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The new and old “normal”
History, Marx believed is a continuous process – that is, a cumulative unfolding of events which do not merely change the faces of the actors, but alters the relations they enter into even as they may imagine they are performing the same old play.
Speculators in the stock market, however, very often imagine it ruled by regularities – cycles, patterns, waves – in which the same events play themselves out again and again across an equities landscape which never fundamentally changes.
They have a rule for this: “Only fools believe it is different this time.”
Of course, it may be a matter of your time horizon: we leave home each day and return to find everything pretty much as we remembered it; but we return to our childhood home and find everything just seems so much smaller than we recalled – if it is there at all.
The median price of a single family home in 1950 was around $3000.
By 2005, a single family home fetched about $264,000.
Blogger Cassandra asks us to consider which of these two prices is the normal one; and, what, if anything, we take for granted in the economy today can be considered normal, as well:
In Japan, “normal” meant that in 2004 residential real estate prices were roughly 30% of late 1980s or early 1990s prices. In Germany , though nominal prices might be similar in many places to those prevailing two decades ago, the real price destruction would be probably be similar to Japan’s. But what is “normal” for economic growth? Or what is “normal” for aggregate US consumption? Or the amount of debt a typical household can sustain? What is the “normal” leverage for a bank, or the normal return on equity o a listed company? What is a normal share of GDP for corporate profits in an economy experiencing deep recession? What is “normal” for sustainable government budget deficits? What is the normal income multiple of a banker or CEO to a policeman, a professional baseball player to a school-teacher or a doctor to a nurse? What is the normal amount of due diligence a bank should do before extending a loan and what is normal for the amount Honeywell Industries will earn per-share in the coming years?
During the time from 1950 to 2008 Washington’s role in the economy has increased several magnitudes, and with this intervention, debt has increased phenomenally, as has the financial sector and prices generally.
Seen one way, price levels for all goods has increased to the astounding heights we currently take for normal.
But, since Marx reminds us history is a continuous process, we cannot afford to ignore the growth of the other factors in the equation – government intervention, public and private debt, and the bloated financial sector.
The latter – financials – is mostly dead; public and private debt continue to hover over us like some massive Sword of Damocles; and, government, whose growth accounts for much of the debt, and much of the growth of the financial sector, is teetering on the icy edge of disaster.
Now, what is normal? With all the changes to the economy between 1950 and 2005 is is clearly unknowable what the “real” price of a single family home is now, much less to assume that it fall somewhere on a curve between the beginning of the housing bubble and when it burst in 2005 or so.
But, let’s add another complication:
Oops! Another complication: Change in labor productivity 1950 -2004
According to Erik Rauch, “the number of weekly hours needed to produce the 1950 worker’s output declined by almost one hour per year until the mid-1970’s, and has been declining by about half an hour per year since then.”
Rauch estimates, “An average worker needs to work a mere 11 hours per week to produce as much as one working 40 hours per week in 1950.”
Which implies, all things being equal, the actual “real” median price of a home built in 1950 (the price measured in the actual expenditure of human working time) may have declined to as little as $825.00.
That’s EIGHT HUNDRED TWENTY-FIVE DOLLARS, not $264,000.
For pretty much the price of your congressman’s shabby, not ready for Wall Street, ill-fitting, rumpled, J C Penny’s quality business suit, you could have a three bedroom, two bath, McMansion on a cul-de-sac in Culver City.
So, even if we assume government statistic on productivity are correct – and there is evidence they are not – clearly home prices have significantly further to fall.
Deflation: a good idea whose time has come.
Iceland on the brink…
Iceland faces dwindling food supplies resulting from the lack of foreign currency reserves.
From Bloomberg:
After a four-year spending spree, Icelanders are flooding the supermarkets one last time, stocking up on food as the collapse of the banking system threatens to cut the island off from imports.
“We have had crazy days for a week now,” said Johannes Smari Oluffsson, manager of the Bonus discount grocery store in Reykjavik’s main shopping center. “Sales have doubled.”
Bonus, a nationwide chain, has stock at its warehouse for about two weeks. After that, the shelves will start emptying unless it can get access to foreign currency, the 22-year-old manager said, standing in a walk-in fridge filled with meat products, among the few goods on sale produced locally.
Iceland’s foreign currency market has seized up after the three largest banks collapsed and the government abandoned an attempt to peg the exchange rate. Many banks won’t trade the krona and suppliers from abroad are demanding payment in a wider lead, according to the CNN/Opinion Research Corporation poll released Monday afternoon,advance. The government has asked banks to prioritize foreign currency transactions for essentials such as food, drugs and oil.
“Nothing has worked…”
Perhaps, I am wildly off-base on this, but I really fear I am not.
From the Boston Globe:
No government gesture in recent days – no matter how many billions of dollars were involved – could calm investor anxiety over the health of banking institutions and the global economy.
