Insanity, the old saw goes, is doing the same thing the same way and expecting a different result.
The essential insanity of the last decade has been this – by creating a vast dollar glut, the United States has managed to create an inflationary rev up of the world economy. By moving much farther up the curve of diminishing returns of oil production, it has manged to create a small amount of extra growth, and a great deal of extra profit and ownership for those involved in the oil production.
The back end of this is flooding the middle east with dollars, which allows theocratic, dictatorial and criminal regimes to fund various destabilizing activities. Both the US invasion of Iraq and the Israeli invasion of Lebanon were the second part of the insanity – that the brute miltiary instrument could be used to deal with the second order effects of the dollar glut. The continuous failure of this policy benefits both extremes – both the oilarchies which can fund radicalism, the militarism of the right wing, and the conflict between the two which persuaded ordinary people that they must choose sides.
The accelerating hysteria of the right over the rise of “islamofacism” – an absurd construction if ever there was one – is matched by the ever accelerating anti-Israel and anti-Americanism of violent extremist movements. However, it cannot be underlined enough that these movements are funded by the oil appetite of the West. If the US wants to impose discipline on the oil producing world – if it wants dangerous loose canons tied down – it has the simple expedient of dramatically cutting oil consumption, or the less simple road of creating a neo-Bretton Woods standard based on a constant price for a barrel of oil with externalities factored in.
The rockets that Hezbollah launched, and the bombs the Israelis dropped on civilians were, both, ultimately paid for by American consumption. Between 1998 and 2006 the American public has voted 4 times to damn the torpedos and go full speed ahead, confident that “kick butt and take names” will work as well in the Arab world as it seemed to in dealing with the cocaine crime epidemic.
Over and over again, large majorities of the American public have backed using force to crush the after effects of our own oil addiction. Each time the result has been more oil consumption – since our military, being highly mechanized and integrated into an air land battle system that uses jet fighters, medivacing and long range logistics – and because the whole point was to flatten any bumps in the road to more and more frenzied consumption of oil. Either withing the US, or in the development and industrialization of nations where we off shored manufacturing in order to free up labor for services and home building.
In short, an invasion of Iraq might have worked if coupled with austerity, but it could not work with rampant inflationism.
This process suits the opposing tendency just fine. There is no circumstance more fertile for the elevation of radical extremism than a flow of almost uninteruptible money, combined with unrelenting hostility from the very people who send it in barrels. Iran pumps 4 million barrels a day of oil. Oil is currently around 72 dollars a barrel. It was once the target of OPEC to get 25 dollars a barrel. This means that Iran is making nearly 200 million dollars a day from the elevated price of oil, and this is pure profit. The need to hold nominal macroinflation down has reduced the price of manufactured goods through the floor. This means that missiles, guns and other accoutrements of war are less and less expensive. Not only does Iran have more money to pursue a policy of instability, it is cheaper to do it, and the very policy itself boosts the price of oil. Consider that the month long Levant crisis has added, on average, 3 dollars a barrel a day to the price of oil. That is roughly 360 million dollars for Iran. Far less than the cost of funding Hezbollah, and even funding a good fraction of the rebuilding of Southern Lebanon as an extremist enclave. Think of it as terror arbitrage.
In order to maintain this polarization, racism is almost inevitable. The racist and anti-semitic images in the Arab press are, by now, well understood. However, with the the US, in political cartoons and in official statements, anti-Arab racism has become acceptable. A simple example comes from yesterday in Boston – a woman on a flight from London to Dulles suffered a panic attack, she began behaving in a disruptive and dangerous manner, and was subdued. The jet was rerouted to Boston’s Logan airport, where bagage was checked and security authorities called in. The local Fox affiliate siezed on an unsubtantiated report that the woman was of Middle Eastern extraction.
She turned out to be a middle aged woman from Vermont.
Racist cartoons in the US press are more frequent, as are pronouncements from public officials that everyone not completely in favor of the present course in Iraq is pro-terrorist. Lieberman accuses Lamont of being an Al-Qaeda dupe, Bush intones about “Islamic Facism”. This is all nonsense, but it is being shouted with increasing hysteria, because it is only by continued polarization that the present course can be maintained.
That there are a host of political observers who blame the Democrats for polarization is par for the course – the polarization isn’t between the two American political parties, but between those that are willing to put the monetary pedal to the metal, and think that M1 tanks will fix the problems that M1 money supply causes – and those who understand that this every accelerating insanity cannot last, and is not working. Sadly, people who ought to know better, like say, former Treasury Secretary Bob Rubin – cannot put their money where their brain is. Intellectual Secretary Rubin understands that current borrow and squander policies don’t work, but emotionally, he is swept up in the polarization as much as anyone by making large last minute donations to Joe Lieberman. He’s not alone, merely the most prominent example.
One reason why there is a revolt within the Democratic Party, is not from peace activist members of the left, but among people who could be called “The Children of Volker” – such as this former central bank member and this tax attorney. The growing anger at The Mess that Greenspan Made is rooted in the realization that inflationary money supply expansion creates the incentive to instability, an incentive which is being exploited by those that fund the insurgency in Iraq – which, if it needs to be pointed out, is not an economically viable entity, nor is it limited to merely Sunni rejectionists at this point.
