Thursday, January 29, 2009

Impaled on the fork in the road

"Is It Time to Bail Out of America?" by Paul Craig Roberts

It can be a thrill to agree with someone you consider to be on the opposite side of the ideological spectrum. I would guess that finding a point of common agreement with the intellectual "other" stimulates the human brain to produce endorphins - and if you step outside our species for a second, the event might look just like two chimps from feuding troops beginning to bond over a shared banana. Look at what seeking this kind of thrill pushed Christoper Hitchens to become.

I got such a thrill when I agreed with Paul Craig Roberts - the so-called "Father of Reaganomics", former Assistant Secretary of the Treasury under Reagan and former Wall Street Journal editor and columnist - from the moment I read the rhetorical question that is the title of his article. His analysis:

"On January 28 Obama announced his $825 billion bailout plan. This comes on top of President Bush’s $700 billion bailout of just a few months ago.

Obama says his plan will be more transparent than Bush’s and will do more good for the economy.

As large as the bailouts are--a total of $1.5 trillion in four months--the amount is small in relation to the reported size of troubled assets that are in the tens of trillions of dollars. How do we know that by June there won’t be another bailout, say $950 billion?

Where will the money come from?

Obama’s bailout plan, added to the FY 2009 budget deficit he has inherited from Bush, opens a gaping expenditure hole of about $3 trillion.

Who is going to purchase $3 trillion of US Treasury bonds?

Not the US consumer. The consumer is out of work and out of money. Private sector credit market debt is 174% of GDP. The personal savings rate is 2 percent. Ten percent of households are in foreclosure or arrears. Household debt-service ratio is at an all-time high. Household net worth has declined at a record rate. Housing inventories are at record highs.

Not America’s foreign creditors. At best, the Chinese, Japanese, and Saudis can recycle their trade surpluses with the US into Treasury bonds, but the combined surplus does not approach the size of the US budget deficit.

Perhaps another drop in the stock market will drive Americans’ remaining wealth into 'safe' US Treasury bonds.

If not, there’s only the printing press.

The printing press would turn a deflationary depression into an inflationary depression.
Unemployment combined with rising prices would be a killer.

Inflation would kill the dollar as well, leaving the US unable to pay for its imports.

All the Obama regime sees is a 'credit problem.' But the crisis goes far beyond banks’ bad investments. The United States is busted. Many of the state governments are busted. Homeowners are busted. Consumers are busted. Jobs are busted. Companies are busted.

And Obama thinks he has the money to fight wars in Afghanistan and Pakistan."

Damn skippy, Paul. Except that I'm not so sure about your prediction that a debilitating bout of inflation will inevitably ensue. On that point, I agree more with this cartoonist:

If we are facing the most serious economic catastrophe since the Great Depression, as Barack Obama has repeatedly stated (the significance of which is that this idea can safely be considered "centrist" within Unitedstatesian political thought), then why not look to what got the U.S. out of the Great Depression. As you can see from the graph that ran in today's Wall Street Journal, under Obama's stimulus plan the deficit would increase to all of ten percent of U.S. GDP. World War II spending, which got the U.S. out of the Great Depression, represented at its peak 30% of U.S. GDP:
Granted, these recent figures are the product of modern Unitedstatesian accounting, and the measurement "Gross Domestic Product" itself is not and never was intended to be a clear reflection of an economy's health. The creator of the GDP measurement wrote in the report that introduced it, "The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above." But regardless of the problems inherent in the accounting and form of measurement on display above, the U.S. experience with the Great Depression does prove the assertion that vast government spending and highly progressive taxation can return prosperity to an economically devastated society.

Chinese economist Minqi Li succinctly summed up the U.S. experience with and overcoming of the Great Depression as follows: "The short-lived 'irrational exuberance' of the 1920s was followed by the collapse of the 1930s. It was the surge of government spending and nationwide planning during World War Two that pulled the US economy out of the Great Depression. After the war, a greatly enlarged government sector and the active employment of Keynesian macroeconomic policies helped to stabilize the profit at relatively high levels."

This is quite similar to the conservative Unitedstatesian historian Alfred Chandler, who wrote that after the U.S. entered the war, "[t]he government spent far more than the most enthusiastic New Dealer had ever proposed. Most of the output of expenditures was destroyed or left on the battlefields of Europe and Asia, but the resulting increased demand sent the nation into a period of prosperity the like of which had never before been seen. Moreover, the supplying of huge armies and navies fighting the most massive war of all time, required a total control of the national economy. This effort brought corporate managers to Washington to carry out of the most complex pieces of economic planning in history. That experience lessened the ideological fears over the government’s role in stabilizing the economy [in the post-war economy].”

