Thursday, February 19, 2015

The Marketplace God and the End of History
Updated May, 28, 2015
Walter Libby

The industrial revolution produced three type of people.  Those that thought markets self-corrected, those that divined that markets self-destructed and those who thought they could keep supply and demand in equilibrium.

I was the latter that held sway up until the early 1970's. It was a mixed economy that kept national industrial economies in balance and Bretton Woods that kept the global economy in balance. It was the golden age of capitalism, a period when post war reconstruction created significant global demand and prosperity. And it came to an end, notably, as Germany and Japan came up to speed along with the rise of the Asian Tigers and the United States began facing stiff competition and a drain on their gold reserves. Nixon responhded by taking the U.S. off the gold standard and manipulating 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, when push came to shove, those who thought they could keep supply and demand in equilibrium had thought wrong, and were pushed to side and neoliberalism was brought to the fore with the election of Reagan. And with Reagan came an escalation in the cold war.

Think about it in these terms. Following the dialectics of Marxism, the United States (the thesis) and the Soviet Union (the antithesis) cannot exist without constantly revolutionizing the mode of destruction and means of exchange: atomic bombs and ICBM's and the synthesis is this: eventually their numbers will reach a critical mass (a glitch) and great leap occurs, matter over mind, the end of all history.

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 that led to the collapse, but that they were allowed to do so. No tanks were rolled out, socialism was and liberal democracy in. The thinking at the time was that we had reached the end of history.  Seemingly, neoliberalism, an unfettered marketplace, was unchallenged. Our faith and fate were firmly in the hands, well... the marketplace god. However, with the fall of the Soviet Union came the rise of socialist China, history marches on.

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.  While adhering to Marxism it was decided they would take the capitalist road to industrialization. Socialism then 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.

So 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 based on gospel: they [the capitalist] 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.

Offshoring manufacturing and assembly to socialist China turned it into the so-called factory to the world while leaving in their wake rising unemployment in their respective countries of origin creating a global disconnect  between supply and demand that, so to speak, killed the capitalist marketplace god; left on automatic, it self-destructed. Not only dispelling the myth that free markets self-correct, but also changed the dynamics of Marxism: it is no longer a global epidemic of overproduction, it is centralized production that leads to a critical mass of globally unemployed workers as global demand for Chinese exports falls, which leads to less import demands from China and the global economy begins to slow down on its way to a day of reckoning. But that day has been off by various events that propped up the system.

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 are bubbles and bubbles, toils and trouble beginning with
the boom that created jobs, paper wealth, and lot of capital gains and so a lot of 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 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.

While the Fed initially lowered interest rates, it was Bush (the decider who decided to do nothing) who pushed the Ownership Society, and with it

the housing bubble that created 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.
As the bubble inflated prices rose that led to a rash of cash out refinancing that financed purchases that ranged from electronic gadgets, new cars and trucks to home remodeling.

But it was the global housing boom that propped up global demand.  

And when the economic bubble popped, the global economy fell into The Great Recession.  And we were a step closer to the day of reckoning.

While the Eurozone has its problems and austerity measures have been forced on its weaker members, the United States responded with 
Keynesianism;  fiscal and monetary stimulus. Obama's Recovery Act and the Fed's  pushing interest rates to rock bottom stimulated demand (here and in China) that led to a modest recovery; those too discouraged to look for work (the participation rate) are not counted, giving a positive spin to the unemployment rate. However the economy is nothing to cheer about: 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. Even so, 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 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 (as they demanded more from the world the world demanded more from them) and their exports surged.  However, exports peaked and began a bumpy decline with a slight uptick as the U.S. began to recover from the Great Recession.

Image result for china export charts

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.

And soaring prices took money out of consumers pockets.
NYMEX Crude Oil Price History Chart


(This is a scary chart in and of itself: $140 per barrel in 2008 and rising prices as we pulled out of the recession,  and that's with a lackluster Eurozone.)

Yet as prices soared they allowed producers in the U.S. to wring out tight oil from expensive to extract reserves; increasing global supply while giving a significant boost to the U.S. economy. So arguably without those investments in new cities and infrastructure, the global economy could have collapsed. And herein lies the anxiety; it's not only the collapse in oil 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. But to be clear, it's not a housing bubble, there is a population restraint on the number of new cites that can be built. It is not a matter of prices or occupancy, it's a matter of limits, and when they reach those limits, China demands less from world, and world demands less from China; and so begins the journey to the tipping point. Are there any more props left? Assuming not, how does/could the global collapse play out?

