Thursday, February 19, 2015

The Marketplace God and the End of History
Updated February 6, 2015
Walter Libby

The industrial revolution produced three types of people:  Those who preached that markets self-correct, those that divined that markets self-destruct and those who thought they could keep supply and demand in equilibrium.

It was the latter that held sway up until the early 1970's; a combination of Keynesianism that kept national industrial economies balanced and a global agreement forged at Bretton Woods that balanced trade. It was the golden age of capitalism, a period when post war reconstruction created significant global demand and prosperity.

Yet with reconstruction came increased global production; notably in Germany and Japan.  And as they penetrated U.S. markets dollars flowed out resulting in a drain on U.S. gold reserves. In response Nixon took the U.S. off the gold standard that effectively ended the Bretton Woods agreement. He then proceeded to manipulate the dollar by making a trade deal with Saudi Arabia.  The United States would provide the Saudi's with weapons and guarantee their security in exchange for denominating the sale of oil in dollars. At first glance this seems odd; currency markets had weaken the dollar and in doing so raised the price of imports encouraging domestic consumption
while lowering the cost of exports providing an economic edge in global markets. The problem here is that the price of oil imports would rise. 

However it was more than a sort of trade off. As the dollar carried on as the predominant global currency it morphed into the petrodollar. And as it did it allowed U.S. trade deficits to continue without repercussions in currency markets and as petrodollars piled up in oil rich nations they were recycled back into U.S. bonds, financing government debt at low rates of interest.

All this is very interesting. The thing is, however, as Germany and Japan and other nations got back into the game the golden age ended and the world was now on a path to the crisis stage that led to The Great Depression: overproduction. How that played out comes later. The point here is that the response in the U.S. was a step back in history: a shift from Keynesianism to neoliberalism under Ronald Reagan. And with a hard turn to the right, out too was d├ętente as Reagan ratcheted up the arms race heating up the cold war.  Risky business, Reagan was playing with nuclear matches. 

Enter Gorbachev and Perestroika: New Thinking for Our Country and the World. Here, the backbone of the new way of thinking is nuclear disarmament, stepping away from the nuclear abyss; humankind's survival.  And while this was the backbone of Perestroika, it also led to the dissolution of the Soviet Union. It wasn't so much that revolutions in the Republics were successful that led to this event, but that they were allowed to do so. No tanks were seriously rolled out and capitalism triumphed over socialism and thus it was declared that we had reached the end of history; ideologically it doesn't get any better than capitalist democracy. 

Even so, what followed the fall of the Soviet Union was the rise of socialist China, and here the revolution was crushed; the tanks were rolled out at Tiananmen Square.

Thus, with China still entrenched in the Marxist camp, the end of history is still in question. And while Marxists and capitalists are diametrically opposed, while they have different prophets, Adam Smith and Karl Marx, their ideologies are both a reflection of the material base: the marketplace. These are matter over mind ideologies. That is bad news. Not just in the evolutionary scheme of things, the progression of ideas to consciously, coherently and purposely meet the consequences of our being, but that the abyss still beckons. So therein lies the challenge: how to define an ideological shift to mind over matter that takes us to the end of history. But first we have to come to terms with the world we live in.  A world divided by those who have put their faith and our fate in their respective prophets who had divined in their own way the will of the marketplace god. So, how goes the battle in a MAD world?

When the communists overthrew the existing order in China they didn't capture much in the way of industrial development which eventually led to a revolutionary shift in ideology: Socialism with Chinese Characteristics. Think of it as divine revelation. While adhering to Marxism it was decided they would take the capitalist road to industrialization by opening their door to world trade. While not stated by Deng, as Marxists, their goal is to capture the mode of production and overthrow the existing order. So, extrapolating from the fact that they are Marxists by opening their door, it was only a matter time until the capitalists transferred their factories and the wealth of their respective nations to China. It was a great leap forward based on Marxist gospel The bourgeoisie cannot exist without constantly revolutionising the instruments of production... [ever increasing productivity therefore requires a] constantly expanding market for its products [and so] chases the bourgeoisie over the entire surface of the globe. It must nestle everywhere, settle everywhere, establish connexions everywhere. Even in socialist China. It was The Art of War; that is:  The supreme art of war is to subdue the enemy without fighting. They captured the mode production while undermining the existing order without firing a shot.