Unitedstatesian conservatives - even smart conservatives like Paul Craig Roberts - are largely ignorant of the historical examples of massive and successful economic performance turned out under socialist governance. (Dead conservative William F. Buckley Jr. was less ignorant of the successes of socialist economic policies, leading him in the 1950s to call for the U.S. to adopt features of Soviet economic policies in order to outperform, and eventually destroy, the Soviet enemy.) During and after World War II, the U.S. was enormously successful in applying socialist policies like central planning, progressive taxation and massive government spending; the Soviet Union, China, Cuba, North Korea also experienced excellent, if initial, results with socialist policies.


But even if the U.S. were to somehow shed its heavy entrenched ideological aversion to socialist policies, there is a wild card in play. The wild card is the outside world. Back during World War II, the U.S. was a creditor nation to whom its World War I allies were massively indebted. Perhaps those foreign loans formed the financial dyke that held back the pressure of inflation and massive currency devaluation when the U.S. began its massive socialist program to arm for the war.

Because today, if the U.S. were to embark on a policy of massive government spending to boost the economy out of recession, as Roberts correctly points out, the U.S.'s creditors might be tempted to pull their line of credit (which exists in the form of their purchases of U.S. Treasury securities with the dollars left over from their trade surpluses). With the U.S.'s foreign rug of credit pulled out from under it, the dollar's value would collapse - absent a nearly unimaginable reduction of the U.S.'s enormous trade deficit with the outside world. Imported goods would become vastly more expensive.

The U.S. could try implementing a highly interventionist/socialist policy of commanding production for the domestic market (to replace imports that would become too expensive as a result of dollar depreciation). But raw materials from foreign countries would become very expensive to buy with a debased dollar, so production would be made dear. Besides, entire factories would have to be built to replace the ones that have long since taken flight to the proximity of highly exploitable foreign laborers.

And by then the whole world would have already fallen apart. The economies of many countries are largely structured to produce things to sell in the world's largest national market, the U.S., for dollars, with which (and only with which) they can buy all sorts of commodities from oil to copper. China, for instance, sells around 20% of its exports in the U.S. only, and with the dollars it receives it buys, among other things, oil and U.S. debt. The dollars oil-producing states receive are used to purchase, among other things, various commodities (like sugar and wheat) and U.S. debt. The dollars these various commodity-producing states receive are used to purchase oil, commodities, and U.S. debt.

Noticing some repetition here? The cornerstone of the system is U.S. debt: once foreign countries stop buying, the dollar collapses, and will no longer be used as the currency in which oil, manufactured good and commodities are denominated.

Thankfully for the U.S., the rest of the world, particularly the semi-peripheral states like Brazil, Russia, India and China, "have no balls" in the eloquent Unitedstatesian turn of phrase. Their respective leaderships are doing a lot of barking at the moment, but there is little indication of any impending bite.

There are major distinctions to be made between yesterday's colonies and today's "developing nations". But to borrow from legal discourse, these are distinctions without much of a difference. The essential similarity between both is that work is done and things are produced in the colonies/developing nations; those things are sold in the imperialist/developed nations; and the lion's share of the profits from the production and selling of these things are "earned by" - more neutrally, "accrue to", or more accurately, "are expropriated by" - the imperialist/developed nations. There are many distinctions to be made between India under British imperialism and sovereign India within the contemporary international economic system, but these distinctions do not create a difference of any transcendent importance.

A 2002 study by China's State Economic and Trade Commission revealed that in the production of one representative manufactured good, profits were split 63/37 between the U.S. and Chinese companies - China being the country in which the item was entirely manufactured. 27% of China's profit was raked in by a Hong Kong-based trading company - a comprador.

The BRIC (Brazil, Russia, India, China) countries are ruled by what amounts to a comprador class. (Remember, there are distinctions between colonial history and contemporary capitalism - but they are distinctions without a difference.) A comprador class is the indigenous segment of a colonized society that profits from their society's colonization. Take the Irish, under British colonization. (The Irish are white and have an affable, familiar culture to match their accents, so Unitedstatesian humans can easily identify with them.) During the Irish famine of the 1940s, while 20-25% of the Irish population was dying of starvation and malnutrition, the Irish comprador class sold direly needed food to the British. And they profited from their sales, although not as much as their British counterparts undoubtedly were.

So long as China's rulers are most greatly influenced by the Chinese comprador class - the capitalists who own or are joint partners with foreign companies in the country's export industries - China will be unlikely to rock the boat. The boat, in this context, being the international economic system, and the roles China and the U.S. currently play in it.

But China may not have to rock the boat. There may be a tsunami.

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