In socialist China,  they turn to communism: from each according to ability, to each according to need. Having captured the mode of production along with the mass production of ghost cites  and related infrastructure, their colonization in parts of Africa along with their waiting base in Angola, they are good to go, albeit not without some trepidation.

How does it play out in the rest of the industrialized world? Looking at the U.S, that depends on the canaries in the stock market, currently reading tea leaves, however, as the fog clears and they read the handwriting on wall, they begin a run on the stock market that leads to panic selling and a unprecedented crash.

There are three thresholds, each of which represent different levels of decline in terms of points in the Dow Jones Industrial Average. These are computed at the beginning of each quarter to establish a specific point value for the quarter. For example, in the second quarter of 2011, threshold 1 was a drop of 1200 points, threshold 2 was 2400 points, and threshold 3 was 3600 points.
  • If threshold 2 is breached before 1 p.m., the market would close for two hours. If such a decline took place between 1 p.m. and 2 p.m., there would be a one-hour pause. The market would close for the day if stocks sank to that level after 2 p.m.
  • In the event where threshold 3 is breached, the market would close for the day, regardless of the time.
Reaching these numbers are unprecedented, but so are the times. The crash may be put off, but there is no stopping the panic from spreading to the general populace. Telling the people we have nothing to fear but fear itself; now's not the time to panic; cool yours jets; all good advice in regards to a run on the  equities markets and banks, however when they look to their  cupboards and look outside and see the chaos, there is going to be a run on supermarkets. And when they empty out it's a war of all against all.

There is no revolution; there's just death and chaos. What happens next? It is either martial law or the Federal government taking total control under the provisions of the Defense Production Act of 1950.  Given the track record of our leaders, the rise of a military dictatorship looks to be inevitable.

Following World War II was the golden age of capitalism during which time democratic capitalism was the paradigm: the welfare state, unions and capitalists coexisted. It was relatively good times, the American dream was alive; all due to the global demand as the world rebuilt after World War II.  Yet as Japan and Germany (along with the rise of Asian Tigers) rebuilt their nations, they emerged as formidable competitors, and the dream began to fade.

Workers produced much more, but typical workers’ pay lagged far behind: Disconnect between productivity and typical worker’s compensation, 1948–2013
In 1973 wages entered an era of stagnation. Beginning in 1976, America began running continuous and increasing trade deficits (stalled in 2008 due to the Great recession as imports plummeted).

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 a all time high in the misery index, prompted Reagan to ask: 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.”  

So it's no surprise their reaction to the unfolding crisis was to become reactionary.

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 spend, whatever government takes in, it equally puts out in demand and underwrites those that whine, moan, and complain the most. Nonetheless Reagan set the nation on a path (and a Republican mindset) where an unfettered marketplace would provide the solution.

That led  to NAFTA and that great sucking sound. And what hope there was for some practical solution ended with the Clinton Administration.

In his 1996 State of the Union Address, Clinton told Nation: "The era of big government is over." While that's true--the revenues are not coming in to support it--it was Clinton's becoming a Third Way Democrat embracing neoliberalism and deregulation (signing into law the repeal of the Glass-Steagall Act) and paving the way for socialist China into the World Trade Organization that in effect ended the government role as an economic balancer. In so doing he threw in the towel while throwing workers under the bus.   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 communist China.

Even so, with The Great Recession Republicans responded by becoming even  more reactionary with the rise of The Tea Party. That the Republican brand gathers such a following is not unexpected. Conservatives, by their nature, are not critical thinkers; but they are master propagandists peddling a false consciousness that attracts a motely group of like-minded. And despite their disparate views, their intolerance, mean spiritedness, the  underlying factor is that the Democratic Party abandoned them.

Obama's embrace of Keynesianism and then his flip to neoliberalism, advocating  another trade agreement, advocating what necessitated  a Keynesian response.

That Keynesian response did create jobs, but jobs that only encouraged domestic consumption that in end fed our trade deficit. And trade agreements may encourage more trade, but they don't lead to rebalancing in the near term. Maybe in the long term...  the curtain is coming down. And as it does, the military will step in to fill the void and establish a military dictatorship.

First, they calm the chaos by assuring the nation with a clear and distinct message: Their first priority is getting food back on your tables (even it is MRE's). At the same time working to get utilities back on line, getting money in your pocket by the taking  over the Treasury (printing press) insuring health care, education, Social Security and unemployment benefits, so you can pay for your food, rent, utilities. Having control of the purse strings, and you, they then set about reindustrializing the nation and securing our energy future
while combating global warming with renewable energy; notably through the subsidizing of algae as a biofuel weaning the nation off of oil, natural gas and coal.   The military is your big brother now, you got to love him, he saved your ass. As far as saving democracy...  ?

Yet, here's what they won't say: global supply chains from food to oil are broken; nothing moves. Yet all eyes turn  to the Middle East and its vast reserves of oil. What prevails is a policy of: if I can't have, you can't have it; a nuclear scorched earth policy that turns the Middle East into a nuclear wasteland. All militaries then retreat back into their nuclear fortresses where they are already in their versions of  DEFCON I; cocked pistol;  don't mess with us. And while there is a deterrent here, the Chernobyl effect (in  the U.S., a hundred nuclear reactors melting down), it is unlikely to deter a cyber-attack, a biological attack,  a nuclear electromagnetic pulse; or combination of all, even in the likely hood of a  dead hand switch.  And it gets worse: there's no more football.
What can you do? Minimize the chaos and hope crazy doesn't prevail and
become a prepper. I don't mean running for the hills type of survivalist, but the home survivalist; stockpiling food, water along with general preparation. If you choose to stockpile bullets (thank you NRA), just remember to save one for yourself. And while you are preparing, so are the wealthy.  But they have to wonder if those that protect them,  really need them.

Of course is this is as optimistic scenario. It may be that their primary mission is to maintain  the military/industrial complex, reinforcing the nuclear fort;
those that can't play a supporting role, are superfluous.

In conclusion:  it is what is... until it isn't.

Part II The  End Point and the  End Game

The Road To Freedom

In the realm of the ideal:  Someday all nations will be powered by renewable energy, produce their own consumer goods in fully automated factories, grow their own food in year-round indoor farms and recycle everything that should be. And it is a given that as nations industrialize and urbanize their populations stabilize (currently industrialized nations populations have stabilized posing a problem in that it leads to economic stagnation and so have adopted (outside of Japan) immigration policies that is a solution and a problem as they increase demand while increasing resentment) so following that trend future global population growth will stabilize.

The net effect is that the global economy--the interdependence of nations--is no more; nations are now economically self-reliant and sustainable thus solving the economic problem.

Sustainable in that nations consume no more than they replace. More accurately, it is nations composed of sustainable cities that provide their own energy, grow their own food, and recycle back to their own manufacturing plants. What is not feasible locally is either produced at the regional or national level.

But it is economic self-reliance that is the key to prosperity. Since their currencies are no longer tied to a global economy, they are free use their monetary printing presses as they choose.

Using the United States as an example, the Treasury, while still underwriting (via the printing press) the Federal Reserve (and so commercial banks), now underwrites the Federal government (and so the welfare of the nation). Their are no longer any federal taxes. The Treasury now funds Social Security, healthcare, and education. Money piles up in meaningless money bins here just as it does for todays'  billionaires.

The marketplace goes about its business; all are still rewarded in relation to what they put in the pot, and people, depending on their ability to entertain themselves are generally happy.  Life is good.

This scenario is kept simple and put forward for two reasons. One, while simple, it is profound. This is the end of history: the end of the industrial revolution bringing with it the end of ideological conflict, the global struggle for markets, resources, wars, and environmental degradation. However getting there is a problem: the global  economy is unbalanced and wobbling on its axis and that is setting off alarm  bells both within the U.S. Treasury and the IMF. Their message is we have to do more, more consumption from those that can and more monetary and fiscal stimulus from those that can't.

What I'm hearing (and others; here, here and here ) is that the self-balancing ideologies, market forces and Keynesianism, have been pretty much kicked to the curb by history.

But if you continue to think in those terms, when you think about it, that means rebalancing manufacturing, reindustrialization in the affected countries, and that leads back to the absurdity of global over-production. So thinking about it means actually thinking about it. And thinking about it means thinking about means shifting from a global economy based on the interdependence of nations to the creation of sustainable self-sufficient nations. the. And that is not going to happen under the current ideological regime; whether it be the invisible hand of the marketplace or the visible hand of governments.

In the realm of reason there is the  theoretical; the foregoing Fine in theory, up until that point that history proves them wrong. However, in that realm, the  philosophical realm,  there is an alternative: practical reason. It is nothing more than doing what is it necessary. What follows is not an absolute prescription, but a thought experiment where the marketplace and government still a play role, here, we are the masters of our fate; we are the captains of our soul: through imagination we, consciously, coherently, and purposely meet the challenges that are the consequence of our being. This is the end game; a shift from the interdependence of nations

First national treasuries are going to have power up their printing presses (no borrowing and no taxes) to subsidize the necessary steps to achieve the end point.

