Updated October 10, 2015
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. Then it was a mixed economy that kept national industrial economies humming and Bretton Woods that kept global trade in balance. It was the golden age of capitalism, a period when post war reconstruction created significant global demand and prosperity.
Yet with reconstruction came new factories, notably in Japan and Germany, and they began penetrating U.S. markets resulting in a drain on U.S. gold reserves. Nixon responded by taking the U.S. off the gold standard. 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. Left to currency markets, the dollar would weaken, raising the costs of imports while making their exports more competitive. The problem here is that the cost of oil imports would rise. I guess it was a trade off of sorts. The thing is, taking the U.S. off the gold standard in effect collapsed the Bretton Woods agreement. But it wasn't until the election of Ronald Reagan and the Reagan Revolution that things began to change. A mixed economy was out and neoliberalism, a return to laissez-fare economics, was in. Out too was détente 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, new thinking 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 rolled out, socialism was out and liberal democracy in. Seemed too good to be true. Even so, the thinking at the time was that we had reached the end of history: liberal democracy being the end point of humanity's social economic evolution. However, with the fall of the Soviet Union came the rise of socialist China, and here the revolution was crushed; the tanks were rolled out at Tiananmen Square.
Thus, the end of history was out and the ideological battle between capitalists and Marxists was still in play. And while they 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, i.e., mind over matter bringing about the end of history, but that the abyss still beckons. This is the world we live in. A world ruled by high priest ideologues who have put their faith and our fate in the hands of their respective marketplace god who has reveled to them the path to the promised land. So, how goes the battle of the titans 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. Socialism now is the primary stage where they capture the mode of production where the dictate is: to each according to his work that precedes the advanced stage of communism where the dictate becomes from each according to ability to each according to need.
And to get there they simply adopted an open-door policy. Here the chief characteristic is 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. It was a great leap forward based on Marxist gospel: they, the capitalists, must nestle everywhere.
However, when the multinationals (the highest stage of capitalism, self-interested stateless entities) , driven not so much 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. It is zero-sum game that should have led to a global recession as lost manufacturing jobs in the U.S. and elsewhere led to less demand; a disconnect between supply and demand. But as we'll see, events postponed the day reckoning. However, the underlying facts are that capitalism left on automatic self-destructed and 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. What that means is that while capitalism will eventually collapse, so too will socialist China as eventually the world demands less China, and China in turn demands less of world. What that means is chaos in the capitalist world while socialist China, having captured the mode of production, turns to communism. Hence socialism with Chinese characteristics.
And we are on the cusp. Right now the global economy is unbalanced and wobbling on 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 jobs, say to the United States, that's left to market forces. If jobs go anywhere, they'll go where labor is the cheapest. So, as to those events.
Looking at the United States, first there is the ever-increasing national debt that propped up the federal government and so propped up a significant part of GNP. Then there were bubbles and bubbles, toils and trouble beginning with
the dot.com boom that created jobs, paper wealth, and lot of capital gains and so a lot of capital gains taxes that together 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 even as the bubble popped dispelling the myth as the economy fell into a mild recession. Yet the fear was the economy might double-dip into recession: 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 own and Bush pushed the Ownership Society. 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. And as the price went up a bubble emerged; prices were going to go up forever. Eventually the market corrected as buyers were priced out of market, and the bubble popped.
Yet, 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. Compare that with 2014.
There was also indirect demand. Speculation was rampant driving up prices prompting flippers to enter the market 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, quite the stimulus package.
But it wasn't just a U.S. housing bubble, but a global bubble. And when the bubble popped, the global economy fell into The Great Recession.
The resulting crisis in the Eurozone puts into question the concept itself. Individual nations no longer have the power to print their own currencies. Would the crisis turn out different if they retained that right? We'll never know. But what we do know is that austerity isn't working (bailouts may have kept afloat Greece's government, but austerity measures are sinking its economy) and Europe remains on the edge of recession.
The Federal Reserve lowered interest rates and pumped more liquidity into the system and that together with Obama's Recovery Act led to 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; most 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 factory orders are more down than up. And while GNP hovers near three percent, understand that GNP reflects total goods and services. And since most goods are imported, it is services, small businesses from pizza parlors to retail outlets, that drive a consumer led economy. And it may be there is a saturation point, that is a point where supply exceeds demand; too many entrepreneurs chasing the same customer.
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 and globally. Yet while their exports initially surged they began to fall off.
But why the bumpy decline in exports? The simple answer is oil. China's rise required huge amounts of oil straining global supply pushing up prices.
China is currently demanding less from the global commodity markets, signaling a slowdown in the development of new cities (so-called ghost cities); perceived as the mother of all housing bubbles, and when it pops, 50 million migrant workers lose their jobs as well as those in upstream and downstream industries (such as steel, cement, glass, furniture and appliances) and the service sector. China's economy is collapsing and the industrialized world is wringing its hands. And China? Not only have they captured the mode of production, they've built hundreds of new cities. They've colonized segments of Africa. They are getting rid of the corruption. They are cleaning up the environment. They are getting ready to turn to communism: from each according to ability, to each according need. And those millions empty apartments, they don't seize them, they just print the Yuan and buy them from the current owners (a good investment after all). Yet, while building up their military, fortifying the South China Sea, are they ready for follows?
As global markets crash, global food supply chains break and panic leads to a run on supermarkets, a war of all against all breaks out and martial law is imposed giving rise to military dictatorships that may or may save the day. Yet... oil is the life-blood of industrial economies and the Middle East, already on the edge chaos, will plunge into total chaos. In an effort to assure their supplies the United States steps in militarily and Russia responds in kind resulting in a nuclear skirmish reducing the Middle East to a nuclear wasteland. They then retreat into their nuclear forces where they go into their versions of DEFCON I; cocked pistol and morph into a quasi-Orwellian existence 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.
