Friday, July 30, 2010

We Are Where We Are

I read this masterful analysis of why we are where we are on Adventure Rider of all places. The author calls himself KirkMoon from San Francisco.

Reagan arrived at just the right time for him to "succeed". Most of dirty work had already been done by his predecessor. Carter was a good man. He wasn't a particularly good politician, but he was a very decent and well intentioned man. Volcker, his Fed Chief, killed the dragon of inflation by raising interest rates to the sky. Politically bad. But economically great once the medicine took hold and induced a recession. Volcker slayed the dragon. And Carter suffered the political consequences for that success. I think he did it on purpose and for all the right reasons. He honestly put the interests of the country ahead of his own political interests and he paid the price. (I remember trying to buy my first home at that time and we almost bought a condo that had 12% subsidized financing because it was "such a good deal!" Hard to believe, but true.)

Reagan waltzes in just as the beast of inflation is breathing its dying breath, makes fun of Carter's pleas for frugality and ecological sustainability, and says: 1) time to spend like crazy on defense and 2) taxes are bad...lets get rid of most of them. The result? Massive deficits.

But also a big stimulus to the economy. The economy starts to grow rapidly. Gordon Gecko becomes the new idol of America. College students, previously the vanguard of idealism and left wing sensibility, are magically transformed into anti-intellectual party animals who revere money and "the good life" and who see Ronald Reagan as their spiritual leader.

The USSR falls after a while. Unclear to me whether it died a natural death or if Reagan hastened it, but Reagan claimed all the credit for it and conservatives loved him for it. The rapidly rising debt was ignored and everyone felt all warm and fuzzy inside. It was "A New Day in America™".

Few people stopped to think that perhaps the good times were an illusion built on a foundation of debt and newly-legitimized greed. Why look a gift horse in the mouth, right? (Except for those of us who couldn't stand the fact that Reagan was an intellectual lightweight who was really little more than a very appealing front man for a group of otherwise rather obnoxious hard core conservative ideologues who were dead set on re-inventing the government in their image using any and all means possible, including illegal ones.)

Life went on like this for quite a while. The economy grew. People grew more affluent. Liberal (idealistic) thought was looked upon as anachronistic and naive.

But all the while the debt mounted. Not only in the government, but in the private sector as well.

Deregulation became the "in" thing and corporations pushed the limits as far as they could.

As a result of the policies begun by the Reagan group and extended by all subsequent administrations (including, unfortunately, the Clinton administration), the wealthy in America benefited greatly, but the middle class started seeing its economic standing drifting downward. Incomes (in real dollars) were flat while expenses were rising. They didn't really understand what was going on, so they adapted. They took on additional hours at work. Or took a second job. When that didn't get the job done, their wives went out and got a job. That worked for a while, but ultimately that didn't cut it either. So, with the assistance of a well oiled capitalist machine that encouraged them to do so, they started taking on debt to maintain their lifestyle. And more debt. And more debt.

Companies did the same thing. Why not leverage up and double or triple profits? What could possibly go wrong. Manufacturers noticed that many of their consumers were having a hard time affording their products, so they developed methods of selling their products on credit. The loose regulatory environment encouraged companies like the Savings and Loans and Enron and Qualcomm to push the limits and beyond. Things started exploding every now and then, but since the economy was growing, who cared?

The foamy, frenzied, crazy money, greed and debt fueled party continues unabated until the Dot Com bubble burst, but even that only turned out to be a small speed bump on the road to riches. When the investing class discovered that dot coms weren't going to lead them to riches any more they found a new vehicle, real estate, and went after it with all the same nearly insane intensity that they had previously focused on the dot coms.

Eventually the souffle got so hyperinflated with leverage and greed and overt dishonesty and nothingness that it collapsed under its own weight. And the rest is history.

We will be cleaning up the mess for at least another decade, perhaps several.
Kirk Mn

Thursday, July 29, 2010

We Are Obsolete

Published in Salon:

Have the American people outlived their usefulness to the rich minority in the United States? A number of trends suggest that the answer may be yes.

In every industrial democracy since the end of World War II, there has been a social contract between the few and the many. In return for receiving a disproportionate amount of the gains from economic growth in a capitalist economy, the rich paid a disproportionate percentage of the taxes needed for public goods and a safety net for the majority.

In North America and Europe, the economic elite agreed to this bargain because they needed ordinary people as consumers and soldiers. Without mass consumption, the factories in which the rich invested would grind to a halt. Without universal conscription in the world wars, and selective conscription during the Cold War, the U.S. and its allies might have failed to defeat totalitarian empires that would have created a world order hostile to a market economy.