This incentive to instability creates a no lose proposition for those involved. The higher the stack of monetary plates grows, the more pressure there is for the Federal Reserve to “laissez les bonnes temps roulez” and cushion energy price shocks with too many dollars, because the down turn will be so painful. The more loose money, the more incentive there is for those that profit from instability to do so, because they will then get more of those dollars. The prisoner’s dilemma is now in charge of the monetary policy of the world, as betrayal by oil producers leads to betrayal of inflation fighting by the dollar producer, which sets up another round of double betrayal, since neither group pays the price of the lowered real wages, lowered job creation, lowered investment available for industrial and economic development in the core nations, and political fall out for the failure of the developed economies to provide the expected standards of living for their citizens. The arab street doesn’t know any better than the crumbs they are getting, and main street doesn’t think it can do any better than the crumbs they are getting.
Facts of life – such as the draconian bankruptcy bill – mean that even those who understand how the situation is ultimately unstable realize that they, personally, will be ruined if and when it blows up.
This cycle indicates that there will be a two stage political upheaval. The first will be the rebellion of the moderately insane. Those who think that the problem is not the general idea of inflationism backed by militarism, but with the way it is being done. The present management looks pretty incompetent, until one realizes that they almost perfectly judged exactly how much money they could extract from Iraq, and how much they could slash Federal Revenues. Despite, as economist and former Treasury official J. Bradford Delong puts it, having economic policy from “the gamma quadrant”, a reference to Star Trek Voyager thrown outside of the FFederation by thousands of light years, the result has been substandard wage growth and a short economic cycle, but not a lack of GDP and productivity growth, and the best corporate profits since the early 1960′s.
It isn’t that the present managers of the borrow and squander policy are incompetent, it is that they are at the ragged edge of disaster from a policy which gave them only so many resources to invade Iraq with. And despite these resources being woefully inadequeate, they have managed to avoid a complete meltdown in an occupation which is increasingly beleaguered. This is an essential paradigm conflict, the powers that be in Washington, even reporters who have documented the “Fiasco” of Iraq, such as Thomas Ricks, still support the concept of “winning” the inflation/militarization cycle.
The reality of the other position is that while it rests on an increasing unwillingness to trade stagnation, pressure, loss of opportunity, militarism and blood for SUVs and bigger McMansions, also rest on a relatively straight forward assertion that the shift in production from housing and financial manipulation to production, energy and research is acceptable. That is that the disutility of going to a capital energy system is vastly overstated by those who are benefiting from the current extractive system. It may well be so that the beneficiaries of the current system will not be anywhere near as well off under a different one, but it is far from clear that the total well being will be far lower. As the housing bubble pops it will be realized by home buyers that the gains were realized by home builders and mortgage companies, and not by home owners themselves. Since home owners are the electorate in much of the US, if they are unhappy, no incumbent is safe.
One reason I advise new investment strategies to large companies and others, is I see that this present road dramatically increases risk, without dramatically increasing profit. The last few years have not really increased profit, but have merely borrowed and accepted much higher structural and regulatory risks in the future. The pricing of options is merely the tip of the iceberg, where risk was offloaded from present executives on to share holders, and from present shareholders on to future share holders. Sooner or later, however, risk comes due. One cannot generate higher returns without higher risk, merely shift when those returns can be captured as profit.
As noted above the simplest road to ending this instability is by brute neo-classical austerity of the Volker variety. It is a crushing road, and leads to massive disruption. It also works, and is conceptually easy to implement, merely raise interest rates until money supply contracts. It risks a deflationary spiral, and ruins those who bet too heavily on inflation. The bail out from this will eventually come to rest on governments.
Another road, less talked about, even though often hoped for, is a return to what amounts to a single global currency, based on a single commodity of fixed price. Instead of gold, the logical unit is the sustainable barrel equivalent. That is a barrel with the price of depletion and global warming factored in. This price would be set on a single world market, and then providers of energy would bid to fill available demand, central banks would have to maintain a monetary policy to harmonize their currency with this price, and that would regulate both interest rates and direct trade policy.
The disadvantage – greater difficulty in hedging against economic fluctuations in different nations – will be offset by the ability to hedge against fluctuations in energy – and a reduction in the fluctuations themselves. As importantly, it will move the global monetary order back to one where a few players cannot betray in tandem and gobble most of the benefits of global growth.
Insanity, as noted, is attempting to do the same thing the same way over and over again and expecting a different result. Stacking corrupt resource economies with money, over and over again, leads to aggressive militarism and aggrandizement by their leaderships. It is no accident that the arab states were most willing to come to terms with Israel when oil was trading in the teens, and are unwilling when oil is trading over 70. It is no accident that Saddam was easiest to contain when his oil revenues barely covered the cost of his personal body guards and security forces. It is no accident that since the explosion of energy inflation Russia has turned back to autocracy, and there is a rise of hard left populism in resource rich Latin Americna countries.
The liberal, and neoliberal, vision of capitalism, markets, democracy and open societies is the product of preventing short easy outs to boom prosperity. Many of the would be supporters of such a vision have attached their stars to a policy of inflation and militarism which is in direct conflict with that vision, and are so terrified of seeming “weak” that they will not see that the course they have set is rapidly destroying what was built in the 1990′s to achieve a global order based on trade and diplomacy, with force used only on the margins.
It is socialism and plutocracy that flourish in resource eras, because in such eras there is only one really economically productive activity – resource extraction. Either there is the decision to confiscate the profits and distribute them according to the vision of an elite on the top, or there is the decision to allow those who make such profits to keep them and be the elite at the top that decides how the procedes are to be distrubuted. Either way, the society collapses to a closed society which is a perpetual fight to control the spigot.
That is the basic choice of political economy of this age – to return to a system which is focused on capital, and therefore on the relationship between labor and capital – or to continue with a system focused on rent, because energy extraction is a rent, and thus on the use of military force to control that rental structure and protect it.
There is no third course.