The Return Of Stagflation?

Those of us around in the 1970s will remember the term stagflation - a combination of economic stagnation and inflation that created a conundrum for bourgeois economists: do you move to rein in inflation by tightening credit and imposing wage and price controls - or do you seek to boost economic growth by loosening credit and "priming the pump" by injecting billions into state directed projects. As it happens the first thing they did was attack workers by imposing wage controls (price controls were bullshit), either through direct legislation (Canada and the UK) and/or by encouraging open war on the collective bargaining right of unionized workers (Reagan's firing of 10,000+ striking air traffic controllers). That was combined with interest rates that went through the roof - up to 20% at their peak. Then, once the working class was defeated, there was a return to loose money - Reagan increased military spending (and thus the deficit) massively, there were big tax cuts for the rich and policies that encouraged the growth in speculative investment (and, thus, stock and property bubbles).

Well, if you liked that economic bloodbath the first time around, get ready for the next round.

First off, the damage - both social and economic - from that first battle against stagflation is still with us. The North American economy is much more "financialized" than it was before. Speculative bubbles - that roam from sector to sector; now in stocks, then in tech, later in housing followed by commodities - continue as a matter of policy in an attempt to keep the economic inflated. In fact, price and credit inflation - combined with social and wage austerity - is the economic policy of western governments to this day.

But they face a problem that is the result of the success of these policies in many ways. The Chinese miracle is, in part, a product of the fact that increasingly squeezed western workers, particularly in the USA but also in Europe, need the cheap goods produced in the sweatshops of China to sustain their standard of living along with access to easy credit. China's export led boom can't be separated from the boom in debt in the west - total US debt, private and public, is now close to 400% of US GDP. Nor can it be separated from the decline in unionization and real wages (which includes the "hidden" social wage of services previously provided by governments and now privatized - from public pools and community centres to welfare and unemployment insurance rates, pensions and healthcare).

The debt/sweatshop model could work for a while but it reaches its inevitable limits when debt simply can't grow any further; consumers and businesses can't afford to add any further to their debt servicing costs. Oh, this can be creatively skirted and hidden for a while - the exotic debt products of the first decade of this century proved that. The crisis of 2008, however, was a sign that the debt shell game was coming to an end. Massive state intervention was able to prevent total economic collapse but it can't wish away the debt loads held by everyone and that means that growth will, at best, remain sluggish after the brief episodes of state intervention end. In weaker countries, like Greece, it means the threat of default as international bankers, the lowest form of human, try to push a program of massive debt privatization - so that they can recoup state loans as though depressing consumer demand will somehow save an already depressed economy.

These recessionary pressures are bad enough but the boom in China - itself fuelled by debt, perhaps half of it bad - has had the effect of jacking up global commodity prices. This creates a conundrum for China - on the one hand capital investment (infrastructure, new manufacturing plants, etc) has led the growth in China, as opposed to a growth in consumer demand. That means that China needs a higher valued currency to lower the costs of imported raw materials. But it needs a cheaper currency in order to keep their goods - for which there isn't a sufficient internal market - cheap for export. The Chinese leadership is trying to change the balance between capital and consumer investment but faces lots of hurdles.

While there is much talk about the "efficiency" of the one-party state in terms of being able to rapidly implement policy shifts, things aren't that simple in a country - and an economy - this size. The rapid growth of China over the last thirty years has created a large, wealthy and very powerful capitalist class, primarily concentrated in the coastal cities. They have regional fiefdoms that are dependent upon cheap and plentiful credit and infrastructural and capital investments (and corrupt kickbacks therefrom). And they have a number of tools at their disposal to resist the central government's attempt to change the priorities of investment. One of them is simply to create an underground credit economy to loan money for projects as they see fit - it's estimated that close to one third of all new loans in China are through this sector. The other mechanism is to simply send money offshore to tax havens before cycling is back into China to invest as they see fit - over half of the $1.1 trillion in foreign direct investment into China is, in fact, money of this sort and not really "foreign" money at all. Foreign investment has, in fact, stagnated for over a decade.

