Never mind all the talk of a V- or even a U- shaped recession: what's in store for the U.S. is a protracted period of economic stagnation and decline. In an article entitled "Recession 'shape' points down", W. Joseph Stroupe, editor of GlobalEventsMagazine.com, calls this an "L-shaped" recession and his logic is compelling. He believes that America (and Britain too) are currently engaged in the futile process of trying to re-ignite the asset bubbles that have led us to our present, pitiful state. He doubts--as do I--that their efforts will succede, but even if they do, they will only succede in creating a still worse crash down the road.
His own magazine is available by subscription only, but this particular article can be read free of charge at Asia Times Online:
http://www.atimes.com/atimes/Global_Economy/KE22Dj02.html
(Asia Times Online, by the way, is probably one of the best sources on the web for in-depth analysis of economic and geopolitical events. I highly recommend it.)
Thursday, May 21, 2009
Wednesday, May 13, 2009
I Stand Vindicated!
Pursuant to my May 5th post ("Back From the Dead: Karl Marx"--see below), I found an excellent article in Asia Times Online by distinguished economist and finance specialist Henry C. K. Liu (http://www.henryckliu.com/) which essentially supports my view of US economic policy over the last thirty years:
Inflation is deemed benign as long as wages rise at a slower pace than asset prices. The monetarist iron law of wages worked in the industrial age, with the resultant excess capacity absorbed by conspicuous consumption of the moneyed class, although it eventually heralded in the age of revolutions. But the iron law of wages no longer works in the post-industrial age, in which growth can only come from demand management because overcapacity has grown beyond the ability of conspicuous consumption of a few to absorb in an economic democracy.That has been the basic problem of the global economy for the past three decades. Low wages have landed the world in its current sorry state of overcapacity masked by unsustainable demand created by a debt bubble that finally imploded in July 2007. The whole world is now producing goods and services made by low-wage workers who cannot afford to buy what they make except by taking on debt on which they eventually will default.
If you're not afraid of a little jargon here and there, the article can be read in its entirety at: http://www.atimes.com/atimes/Global_Economy/KE06Dj03.html.
Enjoy!
Tuesday, May 5, 2009
Back From the Dead: Karl Marx
Of all the nonsense about the economic crisis being peddled today, perhaps no statement is more noxious than the one that this is just a ‘financial’ or a ‘liquidity’ crisis. It is not: this is a full-blown economic crisis which is inevitable and has long-term causes.
For the first twenty years or so after WWII, the U.S. basically had the (free) world economy to itself. All of our major competitors had either been completely destroyed (Germany, Japan) or badly damaged (Britain, France) during the war and the communist countries, of course, declined to compete with us at all. By the late 60’s though, this period was over: Europe and Japan had recovered and now we faced competition.
For a time, the principal effect of this was hidden from us by stagflation. The chronic overspending of the U.S. Government and then the Arab oil embargo of the mid-seventies caused a ruinous mix of unemployment and price inflation which eventually spread to a number of other countries too. Monetary policy was eventually effective in bringing prices back under control, but American industry—and especially her workers—never really recovered. Real incomes there never again reached the level they were at in 1973. Before industry in the U.S. even had a chance to properly recover, the imports hit in full force. In the 70’s and 80’s, it was Japan; then in the 90’s came China. European industry, of course, never went away, so world production capacity surged to historic heights, while wages in America did not. What was going on?
The short answer—the one given long ago by Karl Marx—was the crisis of overproduction. Briefly summarized: ever-expanding production capacity would eventually create unavoidable deflationary pressures, as workers would not be able to naturally afford all that was produced. For a time, he allowed, credit might be able to square the circle, but eventually the bust would hit home with a vengeance. One natural response to this (on the part of the competitors in the system) would be to try to gain relative advantage over the others by the introduction of productivity-enhancing technologies; but in the end, that would only aggravate the problem by lowering wages even further (more productive technologies, by definition, create more goods with fewer workers) and concentrating ever more wealth in ever fewer hands.
And what did Uncle Sam do in response to this? He helped to create one asset bubble after the next to disguise the problem! The Chinese were allowed to buy unlimited amounts of U.S. bonds, which simultaneously financed our debt-binge while keeping the yuan artificially weak. What was going on? Why would the rulers of America allow such a thing to happen?