“It seems that nothing worked this week,” said Allen Sinai, chief global economist at Decision Economics Inc. in Boston. “What has emerged over the last week or so is that the US is in a full-fledged recession. It’s no longer tentative.”
I will continue to carp on this: reducing hours of work is not simply one solution to the current bout of economic bad news, it is the ONLY solution. Without immediately pushing through such a reduction, working families in every country will see their conditions begin to deteriorate horrendously.
From Naked Capitalism:
De Grauwe argues in particular that trying to recapitalize banks while the liquidity crisis is on merely throws money into a black hole. The new equity goes poof when the liquidity worries resurface (as they have, each time in more virulent form).
The Great Depression never ended; it was only papered over with fiat money and credit – a strategy which has worked for some sixty years, but has finally begun to collapse.
Now, governments around the world will be forced to do what they should have done in the 1930: Reduce working time.
This is not an optional measure, this is not “nice to have,” this is not a, “we hope to get to it someday,” policy, which can be promised to working families during election years, like an American health care system that actually covers every one, THIS IS WHAT THIS COLLAPSE IS ALL ABOUT.
We do it, or it will be imposed on us by this crisis – in the form of massive layoffs, as governments at every level go bankrupt in a cascade of of horror, along with the biggest employers and banks.
Trillions in productive assets – GM, Ford, international trade – are threatened by this crisis – simply shuddering to a halt, and dumping millions of working families in every country into the streets, as capital does to itself what we have failed do to it.
This needs to be done NOW before the effects of this crisis begin to impact working families.
Latest in unfolding slide toward Depression level unemployment:
- England, which has been more candid in talking about the financial crisis than other countries (the governor of the Bank of England has said, for instance, that living standards will fall) issued a blunt assessment earlier today. The scary update is that even overnight lending is starting to break down.
- Another sign of market panic: even though Fannie Mae and Freddie Mac are now officially wards of the state and the Treasury has assured that they will not fall into a negative equity standing, the general credit market stress and flight to quality means that their mortgage backed bonds are trading at elevated spreads. However, mortgage rates are lower than in July due to the rally in Treasuries.
- Those who wrote $400 billion plus of protection on Lehman’s credit default swaps had been expected to make a substantial payout in the 80% to 85% of face value range, but the preliminary auction showed even worse results.
- Economist Paul De Grauwe, who has been an astute and harsh critic of central bank’s models and priorities, makes a very simple point and draw a conclusion. Banks are not lending to each other out of mistrust. Various measures to increase liquidity and backstop banks have not made them look any more favorably upon their brethren, A modern economy needs a banking system. De Grauwe argues in particular that trying to recapitalize banks while the liquidity crisis is on merely throws money into a black hole. The new equity goes poof when the liquidity worries resurface (as they have, each time in more virulent form). The only way to break the cycle is for governments to take over banks, or a least most of the big ones.
- The credit crisis is spilling over into the grain industry as international buyers find themselves unable to come up with payment, forcing sellers to shoulder often substantial losses.
New York Times:
- GM verging on bankruptcy, in talks for merger with Chrysler: Speculation about a possible bankruptcy filing by G.M. has mounted in recent weeks because of the automaker’s dwindling cash reserves. The automaker had $21 billion in cash on hand at the end of the second quarter, but it was burning through more than $1 billion a month.
Huffington Post:
- Stocks post their worst week ever
Boston Globe:
- State layoffs imminent, lieutenant governor says
- Nothing worked this week: No government gesture in recent days – no matter how many billions of dollars were involved – could calm investor anxiety over the health of banking institutions and the global economy.
What does Mr. Market want?
Ben Graham’s Mr. Market is an interesting guy, whose biography was imagined, thusly:
Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.
Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will
unload your interest on him.
That Mr. Market is some kind of accommodating guy – always ready to give his opinion of the actions of Washington, Britain, Iceland, Germany, France and the EU.
Every time these learned gentlemen inject more cash into the banks, Mr. Market responds by wiping out more paper wealth in the world markets. It would seem as if Mr. Market, and all the other Sir, Monsieur, Herr Markets around the globe are saying: “Enough with the liquidity! We have been drowning in debt instruments since the Great Depression!”
However, our leaders in the financial capitals of the world market are hard of hearing; and insist on continuing to fight the Great Depression with greater amounts of cash.
That’s right: the Great Depression never ended – all the “economic growth” we have experienced since 1929 is mere flooding of the market with paper.
And more paper is not going to fix it.
Is serious left criticism of government’s share of GDP possible? (20)
Continued from here.