Globalization has eliminated the first reason for the rich to continue supporting this bargain at the nation-state level, while the privatization of the military threatens the other rationale.

The offshoring of industrial production means that many American investors and corporate managers no longer need an American workforce in order to prosper. They can enjoy their stream of profits from factories in China while shutting down factories in the U.S. And if Chinese workers have the impertinence to demand higher wages, American corporations can find low-wage labor in other countries.

This marks a historic change in the relationship between capital and labor in the U.S. The robber barons of the late 19th century generally lived near the American working class and could be threatened by strikes and frightened by the prospect of revolution. But rioting Chinese workers are not going to burn down New York City or march on the Hamptons.

What about markets? Many U.S. multinationals that have transferred production to other countries continue to depend on an American mass market. But that, too, may be changing. American consumers are tapped out, and as long as they are paying down their debts from the bubble years, private household demand for goods and services will grow slowly at best in the United States. In the long run, the fastest-growing consumer markets, like the fastest-growing labor markets, may be found in China, India and other developing countries.

This, too, marks a dramatic change. As bad as they were, the robber barons depended on the continental U.S. market for their incomes. The financier J.P. Morgan was not so much an international banker as a kind of industrial capitalist, organizing American industrial corporations that depended on predominantly domestic markets. He didn't make most of his money from investing in other countries.

In contrast, many of the highest-paid individuals on Wall Street have grown rich through activities that have little or no connection with the American economy. They can flourish even if the U.S. declines, as long as they can tap into growth in other regions of the world.

Thanks to deindustrialization, which is caused both by productivity growth and by corporate offshoring, the overwhelming majority of Americans now work in the non-traded domestic service sector. The jobs that have the greatest growth in numbers are concentrated in sectors like medical care and childcare.

Even here, the rich have options other than hiring American citizens. Wealthy liberals and wealthy conservatives agree on one thing: the need for more unskilled immigration to the U.S. This is hardly surprising, as the rich are far more dependent on immigrant servants than middle-class and working-class Americans are.

The late Patricia Buckley, the socialite wife of the late William F. Buckley Jr., once told me, "One simply can't live in Manhattan without at least three servants -- a cook and at least two maids." She had a British cook and Spanish-speaking maids. New York Mayor Michael Bloomberg recently revealed the plutocratic perspective on immigration when he defended illegal immigration by asking, "Who takes care of the greens and the fairways in your golf course?"

The point is that, just as much of America's elite is willing to shut down every factory in the country if it is possible to open cheaper factories in countries like China, so much of the American ruling class would prefer not to hire their fellow Americans, even for jobs done on American soil, if less expensive and more deferential foreign nationals with fewer legal rights can be imported. Small wonder that proposals for "guest worker" programs are so popular in the U.S. establishment. Foreign "guest workers" laboring on American soil like H1Bs and H2Bs -- those with non-immigrant visas allowing technical or non-agriculture seasonal workers to be employed in the U.S. -- are latter-day coolies who do not have the right to vote.

If much of America's investor class no longer needs Americans either as workers or consumers, elite Americans might still depend on ordinary Americans to protect them, by serving in the military or police forces. Increasingly, however, America's professional army is being supplemented by contractors -- that is, mercenaries. And the elite press periodically publishes proposals to sell citizenship to foreigners who serve as soldiers in an American Foreign Legion. It is probably only a matter of time before some earnest pundit proposes to replace American police officers with foreign guest-worker mercenaries as well.

Offshoring and immigration, then, are severing the link between the fate of most Americans and the fate of the American rich. A member of the elite can make money from factories in China that sell to consumers in India, while relying entirely or almost entirely on immigrant servants at one of several homes around the country. With a foreign workforce for the corporations policed by brutal autocracies and non-voting immigrant servants in the U.S., the only thing missing is a non-voting immigrant mercenary army, whose legions can be deployed in foreign wars without creating grieving parents, widows and children who vote in American elections.

If the American rich increasingly do not depend for their wealth on American workers and American consumers or for their safety on American soldiers or police officers, then it is hardly surprising that so many of them should be so hostile to paying taxes to support the infrastructure and the social programs that help the majority of the American people. The rich don't need the rest anymore.

To be sure, wealthy humanitarians might take pity on their economically obsolescent fellow citizens. But they no longer have any personal economic incentive to do so. Besides, philanthropists may be inclined to devote most of their charity to the desperate and destitute of other countries rather than to their fellow Americans.

If most Americans are no longer needed by the American rich, then perhaps the United States should consider a policy adopted by the aristocracies and oligarchies of many countries with surplus populations in the past: the promotion of emigration. The rich might consent to a one-time tax to bribe middle-class and working-class Americans into departing the U.S. for other lands, and bribing foreign countries to accept them, in order to be alleviated from a high tax burden in the long run.

Where would a few hundred million ex-Americans go? The answer is obvious: to the emerging markets where the work and investment are found. That will show all those American union members who complain that their jobs have been outsourced to China. Let them move to China themselves and compete, instead of complaining!

Needless to say, the Chinese and Indians might resist the idea of an influx of vast numbers of downwardly mobile North American workers. But like American capitalists, Chinese and Indian capitalists might learn that ethnic diversity impedes unionization, while the mass immigration of North Americans to East and South Asia would keep wages in those regions competitively low for another few decades at least.

Once emptied of superfluous citizens, the U.S. could become a kind of giant Aspen for the small population of the super-rich and their non-voting immigrant retainers. Many environmentalists might approve of the depopulation of North America, because sprawling suburbs would soon be reclaimed by the wilderness. And deficit hawks would be pleased as well. The middle-class masses dependent on Social Security and Medicare would have departed the country, leaving only the self-sufficient rich and foreign guest workers without any benefits, other than the charity of their employers.

Of course there are alternative options, which would not require the departure of most Americans from America for new lives on distant shores. One would be a new social contract, in which the American people, through representatives whom they actually control, would ordain that American corporations are chartered to create jobs in the U.S. for American workers, and if that does not interest their shareholders and managers then they can do without legal privileges granted by the sovereign people, like limited liability.

The American people also could put a stop to any thought of an American Foreign Legion and declare, through their representatives, that a nation of citizen-workers will be protected by citizen-soldiers, whether professionals or, in emergencies, conscripts. The American people, in other words, could insist that the United States will be a democratic republican nation-state, not a post-national rentier oligarchy.

But restoring democratic nationalism in the U.S. would inconvenience America's affluent minority. So instead of making trouble, maybe most Americans should just find a new continent to call home.

Michael Lind is policy director of the Economic Growth Program at the New America Foundation.

Sunday, July 4, 2010

Triffin's Dilemma

Belgian economist Robert Triffin died in 1993 but not before he saw his dilemma affect how the US economy operated.
Triffin postulated that a stable world reserve currency could only be stable and a reserve currency as long the issuing nation was a debtor nation and others around the world bought that currency.

Triffin opposed fixed currency exchange rates as worked out Bretton Woods, New Hampshire, after World War Two. Bretton Woods brought stability to a world badly in need of it, but eventually the system broke down, as Triffin predicted and the US went off the gold standard in 1971.

Now, Triffin's Dilemma has come back to bite us as Triffin's Paradox, in a sense, because even as the world craves a stable reserve currency, and buys it, the US dollar, thanks to that whopping debt is not as stable as a reserve currency should be. So, if the US dollar were strong and stable there would be no debt, if there were no debt, the currency wouldn't be available for foreign investors to invest in. However Triffin was writing off the dollar as "once mighty" in 1971 so his time lines were not that accurate perhaps.

On the other hand the US has an apparently intractable unemployment problem, massive debt, more massive obligations, states that are falling into bankruptcy and a couple of wars it feels the need to fund all at the same time. Economists are also warning that banks in the Britain, the Eurozone and the US are facing debt deadlines that look big enough and bad enough that more bail outs will be needed. This at the same time that Congress has failed signally to rein in risky investment practices and killed off unemployment benefits at the same time.

So, as we go into the Independance Day Holiday in the US we wave pour flags for what reason? Perhaps we celebrate the fact that the US dollar still is the world reserve currency and perhaps we celebrate the hope that the worst is still ahead, that this summer we have a respite from a future that doesn't seem to look any brighter.