However, when multinationals (the highest stage of capitalism, self-interested stateless entities), driven not so much for the need for new markets, but by competition in their race to the bottom--in their quest for fewer regulations, lower taxes and cheaper labor--nestled  in socialist China, they reached the bottom with a resounding thud that changed everything. 

When multinationals offshored manufacturing and/or assembly to socialist China they turned it into the so-called factory to the world that should have led to a global recession as lost manufacturing jobs in the U.S. and elsewhere led to less demand dragging down the supply-side in China. However, while events have postponed the day of reckoning, the underlying facts are: one, capitalism, left on automatic, self-destructed and two, as production was centralized in socialist China, it changed the dynamics of Marxism: a global glut, an epidemic of overproduction, is no longer in play. Nonetheless, the day of reckoning still looms. When that day comes there will be chaos in the capitalist world while socialist China, having captured the mode of production, simply turns to communism; hence socialism with Chinese characteristics. And we are on the cusp.

Right now the global economy is unbalanced and wobbling on its axis on its way to spinning out of control. Yet the perception is one of slowing growth and central banks in response are lowering interest rates. Yet, while they may slow the slowing, they can't rebalance the global economy, they can't return manufacturing jobs--say to the United States--that's left to market forces. And market forces take low skilled manufacturing jobs to where labor is the cheapest.  So, as to those events that postponed the day of reckoning, we start with the United States. 

It begins with Nixon's trade deal with Saudi Arabia that gave America a quasi free rider status as the dollar as the global currency shelters it from currency markets despite its huge trade deficits. So in effect it can import goods and export dollars in exchange. A strong dollar also provides the illusion of a safe haven despite America's ever-increasing national debt; itself a major prop in that it props up the federal government and so props up a significant part of GDP

Then there were bubbles and bubbles and toils and trouble beginning with the boom. It not only gave a significant boost to the economy as it created a lot jobs, it created a lot of revenue via capital gains taxes that led to budget surpluses. Nonetheless Clinton claimed ownership and the myth spread that rationalized Bush's tax cuts and a Republican Congress going on a spending spree.  Yet as the bubble popped, surpluses turned into deficits and the economy fell into a mild recession. Even so the fear was the economy might double-dip into recession. The thinking was: To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble. 

Greenspan obliged and pushed interest rates down and Bush pushed the Ownership Society that together with lax lending standards revived the American dream of home ownership leading to a surge in demand which drove up the price signaling builders to build more. Yet as a bubble emerged the Fed began raising rates, restricting the air supply.

At the same time rising oil prices were taking its toll on the economy

pushing up gas prices pushing it into a recession. But it wasn't just a U.S. housing bubble popped by rising interest rates and rising oil prices, but a global bubble and global energy shock that drove the global economy into The Great Recession

Even so, it did create a lot demand. In the U.S. housing starts went from 1,560,000 in 2000 to a peak of 2,068,000 in 2005 (peak bubble). There was also indirect demand. Speculation was rampant driving up prices prompting flippers to enter the market en masse buying and upgrading homes and quickly reselling; yet the positive side was that upgrading created jobs and demand for materials and appliances. Then there was a rash of cash out refinancing by home owners that financed purchases that ranged from electronic gadgets, new cars and trucks to home remodeling.  All in all--tax cuts, government spending and the housing boom--it was quite the stimulus package.  Yet, while the energy shock and the collapse of the housing boom led to a global recession the global response was mixed.

The resulting crisis in the Eurozone was met with a fiscal policy of austerity at odds with its monetary policy and so remains on the edge of recession
In the United States, however, Keynesianism, a bench warmer since the Reagan days, was called back into the game.  The Federal Reserve lowered the Federal funds rate to rock bottom and pumped more liquidity into the system that along with Obama's Recovery Act produced a modest recovery while putting some wind in the sails of China and the Eurozone. But take a closer look at the recovery. Those too discouraged to look for work (the participation rate) are not counted, giving a positive spin to the unemployment rate; many of the new jobs are low-wage or part-time; wages continue to stagnate; too many live from paycheck  to paycheck, receive food stamps, and go deeper in debt.  And you really can't call it a recovery until we have recovered our lost manufacturing jobs. Even so what manufacturing jobs we have are in decline as factory orders are more down than up. Housing starts are near pre-recession historical lows while the demand for apartments has driven up the price of rents.