Here is an excerpt from Bill Moyer’s recent interview with Andrew Bacevich which touches on the issues raised by this series. In particular, Bacevich surveys the period we will now cover:
****
BILL MOYERS: You say in here that the tipping point between wanting more than we were willing to pay for began in the Johnson Administration. “We can fix the tipping point with precision,” you write. “It occurred between 1965, when President Lyndon Baines Johnson ordered U.S. combat troops to South Vietnam, and 1973, when President Richard Nixon finally ended direct U.S. involvement in that war.” Why do you see that period so crucial?
ANDREW BACEVICH: When President Johnson became President, our trade balance was in the black. By the time we get to the Nixon era, it’s in the red. And it stays in the red down to the present. Matter of fact, the trade imbalance becomes essentially larger year by year.
So, I think that it is the ’60s, generally, the Vietnam period, slightly more specifically, was the moment when we began to lose control of our economic fate. And most disturbingly, we’re still really in denial. We still haven’t recognized that.
BILL MOYERS: Now you go on to say that there was another fateful period between July 1979 and March of 1983. You describe it, in fact, as a pivot of contemporary American history. That includes Jimmy Carter and Ronald Reagan, right?
ANDREW BACEVICH: Well, I would be one of the first to confess that – I think that we have misunderstood and underestimated President Carter. He was the one President of our time who recognized, I think, the challenges awaiting us if we refused to get our house in order.
BILL MOYERS: You’re the only author I have read, since I read Jimmy Carter, who gives so much time to the President’s speech on July 15th, 1979. Why does that speech speak to you so strongly?
ANDREW BACEVICH: Well, this is the so-called Malaise Speech, even though he never used the word “malaise” in the text to the address. It’s a very powerful speech, I think, because President Carter says in that speech, oil, our dependence on oil, poses a looming threat to the country. If we act now, we may be able to fix this problem. If we don’t act now, we’re headed down a path in which not only will we become increasingly dependent upon foreign oil, but we will have opted for a false model of freedom. A freedom of materialism, a freedom of self-indulgence, a freedom of collective recklessness. And what the President was saying at the time was, we need to think about what we mean by freedom. We need to choose a definition of freedom which is anchored in truth, and the way to manifest that choice, is by addressing our energy problem.
He had a profound understanding of the dilemma facing the country in the post Vietnam period. And of course, he was completely hooted, derided, disregarded
****
In this interview, which we consider one of the most enlightening we have read this year, Andrew Bacevich so completely disagrees with the main thrust of our series, it is simply a matter of taking his entire argument and turning it on its head for you to grasp the essential point we are making here.
The war against Vietnam marks the critical turning point when the United State’s trade balance descended into a deficit from which it has not since recovered.
So far we agree with Bacevich until we reach this:
By the time of the Carter administration, Bacevich paraphrases Jimmy Carter, “we’re headed down a path in which not only will we become increasingly dependent upon foreign oil, but we will have opted for a false model of freedom. A freedom of materialism, a freedom of self-indulgence, a freedom of collective recklessness.”
This is the typical interpretation of post-war American history as conveyed by that section of the American intellectual class who believe the economic problems the US currently faces amount to the vice of rampant materialism.
In this argument, for instance, the wars and occupations of Iraq and Afghanistan, as well as the intimidation of Iran, the current conflict with Russia over Georgia, can all be traced to the desire of The American People for cheap oil. (A variant of this theory also includes the profits of American oil companies.)
Bacevich advances that argument this way:
Our foreign policy is not something simply concocted by people in Washington D.C. and imposed on us. Our foreign policy is something that is concocted in Washington D.C., but it reflects the perceptions of our political elite about what we want, we the people want. And what we want, by and large – I mean, one could point to many individual exceptions – but, what we want, by and large is, we want this continuing flow of very cheap consumer goods.
We want to be able to pump gas into our cars regardless of how big they may happen to be, in order to be able to drive wherever we want to be able to drive. And we want to be able to do these things without having to think about whether or not the book’s balanced at the end of the month, or the end of the fiscal year. And therefore, we want this unending line of credit.
Thus, we are led to believe, our sons and daughters are killing Arabs in Iraq because we want cheap oil, and the Washington elite is trying to deliver on that demand. But, as we have seen, NSC-68 and Washington’s military buildout long preceeded the dependence on foreign oil or the trade deficit.
The argument, in other words, tries to ascribe to the allegedly materialistic and debt ridden population of selfish insatiable baby boomers, and their equally selfish and insatiable progeny, a result which was already in existence when the baby boomers were babies!
Still, we have to admit, to get from Bacevich’s view of American history to our view only requires the substitution of a few words:
The Bacevich argument is this:
Since 1970, Americans have become increasingly dependent on imported goods purchased on credit, which led Washington to erect a massive national security state in 1950.
Our argument would be this:
Since 1970, Americans have become increasingly dependent on imported goods purchased on credit, because Washington erected a massive national security state in 1950.
The leading economic concern the authors of NSC-68 was the impact of an aggressive policy of containment on domestic consumption of Americans. Keyserling argued, as we have seen, that impact would be offset by greatly accelerated economic growth increased defense spending would generate.
