“Every magic trick,” Caine’s character tells us, ‘has three steps’: 1) the “Pledge” which is sometimes called “the Magician’s Choice” offers audiences an option, but really tips the process, favoring one option over others. In the same way, life seems to offer everyone the same set of choices, when (in reality) the best choices are more ‘real’ in some lives than in others; 2) The next phase in the magic trick is the “Turn,” transforming one possibility into another unexpected possibility; and finally, 3) the “Prestige,” or return of the original promise in a surprising fulfillment or realization, such as the reappearance of the person who has first vanished.
—Critical Vision – “The Prestige”: A Movie Review.
The facts laid out in the preceding section of this post raise the question of whether Washington’s deficits are, in reality, nothing more than the excessive accumulation of social resources in the hands of the very wealthiest members of society. But, in a brilliant example of misdirection, Marshall draws our attention to mere accounting identities: Washington must run deficits, if the rest of society is to save, i.e. if society is to produce more than it consumes. He conceals the nature of these “savings” – the massive concentration of wealth in a few hands, side by side with the relative and absolute collapse in the living standards of the great majority. Hence, the idea that Washington’s deficits only serve to maintain this massive inequality within society need never be seriously addressed by Marshall or his cronies Bill Mitchell, James Galbraith, Randall Wray, Warren Mosler and Rob Parenteau.
The accounting identity of national income to the sum of its parts is the hook intended to grab the attention of millions of desperate working families, who are drowning in debt and looking for any means to keep their heads above water. It serves the purpose of offering a seemingly costless way to increase their income sufficiently to restart the cycle of indebtedness: If Washington runs a deficit, Marshall explains, the massive accumulation of superfluous wealth in the “private sector” can be placed back into currency in the form of public consumption – generating jobs and wages for millions of unemployed.
The rubes are now set up for this performance of economic magic.
Since you have now exhausted your capacity to absorb any more debt in the run up to this Great Recession, Brad Delong has a solution: It is time to max out the credit limit of the United States federal government as well.
DeLong’s solution would be straining at credulity if it were simply a matter of the United States having the financial strength to service the debt accumulated in the present catastrophe, as well as the trillion dollar annual deficits which are projected hit in the coming years, AND, absorb another hit like the economy just took on the financial system.
But, if Dorman is right, that is only the beginning of what DeLong’s five percent solution would have to cope with
Picture the current economic problems, PLUS a second financial crisis, the likes of which we just experienced, PLUS, the long-term problem of stagnating wages for American families, who are deep in debt, and whose wages will continue to fall, since the process Dorman describes (off-shoring industrial work) has not slowed in the least, but is accelerating under the pricing pressures produced by households paying off their debt as unemployment explodes upward.
On this score, we could point out that DeLong’s s panacea for all of this – that government can offset these depressionary forces by accumulating still more than the 12 trillion dollars of debt it already has incurred – has never been shown to work; that it did not work in any sustained way to get the country out of the Great Depression; and, that when it does not work this time, and disaster ensues, good ole’ Brad will just waddle away from it as has every economist from his own discredited idea in a profession littered with grandiose claims for one failed theory after another, while its erstwhile proponents continued to be taken seriously.
A real recipe for disaster, huh?
Oh, but we’re not finished yet – not by a long shot
Do you remember that bottomless reserve of cheap rural labor in China?
Well, they are still there. In fact they’re pouring into China’s cities by the millions looking for work. And, as with all other things Chinese, we are talking huge numbers of unemployed peasants searching desperately for work. An estimated 20 million rural migrant workers lost their jobs as exports fell last winter, forcing millions back to their rural homes for lack of work – which is precisely where there is no work.
And, the solution of the PRC leadership?
Well, like almost every other country on the planet – with some notable exceptions like Germany – China implemented a strong stimulus package to boost the economy. And, unlike the United States, they did not have to borrow the money because they actually have a trade surplus to draw down on in times of economic dislocations. (You see, Brad, it helps if you actually produce things people need in the goods times – times when the US is sailing aircraft carriers around the Persian Gulf trying to intimidate Iran, or piling up the bodies of wedding guests in Afghanistan.)
As a very poor country, with hundreds of millions still living in conditions not much different than an American sharecropper at the end of the 19th Century – absent a cell phone or two – the Chinese need everything, in huge quantities; and, to pay for everything, they have adopted the US development strategy of export-led development.
And, they are pretty damned good at it. Unfortunately, and through no fault of their own, this has led to a situation where there is a global condition of excess capacity in virtually every area of the world economy. While it is beyond the scope of this piece to go deeply into this problem, let it be sufficient to say this:
For Brad DeLong’s five percent solution to work, Washington would have to spend enough not simply to offset a too long work week here in the United States, which is the underlying cause of the financial crisis, another financial crisis, the collapse of American consumption under the weight of the debt brought on by decades of manufacturing offshoring, AND, THE ALMOST DAILY ADDITION TO THE GLOBAL PROBLEM OF A TOO LONG WORK WEEK CREATED BY CHINA’S DEVELOPMENT STRATEGY.
Every factory built, every mile of road laid, every power plant finished, every export contract entered into in China adds to the growing glut of global excess capacity. And, China is pouring most of its resources into expanding precisely this activity: most of the 8.9 percent growth of China’s GDP in the most recent quarter took this form.
You can add to this, huge populations like that of India, Brazil and a host of other countries which are also growing at an astounding rate in the middle of the worst global economic crisis since the Great Depression!
Brad DeLong’s five percent solution ultimately rests on the notion that the five percent of the human race residing in the United States can continue to absorb the surplus output of the rest of the planet, as it has under the American system – the Dollar Empire. And, when he is proven wrong – as he must be – he too will waddle away from this insanity which passes for economic policy to receive his Nobel Prize in Economics, while you starve.
From Mish’s Blog:
To stimulate lending, the bailout plan will attempt to recapitalize banks. The method of recapitalization is best described as robbing Taxpayer Pete to pay Wall Street Paul. In essence, money is taken from the poor (via taxes, printing, and weakening of the dollar) and given to the wealthy so the wealthy supposedly will have enough money to lend back (at interest) to those who have just been robbed.
All this talk about Strategy, Implementation, Recruitment, Procurement, operations, compliance, and other details masks the essence of the plan. And even though “A program as large and complex as this would normally take months — or even years — to establish“, the Secretary for Financial Stability is going to ramrod something through as quickly as possible.
Unfortunately, no matter what seat of the pants strategies they come up with, I can guarantee in advance that the unforeseen consequences of whatever decisions they make, simply will not be any good. Besides, it is axiomatic that plans to rob Peter to pay Paul, can never really work in the first place, regardless of how much time is spent crafting them.
Iceland faces dwindling food supplies resulting from the lack of foreign currency reserves.
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.
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.
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.
- Stocks post their worst week ever
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.