United States Housing Starts

Yet the perception is one of optimism: the Fed, while patient, is thinking about raising interest rates. However, in a global economy you need to think beyond your nose. So the Fed waits to see how the global economy is playing out; so back to China.

With the Great Recession their exports plummeted, and they responded by accelerating the development of new cities and infrastructure increasing employment domestically while creating a global commodity boom, that fed back and their exports surged.  Yet while their exports initially surged they began to fall off.

But why was there a decline in exports? The simple answer is oil. China's stimulus required huge amounts of oil straining global supply pushing up prices.

However, while rising oil prices again impacted consumers at the pump, they also allowed U.S. oil producers back into shale patch and as they began again to wring out tight oil from expensive to extract reserves they significantly increased domestic production giving a significant boost to the economy. But it also led to a drop in oil imports increasing global supply that led to a global glut; a reversal of fortune that benefited consumers and put oil producers at risk, their creditors, their suppliers and related workers. Here consumers are spared higher prices, but overall as global investment and development stalls, in proportion, so does the global economy. Yet, given time, prices again will rise; rig counts are in free fall. Also, these are not giant fields, basically what they are doing is cracking rocks and therefore they have a rapid depletion rate. Consequently production will fall along with inventories, and the U.S. will eventually import more oil and prices again (factor in that China's oil production has likely peakedwill go up.

The point being is that without the China prop, there would no oil play in the U.S. and as China's development of  hundreds of new cities (portrayed as ghost cities and the mother of all housing bubbles) is coming to a standstill, you can't separate the two as China's slow down impacts the global economy. And as it slows down millions of Chinese migrant workers will lose their jobs as well as those in upstream and downstream industries (such as steel, cement, glass, furniture and appliances) and the service sector prompting fears of a hard landing and another global recession as China demands less from the global commodity markets and the world in turn demands less from socialist China who in turn demands less from the world.

What's changed in the interval is that while capitalism still faces collapse and chaos, socialist China, along with capturing the mode of production, has built hundreds of new cities. They are getting rid of the corruption tolerated during their capitalist phase. They are cleaning up the environment. They are consolidating control. They are getting ready to turn to communism: from each according to ability, to each according to need filling up those millions of empty apartments while paying current owners with freshly printed yuan.  They are also getting ready for the collapse of capitalism, building up their military and fortifying the South China Sea. Russia too is distancing itself from the West under the guise of the Ukrainian conflict, turning to autarky while building up its military arsenal. What this suggests is that the Soviet Union's fall and China's rise was no mere coincidence but an variation on a theme, an act of deception.  With the collapse of the Soviet Union communism was in ash heap of history, what was there to fear from China as it took the capitalism road? Again, it is the Art of War; deception at its best. Yet, are they ready for what follows in the rest of world?

Eventually, as the global economy continues to circle the drain, global stock markets will crash leading to another financial crisis; this time around with no China prop and the federal funds rate at rock bottom. And quantitative easing, infusing more liquidity into the system (outside of equity markets) was trapped by a deflationary spiral, a lack of demand. What's left is government borrowing and spending on infrastructure, and that will be too little, too late.

What's the worst that could happen? Global food supply chains break and there
is a run on supermarkets and a war of all against all breaks out and martial law is imposed giving rise to a military dictatorship. Yet... oil is the life-blood of industrial economies and the Middle East, already on the edge of chaos, will plunge into total chaos.  In an effort to assure their supplies the United States steps in militarily and Russia and China responds in kind; all go into their versions of DEFCON 1 resulting in a nuclear standoff. And with it a quasi-Orwellian world begins to emerge; the oil fields are divided up and they then retreat into their nuclear fortresses where the priority is maintaining the nuclear fort, the military/industrial complex. But the threat that each poses to other is manifest; a constant strain on the psych until one or other breaks and unleashes a nuclear apocalypse. 