The Chinese government also faces pressure from the ordinary people of China - workers and peasants - who see and feel the results of the "Chinese model" of development first hand. Peasants are expropriated by regional governments for their pet projects - from dams and wind farms to chemical plants and other manufacturing facilities. Workers see the investment boom year after year after year and haven't seen a commensurate amount of wealth "trickle" down to them. This has led to mass - though still fragmented - resistance. In March of last year, in the town of Huaxi, 20,000 people took over the town and threw out the 3,000 local cops, then burned police property and, get this, sold tickets to the rebellion. The revolts are having an effect - many companies are giving pay hikes of 20-40% in order to end strikes and rebellions by workers.

The failure of the Chinese government to effect the sort of change that the entire leadership in China - in words - recognizes is necessary, means that pressure is building that is effecting the global economy. Commodity inflation is killing the fragile economy in Europe and America (oil economies like Alberta aside) as more income and profit goes to just covering the basics. Back in China this translates into a slowing of the export-oriented manufacturing sector - still accounting for about half of GDP (I believe). So, China and the world face the combined impact of an over-heated Chinese capital investment sector, leading to global price inflation (and to wage inflation inside China) and the potential return to recession. With even less room this time around to use the instrument of state investment to prevent the return of economic crisis - because of high debt and high inflation - it's unclear what governments will do this time around. Pray, I suppose. Or fiddle - while Athens, Rome, Madrid, et al burn.

Some links:
FT.com / Comment / Analysis - Global economy: A high price to pay

Brake in manufacturing momentum in Europe, US, Asia - The Economic Times

Dissecting the Chinese Miracle | STRATFOR

10 Global Signs That the Market Is at a 'Tipping Point' - Seeking Alpha

MacLeans Magazine Is Right! Lock Up The Thugs!

Democracy makes MacLeans froth like a dog

I never thought I'd say that I agreed with that bile-oozing catalogue of demagogic, Tory-fellating asininery that is meant to be our version of Time Magazine. These toads give new meaning to trollness. That's why I was surprised to find myself in total agreement with this week's front cover title - "Lock them up: Why the G20 thugs don’t deserve any leniency - Canada"

Dammit, they're right. Those G20 thugs should be locked up and the key thrown away. Why just last week the US military killed a bunch of people in Afghanistan. And Harper spent $2 billion to host these miserable cretins, including the oppressors of Tibet (China), the blood-soaked British Empire (retired), and the god-awful French who still find time to keep their claws into parts of Africa, not to mention treating their own North African population like utter shite. Never mind that France, the US and Canada played an important role in deposing Jean Bertrande Aristide, the democratically elected president of Haiti, in order to replace him with death squads backed up by Canadian and UN troops - who committed a massacre in 2005 in Cite Soleil. These thugs came out of this summit with the plan to impose austerity (read: layoffs, tax breaks for the rich and massive service cuts for the rest of us) on the majority of the world's population. I mean, what would you call any group of people who lash out uncontrollably, leaving death and destruction in their wake - sociopath, perhaps but thugs will do for me.

Oh, wait. I misunderstood the article. MacLeans meant that WE are the thugs. Shee-it, what was I thinking?

"Only the professionalism and preparedness of police prevented circumstances from being much worse. Rather than an inquiry, we need further police effort to ensure every one of those lawless thugs is brought to justice."

Ha ha ha. Are these guys serious? They must have been drunk when they wrote this. Or, embarrassingly, it was written by some boob who'd only managed to catch Christie Blatchford's trollish and dubious take on events. Somebody ought to tell this writer, after all, that the government spent $1 billion on security, had 20,000 cops on the scene, and had infiltrated the main anarchist organization for over a year, and was therefore in on all the plans. If that's preparedness, then the bar has been set pretty low. But having ensured us that no matter what fuck-up the cops engaged in we were clearly hallucinating it or missing the point, the editorial dismisses the complaints arising from the largest mass arrest in Canadian history:

"It’s possible many of those arrested for breach of the peace were not directly involved in any violence. But they were released in a matter of hours. Canadians’ constitutional rights have survived the ordeal unscathed."

Let's see, 1000+ arrested, less than 20 charged with any offences. That's a charge rate of 2% - or rather, a failure rate of 98%. And given that the cops failed to do what they received $1 billion to do, the fact that they compounded that failure by suspending the civil liberties of everybody, doesn't reflect well on their, you know, preparedness. But, again, this utter failure to achieve any aims that one could regard as reasonable goals in the present circumstances - to permit business and normal life to continue uninterrupted by the G20 circus, to permit the citizenry to exercise their constitutionally enshrined right to express a dissenting an opinion - doesn't seem to disturb MacLeans Magazine, which fulminates that "whatever steps the police took to prevent [the black bloc from disrupting the Summit] were both necessary and welcome."

