Moody's, that there is a very severe risk to the full faith and credit of the United States due to potential political gridlock in the Congress, with the worst of this driven by maniacs who refuse to increase taxes and some of whom even think that a default would actually improve the credit rating of the US. The only thing that could have been worse out of this mess would have been if in fact they had failed to raise the damned debt ceiling.

As it is, the New York Times has a lead editorial this morning calling for the abolition of the debt ceiling, a position I have been pushing here since April 19.

The Choices of 2008, the Consequences for Today (Caution: Very Dark)

It’s always a good idea to try to see the present as a moment in history, in relation to the main forces at work.  By now it can no longer be denied that the US and European, and therefore world, economies are in serious trouble.  We are awash in analyses that examine at close distance the various aspects of our predicament: beleaguered US consumers, sovereign European borrowers who can’t keep treading water as their interest rates rise, and misguided politicians and policy chieftains on both continents who provide half measures at best on top of perversely procyclical fiscal and monetary blunders.  All this is true.

But let’s go back to the critical moment in the fall of 2008 when global markets froze and, in the midst of crisis, decisions had to be made about fundamental economic strategy.

Obama's 5 Options If Congress Fails To Raise Debt Ceiling On Time

1) Declare the debt ceiling unconstitutional and keep on borrowing. Bruce Bartlett, Bill Clnton, and I support this one, based on Section 4 of the 14th Amendment. If it held, as it would be challenged in the courts, it would effectivly abolish this uniquely idiotic device. OTOH, aside from serious people like Laurence Tribe who say the debt ceiling is constitutional, Obama would certainly face impeachment by the House, if not removal by the Senate, and the financial markets might demand higher interest rates on US securities due to the uncertain legal foundation of any new borrowings. While his press secretary has supposedly ruled this out, Obama himself has never specifcally commented on this issue, indeed, has refused to do so. Non-trivial possibility he might follow this one, if he has the chutzpah.

2) The full haircut. Under the constitution the president (and the treasury secretary acting on his behalf) does not have the right to decide to pay some bills and not others (although this has been done in the past during hilariously labeled "government shutdowns"). So, to avoid violating this law, he simply cuts all spending across the board by the necessary amount to immediately balance the budget, everything. This would mean a technical default as interest payments on the debt would not be made. This has serious legality, but very unlikely.

3) Partial haircut. Avoid technical default by paying interest and principal on coming due debt, but cut other spending. This has many variations from applying (2) but not to the debt itself or also preserving some other categories not to cut, with pensions for veterans having perhaps the strongest constitutional argument for being preserved based on the specific language in Section 4 of Amendment 14 that speaks of pensions for Union soldiers in addition to the national debt as being inviolate. Some variatoin on this may be his most likely choice, legally problematic as it would be.

4) Mint high-value platinum coins. I have posted here on this idea of beowulf's, legal under a 1997 law. So, US Treasury mints trillion dollar platinum coin and deposits it with the NY Fed, continues to pay bills without having to borrow. This is indeed legal and would avoid a constitutional crisis, but would kick the can down the road on the broader debt ceiling and deficit issues, and would also probably be ridiculed and poorly received by the financial markets.

5) Have the Fed forgive portions of US debt it holds. This would allow for borrowing without breaching the debt ceiling, and is probably legal. However, no other central bank has ever done such a thing, as near as I can discern from some googling (although some have forgiven interest payments on debt), and would also be received poorly by financial markets. Also, House in particular would probably go after the Fed big time, led by Ron Paul. Indeed, I suspect that if Ben Bernanke and Tim Geithner were to discuss this, Ben would say to Tim, "you mint that coin."

I shall make one final note on the debt ceiling itself. Many are loudly declaring that it has always been there to "discipline" the budgetmakers, even though the budgetmakers are Congress itself and should tie the debt ceiling to their making of a budget, as I recommended in my most recent post here. However, back in 1917 when the ceiling was first adopted, it was done so as a mechanism to allow for flexibility on the part of the Treasury in connection with financing for WW I. Previously, in following the explicit mandates in the Constitution, Congress had always specifically approved (or disapproved) every specific act of borrowing money by the US government, much in the way one sees at state and local government levels. But the debt ceiling was put in place to allow the Treasury to engage in borrowing on its own, although within the limits set by the debt ceiling, very far from the current interpretations by so many people, including a lot of idiots in Washington who, as Paul Krugman describes them, claim to be Very Serious People.

If No Abolition, Then At Least Link Debt Ceiling Changes To Budget Passage

So, nobody at all is responding to my and Moody's call to abolish the debt ceiling, and probably nobody is going to follow up on the semi-wacko coining large platinum coins scheme either. So, while this will not avoid the current oncoming train wreck, if all these people want to hang onto this silly anachronism of a debt ceiling, then the obvious thing to do is to in the future tie changes in it to passing a budget. So, when Congress actually passes a budget, it should make sure that the financing for that budget is in place, either through taxes or borrowing. Part of making sure the latter is in place is to make sure the debt ceiling (if there is one) is high enough to accommodate that borrowing, preferably with some wiggle room for an unexpected deficit surge due to an unexpected decline of the economy. Why do we not see any politician proposing this obvious remedy for the future in the face of what Moody's predicted, a likely default due to "political gridlock in the Congress"? Mandating spending while witholding the ability to pay for it (or finance the paying for it) is the utter height of irresponsibility.