The thing is, all things considered, we are just bystanders to history. And as such, it is a scenario among others (social unrest) that could lead to martial law and global conflict. So the question is: how do we avoid the end of all history and get to the end of history? However, before we go there, it's necessary to complete the narrative and bring events up to date. 

During the golden age of capitalism the reigning paradigm was democratic capitalism; a period of relative well-being where capitalists and unions coexisted. But as global competition increased, it put downward pressure on wages and in 1973 the U.S. entered an era of wage stagnation. Following that, in 1976, trade surpluses turned into continuous trade deficits with a corresponding loss of jobs and wealth.

A tough time for America and even tougher time for President Carter: an oil shock, rising prices, the Fed raising interest rates and so stagflation and an all time high in the misery index led Reagan to ask the nation: are you better off than you were four years ago. So without even thinking, they elected Reagan in a landside and the Senate went Republican for the first time since 1952.

Reagan, in his augural address made it abundantly clear: “In this present crisis, government is not the solution to our problem, government is the problem. It isn't so much that liberals are ignorant, it's just that they know so much that isn't so.”  

Under Reagan the assault against liberals, unions and the Federal government  (the quest for lower corporate taxes and fewer regulations) began anew. Never mind that taxes, no matter how they are spent, whatever government takes in, it equally puts out in demand and underwrites those that whine, moan, and complain the most. Never mind that the New Deal provided  long term mortgages with low down payments and interest rates that set off a housing revolution that drove economic prosperity across the board along with Social Security that stored up demand. Nonetheless Reagan set the nation on a path (and a Republican mindset) where the marketplace god would provide the solution.  And if there was some hope for a progressive solution within the Democratic Party it was dispelled when Clinton became president. 
In his 1996 State of the Union Address, Clinton told the Nation: "The era of big government is over."  Clinton became a Third Way Democrat embracing neoliberalism and deregulation. He signed into law NAFTA and the repeal of the Glass-Steagall Act, and granted socialist China permanent trade relations paving their way into the World Trade Organization. The Democratic Party was the party that represented the interest of workers and the progressive movement. It was the party because Clinton threw the workers under the bus and threw in the towel for new ideas.   Our faith and fate was now firmly in the hands of the marketplace god and the bourgeoisie were firmly back in power.  There were no barriers to trade, no barriers to multinationals, and no barriers for socialist China.  

And what of Obama, he flipped  from Keynesianism to neoliberalism as he tables the Trans-Pacific Partnership. The Reagan Revolution marches on; the marketplace god is alive and well with the expected results:  small business failures have exceeded startups (perhaps a combination of stagnant wages, rising rents and too many entrepreneurs chasing the same customer), factory workers are losing jobs while factory orders again fell into negative territory.  Overall manufacturing is in free fall: a record deficit in manufacturing trade,  a manufacturing recession and a decline in exportsElsewhere: GDP in the Eurozone stands at 0.3 percent, Japan dodged a technical recession; while South Korea, the UK, and Canada are in the doldrums.

Yet, despite these indicators, the Fed, bolstered by surprising job reports and the unemployment rate at 5%, took its first baby step towards normalizing interest rates by raising the Fed's fund rate by 0.25%   In doing so the Fed is expressing confidence in the economy and that would be a good thing except the dynamic in play is population growth that has been sheltered by the dollar umbrella.

Yet, following the rate hike, manufacturing in China and the U.S. continued to contract (along with a slowdown in construction) spooking global markets, retail sales for December contracted and 4th quarter GNP came in at 0.7 and for the year GDP grew at annual rate 1.8 percent. Along with a decline in manufacturing the service sector is starting to cool down along with the demand for loans.  December's jobs report was revised down and January's job creation came in at 151,000 and Wall Street took another tumble. Recession fears are on the rise while tensions between the U.S. and Russia and China continue to mount: Russia in the Ukraine and China in the South China Sea. This is the world we live in.  It's time to take charge.

 That means moving beyond Marxism and capitalism. Theories themselves that are not only bankrupt, but their final end product is MADness.  So change begins with the realization that these ideologies are just theories, and when the theoretical fails, what is left is the practical: simply doing what needs to be none. Or put another way: manning up and consciously, coherently, and purposely meeting the consequences of our being. That's the political ideal; that's the will, but what about way?