But, then again, Keyserling was an idiot.
Military spending is not for human consumption – one can live in a bomb shgelter, but not in a bomb. Bullets can’t be eaten, aircraft carrier hangers can’t be used to assemble cars.
Military expenditures are productive effort expended on unproductive goals.
Beyond the aircraft carriers, and submarines, and tanks, and bombs, and bullets, which require the diversion of human effort from the satisfaction of human needs, those who will employ these weapon systems must be themselves fed, clothed and provided the comforts of civilization – as thinly measured though they may be for the average soldier and his/her family.
But, in addition to these two categories of cost – and, setting aside any destruction of productive capacity which ensues from their actual employment on the field of battle, such as civilian lives lost, rice paddies poisoned, villages torched, and the decline of the birth rate of the local population – one must also figures in the lost output of those employed as service men and women, and, therefore, withdrawn from the productive labor market.
Only an economist could call this waste economic growth. Just as it takes an economist to describe both the activities which create a superfund site, and the activties which clean up that site as GDP.
It is what economists do. There is no cure for this, we fear.
Since, in the real world, where you live ( the planet where bullets can’t be eaten by the soldier, who didn’t produce them, because he was too busy killing the peasants who grow the rice we all need to satisfy our hunger) all that effort is a diversion from human consumption, a substitute for this wasted human effort must be found.
For any nation hoping to maintain their standard of living while wasting human effort on this scale, of course, imports fill in the difference. But, to import, one must export to pay for the things imported, and by 1970, the United States had exhausted its trade surplus and was running a deficit.
From that point forward, the American standard of living could only be maintained by one of two choices:
- Dismantle the national security state. or,
- Convince everyone else on the planet to feed and clothe you.
Amazingly, Henry Kissinger figured out how to do the latter.
To be continued
Is serious left criticism of government’s share of GDP possible? (19)
Continued from here:
In the aftermath of the Vietnam war, when an exhausted and defeated nation might have considered both the logic and necessity of expending itself on efforts to police the planet, the rest of our species likely gasped in horror to behold the return to the public debate of the very who assholes who had, in two short decades, brought the United States from unrivaled industrial, financial, military and diplomatic power to just another embarrassed wannabe colonial power smacked down by a bunch of guys in black pajamas.
Even the British, who believed it to be their destiny to civilize the darker races, had long since conceded their impotence in India.
But, not Paul Nitze and Leon Keyserling – and, of course, the American voter, who continued blithely stumbling through history with his head up his ass.
That latter would be you.
Nitze fired up his old coalition of cold warriors, Committee on the Present Danger (CPD II):
The revitalization of the CPD grew out of an independent group called Team B. Team B was authorized in 1976 by President Gerald R. Ford and organized by then-CIA chief, George Herbert Walker Bush. The purpose of Team B was to develop an independent judgment of Soviet capabilities and intentions. Team B was headed by Richard Pipes and included Paul Nitze, Foy Kohler, William R. Van Cleave, Lt. Gen. Daniel O. Graham (ret.), Thomas Wolf of RAND Corporation and Gen. John Vogt, Jr. (ret.). Also a part of Team B were five officials still active in government: Maj. Gen. George Keegan, Brig. Gen. Jasper Welch, Paul Dundes Wolfowitz of the Arms Control and Disarmament Agency, and Seymour Weiss of the State Department. Team B was housed in the offices of the Coalition for a Democratic Majority.
The Wiki adds, “CPD II broadened its base considerably from the original group by including in its ranks top labor officials, Jewish liberals and neo-conservative intellectuals. It managed this feat by including in its ideology not only a strong anti-Soviet policy, but also one which promoted growth and expansion.”
Which, of course, brings us to Leon Keyserling, also a member of the CPD II, who began to campaign for an updated version of the Full Employment Act of 1946, which would serve as the economic linchpin of a reinvigorated containment policy.
Working with a coalition of labor unions, including the Amalgamated Clothing and Textile Workers, and, the United Auto Workers, Coretta Scott King, the Congressional Black
Caucus, and assorted others, Leon Keyserling drafted the new Full Employment and Balanced Growth Act of 1978.
It was signed by President Jimmy Carter, on October 27, 1978.
At the signing ceremony, President Carter thanked Mrs. King, and to the Congressional Black Caucus for their efforts to make the bill law.
Then, Mrs. King addressed the assembled – thanking Leon Keyserling, and the coalition of labor, civil rights and religious leaders who helped make it possible.
She called the bill signing, “a great historical occasion, perhaps as significant as the signing of the Civil Rights Act of 1964 and the Voting Rights Act of 1965. Perhaps in the future, history will record that it may be even more significant, Mr. President, because I think it deals with an issue on a basic human right that’s the most basic of all human rights, the right to a job. And that is a central priority now of our economic policy with the signing of this act into law today.”