Moody's Says "Abolish The Debt Ceiling"

This actually dates back to July 18, but has somehow gotten nearly zero coverage in the MSM, somewhat like Bill Clinton's argument that the debt ceiling is unconstitutional, something that Obama's press secretary seemed to move him away from agreeing with this past Monday. In any case, one link to the declaration by Moody's that the US should abolish the debt ceiling is at http://economicsnewspaper.com/policy/german/moodys-u-s-should-abolish-debt-limit-47142.html. That Moody's has threatened to downgrade the US credit rating has received a lot of attention, but this piece of their threat has somehow been completely ignored, and so far there are exactly zero members of Congress of either party who have even remotely suggested that we do what Moody's suggests, which is clearly what needs to be done.

I remind everyone again: no other nation in world history has ever had such a ridiculous thing as a nominal debt ceiling. Whether or not it is unconstitutional, it is utterly incoherent. It forces the president to break the law if Congress neither raises the ceiling nor prescribes which bills are to be paid on time (if at all). I find it bizarre that all sorts of people are loudly declaring how the president has no authority raise the debt ceiling but somehow has the authority to "prioritize" which bills will be paid and which will not, meaning that somehow it is his responsibility rather than Congress's to actually destroy the "full faith and credit of the United States" that is demanded by the Constitution. Again, not paying legally mandated bills is a default, not just a failure to pay interest on securities on time.

Fun and Games

Josh Marshall on the debt ceiling impasse: "Yes, it's a game of chicken. But one of the cars doesn't have a driver in it."

What the Other 95% Reads

It’s easy to forget that the vast majority of Americans don’t read econ blogs and know almost nothing about economics. From time to time it’s helpful to check in with them to see what they’re thinking.....like this. (Note: over 360,000 hits from the US.)

What would you say to someone who believes this visual demonstration of how US sovereign debt translates into paper conveys an important truth? My approach would be a variant on the classroom game, “What’s the Denominator?” Everything has to be measured in relation to something else. A million dollars is a lot for me but not Bill Gates. If we put $1M in the numerator, what should we put in the denominator in order to make sense of it? Now do this with the government’s debt: we know what goes in the numerator, but what goes in the denominator? How much room does all that denominator paper take up? What have you learned? (When governments and corporations move lots of money around, it’s better not to use paper.)

Bill Clinton Says Debt Ceiling Unconstitutional

It was nearly a week ago on Monday evening when Bill Clinton gave an interview to the National Memo, http://www.nationalmemo.com/article/exclusive-former-president-bill-clinton-says-he-would-use-constitutional-option-raise-debt . However, it only got picked up by the New York Times yesterday and still has not really gone national.

So, he says he "would not hesitate" to use the constitutional option, that the 4th section of the 14th amendment overrides the debt ceiling and he "would dare" the courts to stop him, which would take a lot of time. Obama has said his lawyers say this is "not a winning case," but has continued to refuse to unequivocally rule out using this tool. The article notes many consequences, including a possible impeachment by the House, not to be implemented by the Senate. It also notes that not bringing this forward makes it more likely that there will be a deal, which may be a lousy deal. In any case, Clinton's waying in on this is important.

Transcending Medieval Economics

In my new book, Sex, Lies and Economics, about early economics of the late seventeenth and early eighteenth centuries, one of the constant themes is the struggle against the medieval thinking. Beginning with William Petty, the early economists I am analyzing were following the new science, which emphasized close observation to replace received dogma. Here is a nice description of how the dogma was presented at the time. Notice how closely the medieval method resembles the scholastic method that the early economists opposed. In this sense, we are losing ground.

Matters of exchange: commerce, medicine, and science in the Dutch Golden Age by Harold John Cook:
15-6: "Universities were the preserve of the professors who had studied and disputed for long years and then passed on their knowledge to students by lecturing and debating. They valued demonstrative certainty above all else, wishing to draw conclusions that could be shown to follow from necessity. Such demonstrative certainty came from reasoning by clear and certain steps from premises known to be true. The classic examples are demonstration by dialectic, in which a proposition (thesis) is contradicted (antithesis) and resolved by a proposition containing truths from both (synthesis) or by the use of syllogism, in which a proposition known to contain true and universal assertions is linked to another that refers to a new premise, yielding new truths conclusively (as in "All men are mortal, Socrates is a man, Socrates is mortal"). These methods could be clearly explained and could be tested not only by writing things down but by debating with an opponent. Because such methods yielded demonstrative certainty, knowledge of this kind could be built into philosophical systems of great range and power capable of being passed on to others by explanation. Above all, they had the capacity to reason about the causes of change, probing for why matters were as they were."