A grim tale with a grim ending based on a true story, but for the sake of narrative, it wasn't complete or up to date. So once again:
A tough time for the nation 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, all of which prompted Reagan to ask the nation: are you better off than you were four years ago. So without even thinking, they elected Ronald 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.” He should have stopped after government is problem.
Under Reagan the assault against 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. Never mind Social Security that stored demand that underwrote the system. Nonetheless Reagan set the nation on a path (and a Republican mindset) where an unfettered marketplace 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.
And what of Obama? Fine fellow that he is, in the end he flipped to neoliberalism; throwing another trade agreement on the alter of the marketplace god. The Reagan Revolution remains in place. There was no audacity, there was no boldness, there is no hope... there is only the marketplace god.
So here we are: a Republican Party still in play even though it is the party that defends an unfettered market that offshored our manufacturing jobs to socialist China aiding and abetting their rise to a global power and now a formidable foe. A party still in play because of a relentless propaganda machine that distorts reality, preying on the susceptible fostering a festering base. In the process they have lured a significant number of workers to their side and given them their just rewards: lower wages. They exist because they still pedal a false consciousness that workers still buy at a high price; not so much lower wages, but that they have lost their minds. They are still functional in workplace, but they have lost the ability to reason. Government is till the problem despite the offshoring of jobs and the American dream. In the process of bending their minds they have created a base that now wags the running dog. It is the most ridiculous, absurd, and mean spirited candidate that rises in the polls.
What hope the Democratic Party now offers is a redistribution of wealth that in part will be further distributed to China. However, it is still the shepherd tending his flock and that too tends to stupefy its constituency despite it's live and let live social agenda and more conscious grasp of the challenges facing us, but there is no conscious plan to meet those challenges.
Meanwhile small business failures have exceeded startups. Factory orders are down again along with factory jobs and the economy added just 149,000 for September while August's and July's were revised downward; Exports are down and third quarter GNP may come in at dismal .09 percent while the global economy continues to contract despite trillions of dollars in incurred debt. But it is the upcoming earnings report that Wall Street is bracing for as earnings are projected to down fanning fears of a looming recession. Meanwhile tensions between the U.S. Russia and China continue to mount: Russia in the Ukraine and Syria and China in the South China Sea.
So what's the alternative to liberal democracy, that is, free market democracy?
What would constitute the end history, the end point of humanity's sociocultural evolution? I think we sort of find it at the end point of the industrial revolution when robots can assemble what autonomous machines manufacture (think cell phones) in fully automated factories.
By the time fully automated factories come on line, global populations will have stabilized, nations will be powered by renewable energy, grow their food in indoor farms, and recycle everything that can be. The interdependence of nations is no more, it has been replaced by independent nations that are self sufficient. There is no longer any ideological conflict, a struggle for markets or resources, no more wars for such ends, and no more environmental degradation. History as such has come to end and along with it we have reached the end of history. Self-sufficient nations are free to use their fiat currencies as they please. The U.S. Treasury, while underwriting the Federal Reserve by supplying (for a small fee) it with Federal Reserve Notes who in turn underwrites banks and so the private sector, can also underwrite the Federal Government, Social Security, education, health care and provide a decent standard to anyone in need. But that arises if we reach the endpoint. And what stands in the way is the marketplace god.
Right now nations are in debt up to their eyeballs, but 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 I'm leading up to is this: why can't we just print money (no borrowing no taxing) and subsidize what needs to be done.
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 their currencies. So they devalue those currencies proportionally. The result for those that do so, the price of imports (think oil) rise and in sync with the rest of economy sets of an inflationary spiral that creates 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.
Inflation could result if there is a shortage of necessary resources. But rising prices are signal to produce more. And if need be, we can subsidize labor to reduce costs. But, what about oil?
So first things first. We start by subsidizing the production of algae fuels (to include labor) to power our cars, trucks, trains and planes. What follows is a decrease in greenhouse gases and, an increase in employment
Next is reindustrializing those countries that lost manufacturing jobs to China and elsewhere. Reindustrializing here is for the home market. Just as algae fuel is about energy independence, this is another step to self-sufficiency. Otherwise we're back in the Marxist world: an epidemic of global overproduction. However, multinationals are not going to return unless wages are reduced to a point where they are globally competitive. So we subsidize wages here too. And all that money that they are hoarding, they can now bring home tax free and rebuilt our industrial base while pushing the automation envelope.
Next are the developing and undeveloped nations. These are the export markets. And what the developed nations export are just not consumers goods, put technology and factories. The problem is: can their exports be in equilibrium with their imports. That is, can they afford to industrialize? To become self-sufficient? Probably not.
So one nation, or a group of nations subsidizes their industrialization to the degree they need to keep their economies buzzing while they move to self-sufficiency.
This is the end of the marketplace god and the beginning of the end of history. But this a simple outline and requires a gathering minds, another Bretton Woods to put some flesh on these bones. And that takes time. And time shortens as the crisis unfolds. So bear that in mind.
And while you're thinking about that, think about this: global warming is in play: extreme droughts, extreme winters and extreme weather along with raging forest fires are going to require some subsidies to meet the respective challenges. Take a look at California. Even if the forecast of a strong El Nino materializes, it's historical impact mainly effects the southern part of the state. Couple that with the fact its main reservoir, the Sierra Nevada snowpack is disappearing with global warming the situation there remains dire. And California is too big to fail.