That's a pretty big blank cheque when, given the 5 metre high fences and 20,000 cops on parade - along with all the toys that the boys in blue love, from helicopters to sound cannons - there wasn't a snowball's chance in hell that anyone was getting anywhere near the Summit. All the cops had to do was sit side-by-side at the fence, sipping tea, and poking through the holes with a stick every now and again and nobody would have made it over, let alone inside the Convention Centre. The truth is MacLeans has a deeper agenda at play here and it is one that ought to chill our spines if these cockroaches ever got the reins of power.

"The protection of free speech and assembly can only exist when there is proper respect for the rule of law. Legitimate protest acknowledges the existence of state authority while providing a different point of view. "

This idea that the citizenry must exist in a state of servitude to the state, accepting its authority no matter what, is frighteningly reminiscent of fascist ideology. What if the state is corrupt or serving interests other than your own? Should Nelson Mandela have "acknowledged the existence of state authority"? How about protesters during the Vietnam War? Or those who fought against the laws of the Canadian state that prohibited access to abortion - or criminalized homosexuality? Clearly, MacLeans either hasn't thought through the madness that they doth preach or someone should give them a very basic lesson in the precepts of democratic rule, in which the state exists to serve the sovereign people and not the other way around. Or perhaps they know full well what those precepts are and are just honest about their view of the role of those of us who can only access power through mass mobilizations. Our role is to shut up or face the justifiable consequences.

Crypto-fascist kookery aside, the MacLeans article is like a sad, over-told joke, proclaiming as has been done again and again that "the global protest movement appears to be losing steam." What are they talking about? The anti-capitalist movement that had it debutante ball at the Seattle protests in 1999? Somebody ought to update these guys on the history of the last ten years. It's been rather tumultuous what with multiple wars, both those that Canada has participated in and those that we have supported - like Israel's thrashing against anything and anyone who might have a problem with genocide. The cycle of mobilizations has certainly seen its ups and downs, such is always the case. But with the conflicts that mobilized people not ending. With growing anger at Israel's treatment of the Palestinians and their supporters int he wake of last year's invasion of Gaza and the more recent aid flotilla slaughter. And with the bewilderment and bitterness that the economic disaster of global capitalism is causing, it is hardly the case that the "global protest movement" is going away. With general strikes rocking Europe and with 25,000 marching in Toronto - the largest mobilization since 2003 - if anything there is a renewed vigour. In any case, none of us need worry about our civil rights or the issues of the day, the important thing is that the G20 leaders agreed a consensus on what next.

At the end of the day, debate over street violence, protest and police ought to be secondary to the summit’s practical achievements. And the G20 summit did conclude on a note worthy of some optimism: a pledge to cut government deficits in half by 2013. While this only applies to the most advanced economies within the G20, it is still a step in the right direction. Bringing the world’s major economies back to fiscal balance is crucial to closing the book on the Great Recession.

This is a fitting closure to an obtuse and delusional editorial. As Nobel Prize-winning economist Paul Krugman and others have noted, implementing austerity when the economy is still such a mess is merely a recipe for an even deeper recession, perhaps depression. The threat at the moment isn't inflation generated by too much deficit spending. It is deflation, particularly in the face of a dramatic shrinking of money supply by reining in government spending. The Japanese could teach us a few things in this department, having done the same thing back in the 90s, causing what became known as "The Lost Decade". In a recent NY Times article Krugman argued that there have been two major Depressions in the past 150 years and that we are entering into a third. And this Depression will be the result of foolish economic policy, ie. imposed austerity at a time when stimulation is necessary. Claims that the crisis in Greece or Ireland demonstrate the need to slash and burn public services, pensions and wages are not rooted in reality, but in a destructive dogma.

I don’t think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between deficits and jobs. It is, instead, the victory of an orthodoxy that has little to do with rational analysis, whose main tenet is that imposing suffering on other people is how you show leadership in tough times.
And who will pay the price for this triumph of orthodoxy? The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again.

To my way of thinking, people who deliberately inflict pain on others to demonstrate who is in charge is the very definition of thug. And yes, MacLeans, I agree: these thugs ought to be hunted down and brought to justice. Let's start with you.