Well any hope that things might slow down before the Xmas — sorry, holidays — break have been pretty well dashed for battered Americans as everything goes to crap all at once. To wit but not limited to:

  1. The Fed cuts the baseline interest rate to 0.25%, even lower than pundits had expected (it was at 1%, forecast to halve), which is basically free money. Crikey’s finance smurfs will explain in more detail elsewhere — I can’t, having a life — but it’s pretty much in line with the Japanese approach in the 90s. Indeed we’re on the way to the Japanese reductio ab absurdum, a negative interest rate, in which the government pays banks to loan out, and/or banks pay people to borrow (in the hope that an adjustable loan that’s out there can be converted to a positive interest rate once things pick up).
  2. The Bernie Madoff Ponzi scheme is swelling and growing in the corner and no-one really wants to think about it. Madoff, a former chair of the NASDAQ board, has been running a scam whereby existing investors are paid with the funds of new investors (the Ponzi name comes from the only episode of Happy Days ever directed by Almodovar, in which Potsy and the Fonz had an affair, and treated Mr Cunningham as their giant baby). Nothing new, except the size of Madoff’s scheme — $75 billion — which is enough to throw a fresh wobble into the financial system’s shaky orbit, and add to the sense that no figure, valuation, price etc can be trusted.
  3. Illinois governor Rod Blogajackoffovitch unaccountably still hasn’t been found murdered in the boot of a car in the shallows of Lake Michigan, which is what he deserves. The Illinois assembly has voted unanimously to impeach the jerk, who is sticking to his guns even though his attempt to shake down everyone — from the Obama team to a children’s hospital — is on tape. What’s the point of having an Illinois machine, if you can’t remove these problems quickly? The right-wing — and particularly the global Murdoch press — have tried to link Obama chief-of-staff Rahm Emmanuel with the shakedown, because he called a Blaggerturdovsky staffer with a list of four names for the vacant Illinois seat who would be acceptable to teamObama, which is quite legal and proper (though they did deny contacting them at all, which was dumb). In any case, the bloom is well and truly off the rose.
  4. The Shoeguy in Iraq, Muntadhar al-Zeidi, is a hero across the Arab world, and his little piece of political performance art is the only thing that’s going to be remembered about Bush’s final swing through the beleagured region. Dana Perino, another of the anorexic ice-blondes the Republicans seem to use exclusively as staffers, was hit by a boom mike in the melee, during which she was reportedly hysterical, being under the impression they were all about to get shot. She subsequently appeared at a presser with a black eye, which, let’s face it, won’t be her last if she marries a Republican male.*

    Bush remarked that this was simply what democracy involved, even as the hapless Muntadhar was being beaten outside the room (actually, this hasn’t been confirmed). The usual right-wing munters (not Muntadhars) bleated stuff about not being able to do this sort of thing under Saddam Hussein etc etc, to which the obvious answer is well of course effing not, but who would be so stupid as to? What the Americans turned Iraq into was a place where no action on your own part made your survival any more likely, where you could be killed for having the wrong name, or not understanding a marine’s bad Arabic read off a card, or, if you were a woman, going to the job you used to have, face unveiled. Muntadhar, who was arrested by US forces shortly after he’d been released by Iranian-backed kidnappers, seems to have coalesced all the frustration with this fatuous self-congratulation in one single image, and it would be unwise to underestimate its ramifications.

  5. Caroline Kennedy put her hand up to take Hillary Clinton’s Senate seat, despite having done no campaigning for it, nor organised politics, and with eleven other candidates already in the field. That her bid was seriously reported is a measure of the residual hold that dynastic families have on American life, and confirmation of De Toqueville’s forecast that, absent a visible aristocracy in American life, a de facto one would eventually coalesce in a mass recoil from the cultural consequences of equality and democracy.