Then, she turned to a brief anecdote:
As President Carter said in 1974, I called him and he was still Governor, and asked him if he would join our committee. And he asked if I would send the material, and later on, he signed his card as a member of the National Committee for Full Employment. Now, we’d selected only one Governor, and we very carefully selected him. [Laughter] I don’t know; maybe we were prophetic, because here he is today as the President who signs this legislation and makes it a law.
Finally, she closed with a moving tribute to her husband:
And also, I would like to say that this bill is a tribute, or this law now, this act, is a tribute to the dedication of Senator Humphrey and Gus Hawkins and both Senators, but it’s also a tribute to Martin Luther King, Jr., because in 1968, he started a crusade calling for a job and income for all people who needed a job. He did not live to carry out that campaign, and so in 1974, we felt that we had an obligation, a mandate, to pick it up and to carry it forward. And now today, I am sure Martin Luther King, Jr., is with us in spirit, because his concern was that all people in our society would be able to share equally in the fruits of this great Nation.
It was, no doubt, a moment heavy with irony for Keyserling, since Mrs. King’s husband, Dr. Martin Luther King Jr., had broken with him and the other Cold Warriors responsible for that bill more than a decade earlier – condemning the Vietnam War, and, drawing their opprobrium.
His words, sealing his break with the authors of NSC-68, were “prophetic” as well:
The war in Vietnam is but a symptom of a far deeper malady within the American spirit, and if we ignore this sobering reality…and if we ignore this sobering reality, we will find ourselves organizing “clergy and laymen concerned” committees for the next generation. They will be concerned about Guatemala and Peru. They will be concerned about Thailand and Cambodia. They will be concerned about Mozambique and South Africa. We will be marching for these and a dozen other names and attending rallies without end, unless there is a significant and profound change in American life and policy.
Mrs. King had collaborated with the very men Dr. King opposed, to renew the very economic philosophy which led to that awful war.
To be continued.
Is serious left criticism of government’s share of GDP possible? (18)
Continued from here.
The economic events now unfolding before your eyes are being driven by such forces as make a backward, low-productivity country like China competitive with you: the requirements of producing, maintaining, supplying, and provisioning a military establishment capable of fighting wars as in Iraq and Afghanistan, and, simultaneously, “hedging and shaping” the global balance of power, vis a vis rising powers like China, to effect the Full Spectrum Dominance of American Capitalism over the entirety of the planet, as this goal has been stated by Defense Secretary Robert Gates.
Washington is planning 10 to 25 years ahead to assure itself the resources required to hedge and shape the behavior of China, Russia, and other possible competitors to its preeminent position in the global economy.
This planning is based on assumptions about the basic vulnerability of the United States to external forces, with a time line for when they need to be addressed.
The continuation of Full Spectrum Dominance, however, is impossible without the dollar remaining as the currency of international trade.
With it, Washington has access not only to the resources of this nation, but also of every nation engaged in international trade.
By issuing paper money, or bonds denominated in dollars, Washington can divert the resources of every nation to its program of military aggression – household products from China for the shelves of Wal-Mart, oil from Saudi Arabia for your Lincoln Navigator, or, my twin his-and-her Hummers, jalapeno peppers from Mexico for our tacos, etc.
As in the case of Argentina before devaluation, it is fairly difficult to find items on the shelves at Wal-Mart which are made in the United States rather than, for example, the People’s Republic of China.
But, this was not always true.
As the Congressional Budget Office report, cited earlier, showed, until the time the Truman administration promulgated the policies which carried NSC-68 into effect, the United States enjoyed a nearly unbroken string of trade surpluses, and was the only major world trade partner with an intact industrial infrastructure.
That relatively strong competitive position was squandered so completely by the pursuit of a Cordon Militaire around the Soviet Union, and, the numerous conflicts arising from that pursuit, so that by 1971 it began to experience persistent – and, in the long run, unsustainable – trade deficits.
As the CBO chart shows:
By 1999, this deficit was becoming a virtual black whole, descending parabolically into the dark mists of economic no-man’s land.
(Now, if we only had enough rhythm to tango gracefully, we could rename ourselves North Argentina.)
In case you were wondering, folks familiar with parabolic curves in the stock market usually refer to it as the precursor to blow off tops – or, in the case of a downside slide, a capitulation.
Minyanville.com define capitulation as:
[T]he absence of hope. A total and complete give up in the marketplace when sellers want to “get out” at any price. From a trading standpoint, very bullish–if you have the ability to take the other side of the trade…which, by definition, you won’t.
And, indeed it was – a capitulation to a long downward spiral which began almost the moment NSC-68 went into force.
In 1950, as the Cordon Militaire was inaugurated, with the incursion into Korea, the balance of payments dropped into the red.
In the mid-50s Eisenhower tried to slow the trend by imposing limitations on imports of oil and other items.
In 1963, Kennedy signed into law his now famous “supply-side” tax cuts in an effort to boost the failing trade surplus.
By now the decade-old global currency regime , the financial structure of containment itself, was faltering headlong toward collapse.
According to the Wiki:
In 1967, there was an attack on the pound and a run on gold in the “sterling area,” and on November 17, 1967, the British government was forced to devalue the pound. U.S. President Lyndon Baines Johnson was faced with a brutal choice, either institute protectionist measures, including travel taxes, export subsidies and slashing the budget-or accept the risk of a “run on gold” and the dollar. From Johnson’s perspective: “The world supply of gold is insufficient to make the present system workable-particularly as the use of the dollar as a reserve currency is essential to create the required international liquidity to sustain world trade and growth.” He believed that the priorities of the United States were correct, and, although there were internal tensions in the Western alliance, that turning away from open trade would be more costly, economically and politically, than it was worth: “Our role of world leadership in a political and military sense is the only reason for our current embarrassment in an economic sense on the one hand and on the other the correction of the economic embarrassment under present monetary systems will result in an untenable position economically for our allies.”
While West Germany agreed not to purchase gold from the U.S., and agreed to hold dollars instead, the pressure on both the Dollar and the Pound Sterling continued. In January 1968 Johnson imposed a series of measures designed to end gold outflow, and to increase U.S. exports. However, to no avail: on March 17, 1968, there was a run on gold, the London Gold Pool was dissolved, and a series of meetings began to rescue or reform the existing system. But, as long as the U.S. commitments to foreign deployment continued, particularly to Western Europe, there was little that could be done to maintain the gold peg.
Of course, what is left out in the above Wiki excerpt is the fact that Johnson – with John McCain’s help – was busily slaughtering the first installment of more than 7.8 million people in Vietnam.
Which, for your information, does not include the lives which would be lost throughout the rest of Southeast Asia in the following years.
Holocausts are very expensive.
The Wiki:
By the early 1970s, as the Vietnam War accelerated inflation, the United States as a whole began running a trade deficit (for the first time in the twentieth century). The crucial turning point was 1970, which saw U.S. gold coverage deteriorate from 55% to 22%. This, in the view of neoclassical economists, represented the point where holders of the dollar had lost faith in the ability of the U.S. to cut budget and trade deficits.
In 1971 more and more dollars were being printed in Washington, then being pumped overseas, to pay for government expenditure on the military and social programs. In the first six months of 1971, assets for $22 billion fled the U.S. In response, on August 15, 1971, Nixon unilaterally imposed 90-day wage and price controls, a 10% import surcharge, and most importantly “closed the gold window,” making the dollar inconvertible to gold directly, except on the open market. Unusually, this decision was made without consulting members of the international monetary system or even his own State Department, and was soon dubbed the “Nixon Shock”.
The surcharge was dropped in December 1971 as part of a general revaluation of major currencies, which were henceforth allowed 2.25% devaluations from the agreed exchange rate. But even the more flexible official rates could not be defended against the speculators. By March 1976, all the major currencies were floating—in other words, exchange rates were no longer the principal method used by governments to administer monetary policy.
The cost of the Cordon Militaire erected around the Soviet Union, and enforced through such adventures as Korea and Vietnam had eviscerated the American competitive position in the global market.
Hundreds of billion of man hours of potential output had been squandered on an open-ended militarization of the economy, adding such costs to the American economy it could no longer maintain its century long trade surplus – its competitively priced goods, while continuing to be exported, were being swamped by the imports from cheaper competitors.
The process of deindustrialization had set in.
Within years, the Midwest would be renamed, “The Rust Belt,” amidst the stagnant and awful economic environment of the 1970s.
The cries you heard during those woeful years was the sound of your living standard being adjusted downward to reflect the new reality.
By 1971, twenty one short years after the inauguration of NSC-68, Washington had driven the nation into a permanent, and thus far irreversible, condition of living off the subsidies of its neighbors.
Without a balance of payments surplus, the national income was no longer sufficient to maintain a balanced federal budget. Below is a chart showing the ever rapidly mounting debt accrued by the treasury to offset the declining income of the American People.
Taken from here, the red line shows the net public debt accrued by government as mounting deficits exploded from 1970 to the present.
The black line shows the real public debt, including that owed to you as future Social Security retirement payments – the iceberg we mentioned in an earlier chapter.
(You will notice the gap between the two expands rapidly after the mid-1980s, and there is an explanation for this as well which we shall offer in time.)
To be continued
Is serious left criticism of government’s share of GDP possible? (The Argentine Solution)
Continued from here.
Jared Bernstein, whose article sparked this series, is an economist and Director of the Living Standards program at the Economic Policy Institute. According to his brief bio posted on its website, Jared’s, “research include income inequality and mobility, trends in employment and earnings, low-wage labor markets and poverty, international comparisons, and the analysis of federal and state economic policies.”
Let there be no mistake, this guy is well qualified for his job, and the fact that he is considered by Barack Obama of such weight as to be drawn into Barack’s network of economic advisors, demonstrates he knows how to dot his i’s and cross his t’s in the area of economics.
So, whatever we may say of his prescriptions, we definitely do not want to leave the impression this guy is light-weight – in fact our opinion is just the opposite: to us he represents the lost opportunity of a dedicated and sincere researcher.
*****
Also with the Economic Policy Institute is Tony Avirgan, Global Policy Network Organizer, who, according to his bio, “was a communications coordinator of The Development GAP, a non-governmental organization striving to give Southern marginalized groups a voice in economic policy making.”
As a filmmaker, writer, and journalist, his rather straight image belies an obviously involved, dedicated, and committed soul, genuinely interested in the struggles of the disadvantaged the world over.
People like you.
People who are poised, unsteadily, on the icy edge of an economic precipice, above the jagged rocks of a global economy, absent-mindedly trying to get service on their Iphone2.
Can you hear me now?
During the week of June 7, 2006, Tony published an economic snapshot for the EPI website, and, fortunately enough, touched on the subject of this series, indirectly, by focusing on the prolonged economic crisis in Argentina, which ran from about 1999 to 2005.
In it, he stated his belief that Argentina’s experience in its economic crisis had something of significance to offer you, as you search for solutions to the Damocles Sword of economic catastrophe hanging over your head.
Wrote Tony:
Four years ago, in an effort to recover from an economic crisis, Argentina lowered the value for its currency, the peso. At the time, it was difficult to find anything “made in Argentina” in its stores. Most goods were imported from low-wage countries such as China.
Does that description sound familiar?
Does it ring a bell?
Excuse me?
Oh, you did not know there was an economic crisis in Argentina in during that period.
Well, neither did we.
Which is why we were so surprised to be dropped in the middle of it, while visiting family in 2002.
Actually, family was working with the Peace Corps in Paraguay at the time, but we met in Buenos Aires, and had the unexpected chance to experience the crisis first-hand.
We captured the images and sounds to video during our trip, but since home movies videos are so boring, we won’t share them with you.
According to the Wiki, the crisis actually reached back to the mid-70s, and the domestic “dirty war,” as well as the war for the Falklands against Britain.
To stem the economic crisis created by this, and the heavy debt owed to international banks and American-backed agencies, the government introduced one new currency after another, each of which almost immediately began to collapse; again and again punishing the Argentines economically; slashing their income and wiping out their savings.
The economy began to decline as industry and businesses closed up shop and business owners sent their capital overseas.
Beset by massive government corruption, heavy debt to international banks and lending institutions, unemployment, and, recession due to the dollar peg, talk began to circulate that the government intended to devalue the official currency yet again.
Argentines, naturally, began converting their pesos into dollars and sending the money overseas to avoid this obvious strategy by the government to cure its economic problems by impoverishing them – triggering a run on banks.
About this time, we decided to visit family in Paraguay, beginning with a trip to Argentina.
The Wiki continues:
The government then enacted a set of measures (informally known as the corralito) that effectively froze all bank accounts for twelve months, allowing for only minor sums of cash to be withdrawn.
Because of this allowance limit and the serious problems it caused in certain cases, many Argentines became enraged and took to the streets of important cities, especially Buenos Aires. They engaged in a form of popular protest that became known as cacerolazo (banging pots and pans). These protests occurred especially during the period of 2001 to 2002. At first the cacerolazos were simply noisy demonstrations, but soon they included property destruction, often directed at banks, foreign privatized companies, and especially big American companies. Many businesses installed metal barriers because windows and glass facades were being broken, and even fires being ignited at their doors. Billboards of such companies as Coca Cola and others were brought down by the masses of demonstrators.
The political crisis was prolonged and intense, ultimately resulting in Argentina defaulting on its international debt; the government converted all dollar accounts in banks to pesos, and ended the peg to the dollar – effectively wiping out a large portion of domestic savings in one fell swoop, and reducing income and wages accordingly as inflation skyrocketed.
By the time we arrived, the exchange rate between the peso and the dollar collapsed from 1-to-1, down to 4-to-1; which is to say, Argentines receiving their income and holding their savings in pesos lost three quarters of their living standards.
The Wiki states:
The peso suffered a huge depreciation, which in turn prompted inflation (since Argentina depended heavily on imports, and had no means to replace them locally at the time).
The economic situation became steadily worse with regards to inflation and unemployment during 2002. By that time the original 1-to-1 rate had skyrocketed to nearly 4 pesos per dollar, while the accumulated inflation since the devaluation was about 80%. (It should be noted that these figures were considerably lower than those foretold by most orthodox economists at the time.) The quality of life of the average Argentinian was lowered proportionally; many businesses closed or went bankrupt, many imported products became virtually inaccessible, and salaries were left as they were before the crisis.
It continues:
Most barter networks, viable as devices to ameliorate the shortage of cash during the recession, collapsed as large numbers of people turned to them, desperate to save as many pesos as they could for exchange for hard currency as a palliative for uncertainty.
Several thousand newly homeless and jobless Argentines found work as cartoneros, or cardboard collectors. The 2003 estimation of 30,000 to 40,000 people scavenged the streets for cardboard to eke out a living by selling it to recycling plants. This method accounts for only one of many ways of coping in a country that at the time suffered from an unemployment rate soaring at nearly 25%.
Agriculture was also affected: Argentine products were rejected in some international markets, in fear that they might come damaged because of the poor conditions in which they grew, and the USDA put restrictions on Argentine food and drugs arriving at the United States.
The scene was rather otherworldly when we arrived: children picking through the rubbish looking for materials to recycle; housewives standing at the entrance to banks banging on pots and pans for hours a day, trying to access their accounts; employees occupying businesses abandoned their owners, as police looked on or marched threateningly toward them; sudden eruptions of demonstrations, seemingly out of nowhere, late into the night; retirees waving banners and signs outside the national government demanding payments of their pensions.
By 2002, nearly 60 percent of the population lived in poverty – SIXTY Percent!
Extreme poverty, defined as not having enough money to eat properly, reached 30 percent of country.
This ugly and chilling assault on the living standards of an entire country at once worked: By 2005, industry and exports were growing, the international debt to the American-backed International Monetary Fund, and American- and European-owned global investment banks was being paid off, economic expansion restarted.
In that economic snapshot, Tony Avirgan speaks glowingly of the success devaluation brought to the economy.
Completely ignoring all of the crude facts of systematic economic violence – economic warfare – perpetrated by Washington and the global banks against the Argentine people for several decades, which we mentioned above.
The devaluation not only brought an export boom, it also triggered an increase in domestic investment and production that displaced imports. Because domestic businesses benefited so much from the currency devaluation, the Argentinean government was able to enact a 30% tax on exports and used the revenue for infrastructure construction and improvements, such as roads and public works projects.
All of these factors combined to stimulate total gross domestic product growth to 38.26 % over a four-year period (2002-05) and caused unemployment to plummet.
In medicine, this might be called killing the patient in order to save the disease.
But, instead, Tony titled his snapshot, Argentina Devaluation Holds Lessons for U.S.
As we have observed earlier: What Left?
We do hope you were listening.
To be continued
Re: The People 
Nothing has worked: “Freedom or unemployment,” Tom Walker responds…
We received an email from Tom Walker, a leader of the Work Less organization in Canada, who has provided further evidence of the consequential moment which may be upon us:
[S]ubstantially reducing the hours of work is a NECESSARY, not an optional or “wouldn’t-it-be-nice” response to the current financial crisis. That necessity, however, is no guarantee that it will occur. People have to organize to demand that it happens. The reason it is necessary is spelled out plainly but densely in a few lines contained in Marx’s Grundrisse, “Capital itself is the moving contradiction [in] that it presses to reduce labour time to a minimum, while it posits labour time, on the other side, as sole measure and source of wealth.
Hence it diminishes labour time in the necessary form so as to increase it in the superfluous form; hence posits the superfluous in growing measure as a condition — question of life or death — for the necessary.”
Each individual capitalist firm must find ways to cut costs through the introduction of labor saving techniques. But value continues to be measured in labor time expended. Productivity increases the quantity of wealth produced with an hour’s labor but not the quantity of value. So economic growth requires the expenditure of ever more labor time even those ever less labor time is required for the production of socially-necessary wealth. In the 19th century, this contradiction could be “resolved” through periodic crises that devalued capital. But with the advent of state interventionist policies in the 20th century, the escalation of the scale of the productivity overhang and the immensity of the consequences of a full self-correction, including the very real possibility of a revolutionary response to the crisis, it has become constitutionally impossible to “let events run their course.”
It cannot be emphasized too strongly that the root of the crisis lies in the nature of abstract labor time. Solutions to the crisis involve either “buying time” — which is to say not solving the problem but putting off the solution to a future date — or transforming SUPERFLUOUS labor time to disposable time. Unemployment is not disposable time but the failure to transform superfluous labor time into disposable time will result in the massive displacement of labor to unemployment.
The choice is that stark: freedom or unemployment. It sounds like it should be a no brainer. But people are SO afraid of freedom that they might let unemployment creep up on them while they’re wracking their brains trying to think of some other resolution to the crisis than freedom! We can’t let that happen. We’ve seen where it leads: fascism and war.