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.
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.
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.
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