Bogarsoleanov stuff aside, the main game was the collapsing American economy. Which brings me to the main subject of this Christmastide sermon, a reply of sorts to one strand of argument that’s been uppermost in these pages through the recent months of financial unpleasantness to wit, that fears of a deep recession cum depression — in the US and all the more in Australia — are unfounded, and that beneath the chaos of financial capital, the fundamentals of the economy are strong.

The evidence, to my eyes, suggests otherwise — indeed I think a lot of forecasts about the future of the Western economy have been near delusional. What has been happening since September is by no means merely a result of a lack of regulation, or still more absurdly, of greed (as if capitalism and greed were somehow inimical!) — it’s simply the most abstract effect of a permanent structural shift in the global economy, and the first signs of a broader world crisis in capital. Yes, capitalism has a ways to run yet.

There have been three dominant accounts of the current financial crunch. The hardline laisse faire one — that the whole thing was caused by overregulation, specifically mortgages mandated by the 1977 Community Reinvestment Act and Congressional pressure on Freddie Mac and Fannie Mae to lend to the poor — is too silly to consider, and even its early partisans have backed off from it, as the crisis spread. The second, milder, neoclassical version, is that all this mayhem is creative destruction at its best, that a crunch in all sectors would discipline labour, reward efficiency and create a leaner western economy. The dominant left-liberal version is that deregulation, greed and deflation of the “Main Street” economy has shunted investment into funny money schemes, while starving infrastructure and industrial investment, and that what is required is a new, new deal.

Whatever the vagaries of financial capital, crises in capitalism are always at root a product of one core contradiction — that, after a certain point of development, it is always in the interest of individual firms to minimise their wages bill, while in the interest of the economy as a whole that wages be enough to create demand. This is meant to be a self-regulating process — when wages go too high, firms go bust, unemployment rises, wages fall etc — but the lived form of that “self-regulation” is boom and bust, stretching over decades.

The West, and especially the UK, had already entered that period — systemic overproduction of goods — by the 1870s. The response was the creation of a consumer society, stimulated by advertising, the rise of department stores, arcades etc — effectively the invention of shopping, albeit only for part of society. By the 1910s this had been generalised, and the prelude to the Great Depression was vicious struggle over wages and conditions, and disastrous attempts to both keep the whole thing going and rein in business costs and an overinflating economy.

The Depression was a sign that capitalism was unfixable from within. The gears were jammed, with no investment due to no confidence that goods would find a buyer. At that point, the notion of raising aggregate demand – rather than lowering costs — became the only solution. The New Deal and Keynsian post-war policies were part of that, as was World War II, which was essentially an aspect of the New Deal – stimulate demand through military spending and mass destruction, remove surplus labour by killing people.

Keynsianism was essentially Western capitalism’s last gasp — since its collapse in the early 1970s, the West has been running a deflated economy, living off credit. From the 1820s through to 1970 (save for the 30s), the UK economy — as a paradigm example — grew by an average of 5%, often more, effectively doubling in size every decade. As Robert Brenner has noted in The Economics of Global Turbulence — the most important economics book of the last quarter-century — since 1970, the whole of the West has grown by an average of 2% and the much-vaunted ‘booms’ of the mid-1990s etc have been ripples on the pond.

Indeed, as George Soros has noted in a recent New York Review of Books article, the current credit bubble is really contained within a credit “superbubble” established by financial deregulation in the 1980s. The Reagan administration presided blithely over the mass deflation of American industrial power, and the conversion of the country to a deficit-funded consumer economy. What followed was a series of bubbles, all designed to draw money in from the rest of the world by offering high and rapid returns — the S and L bubble of the late 80s, early 90s, the dotcom boom of the late 90s, and the mortgage-bundling boom of the ‘zeroes.

The last of these was the ultimate — it took the most widely distributed form of capital, bricks n mortar, overvalued it, and then encouraged people to spend based on that overvalued basis. Unlike a dotcom, a house appears to have intrinsic value — unless of course demand shrinks, as it is now doing (double family occupancy in the US has increased by 80% in the last five years, and will soon skyrocket) in which case its value is zero).