The second step is obvious: replacing oil with renewable resources. The primary focus here will on algae fuel powering our cars, trucks, trains and planes.  What follows is a decrease in greenhouse gases, an increase in employment and an increase in global demand for consumer goods. Now comes the agenda for self-sufficiency and sustainability.

As the affected developed nations reindustrialize and push the envelope on automation, on their way to self-sufficiency, along with China, the new markets will be the developing and undeveloped nations. The developing and underdeveloped  countries are not only new markets for consumer goods, they are in the market for the mode of production. They export resources and the industrial nations export a fishing pole.  This is likely to necessitate the creation of currency zones/fiscal zones/development/zones where applicable.

What about the multinationals and the domestic capitalists who still worship the golden calf? The multinationals that nestled in socialist China, the promised land, having served China's  rise, are now being forced out while they a feeling an earnings pinch that is only to become more painful as the global economy continues to contract and dollar strengthens as central banks push for lower interest rates and quantitative easing. What to do with all that money they have stashed; use it or lose it. Maybe instead being the problem they might think about becoming part of solution. That applies to the domestic church as well. If not, where there is a will, there is a way, we'll move on without you.

And as long as nations are relying on their own resources, they can think about the degree that they  can subsidize the factors of production. And while you're thinking about that, think about this: California is in the midst of a four year drought and their reservoirs may run dry in a year or so. And California is too big to fail. Whatever needs to done, can only with subsidies.

True, there's no denying there is a  perceived problem here: currency markets frown on nations that print money in this manner. Consequently their currencies are devalued and the cost of their imports rise. To the degree they are dependent on global markets, everyone in business has to charge more, feeding a spiral that leads to hyperinflation. However, on other side of that coin, a weak currency makes their exports cheaper, they become more
competitive... if they can survive the inflationary chaos.

But if it is accepted as a common practice that benefits the whole, it is the solution. Are there questions, problems? Sure. There are solutions, and that means a new Bretton Woods that turns to the practical side as well.

About the author:

In and around forty years ago, in my early 30's, I wrote a short essay entitled The Need for Objective Leadership. Mostly it was a rant against the political status quo and unsustainable  urban sprawl. Objective leadership would depart from sprawl and plan the development of new cities along sustainable lines. Having said thus, I didn't know what was out there. So I began my search for new cities (back in the day search engines were library card catalogues) and came to find Columbia and the New Cities. Here I found
Ebenezer Howard, the author Garden Cities of Tomorrow. While perceived as the father of urban planning, he is the de facto father of sustainable cities and sustainable development. He founded a new town movement (re: EPCOT) that spread throughout the world  Howard was described, by Lewis Mumford, as a  practical idealist, and I thought: me too. While perceived as the father of urban planning, in fact he is the father of sustainable cities and sustainable development; I'm just standing on his shoulders. There was a number efforts following that first essay, but it wasn't until housing bubble popped and plunged the global economy into the Great Recession that I hit my stride and  in 2008 I responded with this.  So here we are in 2015, and as a practical idealist, I have presented by case, made my final argument, and while you deliberate, consider who is on trial, consider the tribulations, and consider the time as we move ever closer to midnight.
That said, it is in no small way that I'm channeling Alexis de Tocqueville, who, while observing Democracy In America concluded by saying this:

For myself, who now look back from this extreme limit of my task, and discover from afar, but at once, the various objects which have attracted my more attentive investigation upon my way, I am full of apprehensions and of hopes. I perceive mighty dangers which it is possible to ward off—mighty evils which may be avoided or alleviated; and I cling with a firmer hold to the belief, that for democratic nations to be virtuous and prosperous they require but to will it. I am aware that many of my contemporaries maintain that nations are never their own masters here below, and that they necessarily obey some insurmountable and unintelligent power, arising from anterior events, from their race, or from the soil and climate of their country. Such principles are false and cowardly; such principles can never produce aught but feeble men and pusillanimous nations. Providence has not created mankind entirely independent or entirely free. It is true that around every man a fatal circle is traced, beyond which he cannot pass; but within the wide verge of that circle he is powerful and free: as it is with man, so with communities. The nations of our time cannot prevent the conditions of men from becoming equal; but it depends upon themselves whether the principle of equality is to lead them to servitude or freedom, to knowledge or barbarism, to prosperity or to wretchedness.