Crudely put, they decided that it was cheaper to let the Chinese into the club than to fight to keep them out, so America became—voluntarily!—the world’s designated importer, not only for China, but also for Europe and the rest of Asia too. Both our major trading partners and also our political vassal-states (like those of the Persian Gulf) were expected to plow at least a percentage of their profits right back into the U.S, mostly on Wall Street. The Street, in turn, experienced the longest and greatest bull market ever: the Dow went from just over 2,000 in 1992 to about 14,000 a few years ago. Investment banks poured money all over real-estate backed securities, enabling a dangerous housing bubble. And yet, still, median incomes hardly budged; adjusted for inflation, in fact, many Americans' incomes actually declined slightly. In time, the inevitable happened: a lot of those sub-prime borrowers defaulted on their mortgages and all those elaborate debt-instruments were revealed as so many worthless scraps of paper.
The troubling thing about the crisis of overproduction is that it is a defect—a time bomb, in fact—that is completely intrinsic to the capitalist system. It is not a case of capitalism failing; this is naturally what happens when it succeeds! That means: even if we disregard (or somehow eliminate) all externalities that plague the system, such as environmental problems, political instability, etc., we still cannot preserve the system without destroying it.
In fact, temporarily destroying it (think World War II) might actually be the only way of prolonging it… a rather depressing thought.
For the first twenty years or so after WWII, the U.S. basically had the (free) world economy to itself. All of our major competitors had either been completely destroyed (Germany, Japan) or badly damaged (Britain, France) during the war and the communist countries, of course, declined to compete with us at all. By the late 60’s though, this period was over: Europe and Japan had recovered and now we faced competition.
For a time, the principal effect of this was hidden from us by stagflation. The chronic overspending of the U.S. Government and then the Arab oil embargo of the mid-seventies caused a ruinous mix of unemployment and price inflation which eventually spread to a number of other countries too. Monetary policy was eventually effective in bringing prices back under control, but American industry—and especially her workers—never really recovered. Real incomes there never again reached the level they were at in 1973. Before industry in the U.S. even had a chance to properly recover, the imports hit in full force. In the 70’s and 80’s, it was Japan; then in the 90’s came China. European industry, of course, never went away, so world production capacity surged to historic heights, while wages in America did not. What was going on?
The short answer—the one given long ago by Karl Marx—was the crisis of overproduction. Briefly summarized: ever-expanding production capacity would eventually create unavoidable deflationary pressures, as workers would not be able to naturally afford all that was produced. For a time, he allowed, credit might be able to square the circle, but eventually the bust would hit home with a vengeance. One natural response to this (on the part of the competitors in the system) would be to try to gain relative advantage over the others by the introduction of productivity-enhancing technologies; but in the end, that would only aggravate the problem by lowering wages even further (more productive technologies, by definition, create more goods with fewer workers) and concentrating ever more wealth in ever fewer hands.
And what did Uncle Sam do in response to this? He helped to create one asset bubble after the next to disguise the problem! The Chinese were allowed to buy unlimited amounts of U.S. bonds, which simultaneously financed our debt-binge while keeping the yuan artificially weak. What was going on? Why would the rulers of America allow such a thing to happen?
Crudely put, they decided that it was cheaper to let the Chinese into the club than to fight to keep them out, so America became—voluntarily!—the world’s designated importer, not only for China, but also for Europe and the rest of Asia too. Both our major trading partners and also our political vassal-states (like those of the Persian Gulf) were expected to plow at least a percentage of their profits right back into the U.S, mostly on Wall Street. The Street, in turn, experienced the longest and greatest bull market ever: the Dow went from just over 2,000 in 1992 to about 14,000 a few years ago. Investment banks poured money all over real-estate backed securities, enabling a dangerous housing bubble. And yet, still, median incomes hardly budged; adjusted for inflation, in fact, many Americans' incomes actually declined slightly. In time, the inevitable happened: a lot of those sub-prime borrowers defaulted on their mortgages and all those elaborate debt-instruments were revealed as so many worthless scraps of paper.
The troubling thing about the crisis of overproduction is that it is a defect—a time bomb, in fact—that is completely intrinsic to the capitalist system. It is not a case of capitalism failing; this is naturally what happens when it succeeds! That means: even if we disregard (or somehow eliminate) all externalities that plague the system, such as environmental problems, political instability, etc., we still cannot preserve the system without destroying it.
In fact, temporarily destroying it (think World War II) might actually be the only way of prolonging it… a rather depressing thought.
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