Why could Western capitalism not be restarted through demand stimulus from the 1980s onwards? The short answer is that capitalism could be, but it was no longer merely Western — the opening of China and then India made the system genuinely global for the first time. At that point, base cultural conditions become a barrier — people have a certain standard of living below which, absent of violent oppression, they will not go. That standard of living now depends on stuff being priced low because it is made by people paid a wage we couldn’t live on, physically or psychologically.

At this point, liberals like to talk about the comparitive advantage of nations, trade etc, as if this were an eternal law and a guarantee from God that a region, nation etc could always make a living on the global market. The plain fact of terms of trade indicate that the comparitive advantage of the west is fast disappearing — and the collapse of the big three automakers may be the final act. Financial flows from east to west these days consist of deficits and borrowings, profits arising from financial services, and intellectual property charges, which is effectively a rent. These last two are easily transferable, and they will be in the next decade or two. The West’s sole remaining area of industrial production advantage is in aviation, and I wouldn’t buy that sector a 10-year diary either — last year in Sweden I met a Chinese student who said she got her degree from “Beijing Aviation University Number Four”.

But as numerous commentators have remarked, the Western fiscal crisis is no bonanza for China either, diminishing its largest existing market. And a West re-inflated by schemes such as Obama’s massive green energy programme would provide a major new source of investment, and a global revival. But that will simply forestall a larger problem for the West — that at some point China and India will have to start investing in themselves. They will need to raise wages of a significant class of people — both to create sufficient demand to mop up the production of the tens of millions of people being drawn in from the country to the city each decade, and to avoid mass political upheaval.

At that point, not only will money flow out of the west with a long withdrawing roar, there will also be something approaching a global equalisation of wages, training and competence, at a level far below what most of us are accustomed to.

So the liberal right are correct to suggest that many of the neo-Keynsian schemes to restart western economies will create bloated, inflated, wasteful, misdirected production. Only trouble is the laissez-faire answer offers nothing but a permanent deflation of the West and then the world economy — and ultimately chaos. The shock and awe of an undeflected recession/depression would go further and deeper than anything we’ve seen in the last fifty years. Effectively it’s a recipe for a permanent jamming of capitalism at a low-demand level — underdevelopment on a global scale.

What I’ve found genuinely bemusing in many of the arguments about a soft landing has been the argument that an economy with a trade deficit is somehow all right if its service sector is running nicely. It should be obvious that services are either either essentials, luxuries, or transferable offshore. Yes, it’s silly to say that only physical goods constitute a real economy — but it’s even sillier to think that a trade-deficit economy increasingly composed of luxury services (selling overpriced coffee to each other) or easily transferable ones (effectively, every information sector service) isn’t living on borrowed time.

What’s happened in the past few months has been a very small, very early, but nevertheless significant socialisation of key sectors of the economy. That may well result in subsequent re-privatisation — to be followed by another bubble and another crash — but in the longer term a degree of social management of the economy is now inevitable. The most benign form that would take would be a recognition that some parts of the economy have to be localised and regionalised in order for a stable society tro be possible — effectively a form of post-globalisation.

The worst form it would take would be a rebirth of protectionism with a heavy dose of chauvinist nationalism. In any case, there will be some substantial trasnformation of economic and social life, with or without violent conflict in the passage to it. And in cash-in-hand, consumer-durable, flat screen TV, overseas holiday terms, most of us, and/or our children are going to be poorer. Many in the west may end up better off, lifewise, but we will be passing through the rapids of history first.

Maybe what we need to do is put the more blithe commentators on a bus to Charters Towers. There, in the heat and the dust, they can inspect the town’s long-closed stock exchange, which roared with trade in the boom years more than a century ago — and reflect on what order in heaven ordains that a city, a country, a civilisation, is guaranteed that it will progress, or even survive.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey