Sunday, January 25, 2009

Undigested Thoughts On The Present Economic Collapse

I haven't had a chance to sort through all the elements of what I've been reading regarding present economic conditions but I wanted to get down some preliminary thoughts. It's clear that things are bad. Very bad. The UK may well be driving down the fast lane on the road to Iceland. That is, it may be approaching a situation where its insolvent banking sector is too big to allow it to fail and yet it is too big to save - ie. the government can't afford it because no one will lend them the money. Or, if they go to the IMF, the IMF may well not have sufficient money. If that were to happen, look for disaster to unfold - a collapsing currency, a government forced (according to the rules of the game) to impose austerity measures against its population, and other such notable treats, as outlined by Nouriel Roubini:
"At best, the UK faces an economic and financial crisis that will be as bad as the US one: a severe and protracted recession that could last two years with very weak growth recovery once it is over; a near insolvent financial system, most of which will be formally or informally nationalized; a large fiscal costs of budget deficits surging because of the recession and the bailout of financial institutions; a weakening currency that may risk a hard landing if the crisis is not properly managed. "
It used to be that Roubini would outline the details of what the worst case scenario was but he doesn't any more. Could it be that even "Dr. Doom" is afraid of what might happen?
But lest you think it's only Britain, we shouldn't forget America's spiralling economy. The latest figures out regarding housing starts indicate the biggest collapse since records were kept, back in 1959. Just look at the graph, it's got a drop so sharp even one of those pot-smoking rock climber hippies would shit their pants. And it doesn't look much like its bottoming out.
It could be worse, of course, you could own an import/export business in Japan. The same report(pdf) that highlighted the collapse in US housing starts also points to the collapse in Japan's imports and exports - particularly exports. 
"December imports contracted by 21.5% on the year and were up by 7.9% for 2008 as a whole, but exports fared much worse, posting respective changes of -35.0% and -3.4%. This dragged the annual trade balance down to $20.4 billion, a level not seen since 1983 and a far cry from the 2007 tally of $92.1 billion."
In the face of this kind of global collapse in demand, alongside the spreading implosion of the international financial system, it is unclear what fiscal stimulus packages, such as the one planned by our very own Tories and the stratospheric one being mooted by Obama, will actually do to save the economy.
Obama and the Tories are both trying the same halfway house measures between Keynesianism and neo-liberalism, a combination of infrastructure spending and tax cuts, as a means to try and maintain consensus within different wings of the ruling class. And while the Keynesian side of the equation is still timid, with the Tories, for instance, insisting on forms of spending that aren't permanent programs, such as healthcare or daycare. The neo-liberals, like failed presidential candidate Senator John McCain want "to make tax cuts permanent, and we need to make a commitment that there’ll be no new taxes.”
Of course this is ideology written by idiots, not true bourgeois class consciousness. After all, if they want to save their consumer driven economy, they need to get the vast majority of the population to consume. The trouble is, it is those people who are most fearful right now, facing job losses, the loss of their pensions - often tied up in investment plans that have nose-dived in value, and suffering from a debt hangover the could drop a moose. If you handout tax breaks, like Bush did in spring 2008, it has no effect on growth because the cash is applied directly towards paying down debt. Money invested in infrastructure at least buys goods - even though the companies and individuals who will be paid for those goods and their construction will also probably sink a hefty sum of their wages and profits into lowering their debt load.
And there is the rub of the problem, taking us back to Mr. Roubini. Does the US or any combination of governments acting individually have the political will or, frankly, the credit rating, to "deleverage" their nation sufficient that the debt blockage to further growth can be removed? It's not at all clear that the US can even achieve this domestically. Just look at the insatiable appetite of the banking sector scrambling for more cash, on top of the $700 billion it sucked back quicker than a light beer in a heat wave. And the banks are merely one expression of a problem worth trillions upon trillions.
And the problem is international - so if the US fixes their problem, it won't solve China's, or Iceland's or Britain's, etc. 
That's why there is no agreement on Obama's plan. Even Liberals are suggesting that it won't work, that it's not enough. And certainly, if the system continues to unwind the way that it has over the past year and a half, with housing starts in freefall, employment dropping quicker than the 1980-82 recession and the banking sector doing a fine imitation of musical chairs on the Titanic, then a program of new investment that will be smaller than the present banking bailout package, will have negligible effect. As an article in The New Republic noted, it was the massive and unprecedented spending of World War Two that ended the Great Depression.
"Most economists agree that what finally pulled the U.S. out of the Great Depression was military spending for World War II... in 1936, unemployment was still at 16.9 percent; by 1942, after two years of war spending, it was 4.7 percent, strongly indicating that it was war spending that did it. I am not suggesting that the United States start a world war in order to solve the world's economic problem. But I am suggesting a strategy that could be called the fiscal equivalent of war."
However, I would suggest, it was more than just the spending. It was also the destruction that was key. Then, like now, there was the capacity to create too many goods. It has been sustained up till now with the massive accumulation of debt. But that strategy has come to an end. Capital must be destroyed on a vast scale to re-open the vistas for further accumulation. America must reconquer her markets - and thus there are noises from the new Treasury Secretary about China's currency manipulation to sell its products to US consumers. The next step will be trade barriers. China's factories will close, creating the space for factories to open in America.
And this creative destruction will also have the effect of lowering the price of capital (and other inputs) relative to labour. Labour is the source of all profit - which isn't a natural phenomenon but merely a social creation requiring some common source of comparison, in this case labour. When the amount of investment in capital rises in relation to labour, profits tend to fall (though there are a whole number of means to countervail this, including rises in technological efficiency leading to a fall in the price of capital goods, etc). When the investment in labour rises viz the investment in capital goods, profits can also rise.
I'll stop myself here before I get too deep into a subject I can only half defend. Suffice it to say, even on the basis of the need to destroy other capital to conquer new markets or reconquer old ones - the ultimate expression of which is war - the present system is utterly mad and getting crazier every day. Surely we can come up with a better way to run the world than this.
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