Right now nations debt ratios to GDP  are disturbing, especially in the U.S. Still nations subsidize domestic industries to better compete in the global marketplace, to support needed development, health care, or just good old crony capitalism.  This is all possible because of fiat currencies.  What this is leading up to is this: if they can rationalize this illusion as sustainable then we can rationally do what is necessary for building a sustainable global economy simply by printing our respective currencies (no borrowing or raising taxes) and subsidize what needs to be none.

True, there's no denying there is a  perceived problem here: hyperinflation. But inflation here is a result of currency markets responding to what they see as flagrant  abuse of currencies, so they devalue those currencies. A weak currency leads to import inflation (think oil) which sets off an inflationary spiral creating socioeconomic chaos. But if it is accepted as a common practice that benefits the whole, if it is a collective will, then there is no problem. So what to subsidize? A good place to start is with algae fuel.

In the United  States the Treasury, the underwriter of the Federal Reserve, cranks up the printing press and subsidizes the production of algae fuel (including labor) to the point it is competitive with oil. As we wean ourselves off oil to power our cars, trucks, trains and planes it puts us on path to energy independence that leads to a corresponding decrease in greenhouse gases and an increase in employment and global trade.

Looking at the Eurozone, where member Treasuries cannot print euros, the European Central Bank can subsidize the development of algae fuels in Greece, or for that matter in  Italy, Portugal and Spain, increasing employment while putting the Eurozone on a path to energy independence. 

We also have to put us and world on path to self-sufficiency. Having a goal of rebalancing the global economy, or just reindustrializing the U.S. would bring us back to Marx's world of overproduction.  Using the U.S. as an example, as it reindustrializes with the long term goal of self-sufficiency, it is still a player in the global economy, it is a different kind of player. It not only exports consumer goods to the developing and underdeveloped nations, but also exports the means of self-sufficiency; the factory parts for assembly along with brand and technology licensing. And in some sense we subsidize them. There is no way the U.S. is going to rebuild its industrial plant without global wage parity. And the only way that can be achieved is through wage subsidies and that in turn lowers the cost of our exports. There is no problem here, the amount of work to achieve this end will keep all industrial nations humming until the task is completed.

No doubt there will have to be a general agreement, another Bretton Woods that hammers out the details. However, while reason prevails, it in itself doesn't represent the end of history but the beginning of the end.

When all nations become self-sufficient they will have gained full monetary independence.  As such individual nations, via the printing press, can fund their governments, social security, health care, education and guarantee a minimum standard of living. When that day arrives we'll have reached the end of history. Not the end of the industrial revolution, replacing workers with machines, that's ongoing, and will eventually come to an end. Yet, while it is ongoing, it doesn't pose a threat; there's still a lot work to be done.  And as technology advances it may take the bulk of agriculture indoors.

There is also this: as nations industrialize and urbanize, their populations tend to stabilize that along with recycling will lead to a sustainable planet. And as we agree to agree ideological conflict falls into the ash heap of history; along with the struggle for markets or resources and wars for such ends.  

So, it's all about getting there. And getting there isn't done in one great leap; it is an incremental process. Right now nations can agree to subsidize the development of algae fuel just by doing it. Following that up, say in the U.S., would be wage subsidies for steel, copper, and aluminum and rare earth elements necessary to rebuild our industrial base and infrastructure; a fundamental step towards self-sufficiency.

And while America, as it spans a continent, can easily turn to self-sufficiency, other nations not so endowed will have to follow the example of the Eurozone who out of necessity will eventually have to shift from a fiscal policy of austerity and adopt a
fiscal policy that's capable stimulating the member nations.

Still, going forward, we then have to think how to reduce our debt. Since Social Security and Medicare make up the lion's share of our budget we can subsidize both to the degree where deficits are eliminated and surpluses are created sufficient to eliminate taxes for the bottom tier of workers, fund needed infrastructure and even give a bump to Social Security benefits to those in need.  There are no negatives here;
the global economy is dying from lack of demand. But understand the transition. As we turn back to democratic capitalism guided by the visible hand of reason Marx's dictum that everlasting uncertainty and agitation distinguish the bourgeois epoch from all earlier ones is replaced with a calm certainty. That's change we can live with.