Friday, July 2, 2010

Squeezing The Turnips

I have been following with some interest the debate over debt deflation and I cannot escape the feeling that we have collectively forgotten our history and are doomed to repeat it. I was encouraged by Paul Krugman's widely quoted remarks pointing out Federal stimulus is too little and being cut off too early by deficit hawks who worry about excessive government indebtedness. When stimulus money runs out unemployment will rise and suffering will increase. The theorists who support this course of action will not be personally impacted by the subsequent shortage of money and increasing scarcity of work.
There is no recovery until there is employment and the private sector isn't hiring. You'd think then the federal government would be leaping into action as, belatedly, President Roosevelt did a century ago during the last Great Depression. When the Works Progress Administration was successfully keeping Americans from starving the deficit hawks got into gear and cut the program off at the knees thus keeping the Depression alive until the advent of World War Two. And we seem bound and determined to follow the same course.
While I agree in principle with the ideal of reduced federal deficits I find myself heeding the words of an English professor I studied under many decades ago. "Beware people who act on principle," he said succinctly, "it's not their real agenda." If deficit reduction were he real agenda we would see super taxes imposed on banks claiming profits after receiving billions in public hand outs. If budget deficit reduction were the agenda we would see military withdrawls from around the world. We have 700 US bases around the world and Osama Bin Laden is still at large. If deficit reduction were the agenda the talk would not be of squeezing the already poor, the former middle class out of homes and jobs and medical benefits. Squeezing deficit reduction out of the very victims of this Depression makes no economic sense at all.
The agenda should be to bring home the troops, bring home the jobs, stop outsourcing and start spending money at home to create wealth in the US among all levels of citizenry. Everyone does better when everyone does better and instead we are turning into a Third World nation of uneven wealth distribution and concentrated power and influence. The rule of law is eroding and the cult of personality has taken over our political structure. Ina nation devoted to the cult of the mystical perhaps someone on Wall Street has finally figured out how to squeeze blood from a turnip. Perhaps destroying the American middle class will finally yield deficit reduction.

Thursday, July 1, 2010

The Sheep Versus Cassano

A shiftless bunch of know nothings in Washington are trying to figure out how the world economy started it's collapse in 2008, led by former California Insurance Commissioner Phil Angelides and they are asking AIG to explain how the credit default dominos started to fall. "We had no idea" AIG executives say when asked to explain how the corporation needed 190 billion taxpayers dollars to stay in business. No idea at all how risky their trades and swaps and insurance derivatives were. You can read their comments on Bloomberg's website.

Cassano himself (pictured here) isn't at the hearings- he's tucked up in London with the $280 million he made working for AIG over 8 years- including a million a month consultancy after his train wreck forced him to resign from AIG and take up full time cycling, his preferred sport. AIG executives are busy soothing political leaders in Cassano's absence but why should he worry- all legal investigations of his fraud have been dropped on both sides of the Atlantic. The following paragraph is taken from Bloomberg, quoting Robert Lewis AIG's "head of risk:"

“We were wrong about how bad things could get,” Lewis said. “What ended up happening was so extreme that it was beyond anything we had planned for.”

Goldman Sachs Group Inc. President Gary Cohn and Chief Financial Officer David Viniar are also slated to appear before the FCIC during the two-day hearing. Goldman collected $12.9 billion after the rescue from contracts with AIG.

Viniar has said that collateral agreements would have helped protect the firm, among AIG’s biggest counterparties, against default. AIG’s $182.3 billion bailout ensured that Goldman Sachs was paid in full.

Cassano had shied away from public statements while regulators investigated his role in the swaps trades. The U.S. Justice Department and the U.K.’s Serious Fraud Office dropped probes last month, and the U.S. Securities and Exchange Commission closed its investigation, AIG and Cassano’s lawyers said this month.

By paying off AIG's risky business in full the American taxpayer made sure that Goldman Sachs and their cronies got their risky investments back, also in full, with the implicit message that messing everything up only has consequences for the American taxpayer. Wall Street will always be covered. They all told us at the time it was necessary to prevent the system, such as it was, from imploding. This is where I can point to my own blog for my own opinions at the time, as conflicted as they were, and the serious misgivings I had about that course of action. The further we have sunk into this morass the more certain I have become about the planned and anticipated destruction of our economic world.

We now find Wall Street once again reverting to this irresistible cash cow of bonuses, government backed "risk taking" and general impoverishment of the American middle class, as the middle classes spend their time arguing fruitlessly about the merits of the World Cup Football tournament underway in South Africa. It amazes me ow impossible it has become to rein in these financial cowboys. After the Great Crash of 1929 the Pecora Commission managed just that and created a stable financial platform of government regulations that helped guide the increasing wealth of this nation for decades, until Ronald Reagan came along as the know nothing spokesman for financial deregulation and all the destruction that has wrought. It seems to have escaped general notice that in Italian the Pecora Commission's name (derived from the Italian-American Chairman's last name)means "sheep" in Italian (pecora). I find it a highly ironic sidebar that in this age of public submission to the ravages of these financial wolves we lack any kind of shepherd to lead us out of this Valley of Economic Death.