Global Gloom

In history a great deal of time is spent on the ultimate crisis of an order, it is the time of mythic action, great good, and great evil. But less is often paid to the penultimate crisis, the moment before the moment. This is an error, because the ultimate crisis is the ultimate crisis because of the attitudes brought to it from the one just before.

At the point of ultimate crisis, certain groups, hammered by the previous solution, vow not to accept again terms of the same kind. Others, buffered by the previous solution, become complacent in their ability to impose, by force if need be, the same terms again. Some of the ruling elite become marginalized, they become so unacceptable for their insistence on the unsustainability of the old order, that they are reduced to the margins, or screaming. The ultimate crisis occurs because there is a polarization to intransigent confidence, by some, and hysterical marginalization by others. At the same time, a forest of fingers appears, each pointing blame at different things, and therefore prescribing incompatible remedies.

These attitudes are created, of course, by how the penultimate crisis is solved, often imposing pain disproportionately on a few. It leads to those who know they are paying forever for the past, and those who feel that they have a magic protection against consequence.

One of the reasons that we have not reached the ultimate crisis, is because this pure polarization has not occurred. Yet. However, many signs of it are visible in the spreading global gloom.

One is the distinct difference between predictions on the future. At the same time that Japan’s Prime Minister resigns over the economy, though we should note that he is more-popular than George W. Bush is at the present time, and Great Britain’s Chancellor of the Exchequer, their Treasury Secretary, has called this the worst economic crisis in 60 years in a public and wide ranging interview – economists are predicting that the coming recession will be short and shallow.

There is, as they say, a failure to communicate.

What should be understood is that from the perspective of the business cycle, we had a recession, not a hard landing, but a recession, in late 2007 to early 2008. We then had a rebound from government stimulus last quarter. However, because the recession was neither long enough, nor deep enough, to force the creative destruction of capital, this was accompanied by a burst of inflation.

The blame lies, of course, with two groups: the monetary authority for its decision to accept all of the risk from the bad debt of the last decade, and hand out fresh money in return, without taking any direction over the resulting financial entities. These entities, of course, flooded the money into the pockets of those in possession of the company. The write downs obscure how buy outs, golden parachutes, and assorted swap deals have prevented any major reorganization on Wall Street or globally. The same bankers who got us into this mess, by and larger, are still in charge.

The second group, of course, is the fiscal authority of the US. Namely the Rahmite Congress, unconvinced of the existence of a recession but willing to engage in their favorite pass time of handing out subsidies to the middle class to consume. The checks sent out were, as I said at the time, partial rebates on the inflation tax for some, who proceeded to do exactly what should have been expected: namely, they spent it on goods that were inflating. What Rahm should have done was just written a check to the oil companies of the world for 150 billion dollars, because that is exactly where all of that money ended up.

The problem here is that the progressive and Democratic spheres have embraced – the supply side economics of Reaganism – so long as their right to fuck is not going to be gutted. They run in fear from McCain, whose voting record is that he is somewhat less of a Reaganite than most Republicans on economics, for a Democrat who has, in his time in office, matched McCain vote for vote in the Reaganite theory that there is nothing that can be fixed by making profits that you haven’t earned, with money that you won’t payback, for things that people do not need. We are getting a choice between Ronald Reagan with social conservatism, and Ronald Reagan with less social conservatism. The center-left and left, after having spent decades complaining about neo-liberal, University of Chicago, reactionary economic theories, has embraced them.

The little people, in otherwords, have betrayed themselves, in order to get temporary respite. The activist class, including the vast majority of so-called progressive bloggers, have joined in this. However, the one experiment with Rahmite polices tried so far has been a disaster: a wave of inflation and an economic recovery that will last less than a year, with a global recession predicted by Christmas. And yet, the so-called progressive bloggers praise a speech that was lifted, almost entirely, from the Rahm-Schumer “The Plan” for the economy: massive subsidies for the middle class and ex-urban class, tax cuts, tax cuts, tax cuts, and little in the way of fundamental restructuring. Having supported a massive military adventure over seas – and Obama voted for every spending bill that came down, and every expansion of domestic spying once in final form – and supported Supply Side Economics attempted this time around to produce inflation and recession, the Democratic Party has committed itself, and committed Americans, to another Crooked Deal.

Obama’s plan will work, only because Bush is a catastrophe like Katrina, while Obama is merely Gustav: smaller, weaker, off target, and for which people are better prepared. While ending the 150 billion dollar semi-annual spending sprees will do a huge amount of good, Obama is steadfastly not going to do anything with the time that this will buy him. His economic core is “make the poor pay.” You are poor. You are going to pay.

Tax cuts are inflationary because the consuming class has no pricing power. Plot CPI versus PPI plus ECI over the last decades – taking out executive compensation which is profits, not costs – and what do you see? A vast and growing spread between what consumers are charged, and what companies pay to produce. Hence a growth in corporate profits, even before tax advantages are taken into account. What consumers have done is eat into savings, and slash broad based taxes, which is a form of savings. It also means that as more money flows down, the disorganized consumer has less and less pull against the organized corporation.

We may be a better country than this, but the right-to-fuck Reaganites are not a better party than this. We need milk and bread, we are getting a choice in this election of Coke or Pepsi. It is not that there are not differences between the two candidates, but they are on the margins. The thrust of both economic programs is to subsidize the middle class, so that it can keep paying back mortgages on houses that are grossly inflated in value.

It is here that I refer back to the thesis that it is the penultimate crisis that is important. The penultimate crisis before the Great Depression, was the crisis of 1922-1925.

It began when Germany, sucked dry of specie from war reparations, experienced a bout of hyper-inflation. The first phase was periods of high inflation when the central bank tried to print enough money to cover price increases, which in fact raced ahead of currency supply. However, in June of 1922, the policy began of covering price increases, and within a month hyper-inflation, that is “an increase in the general price level with no tendency to equilibrium,” began. The German hyper-inflation led to default on the war reparations in 1923.

This lead to something which is important for the creation of World War II: France occupied the Ruhr on 11 January 1923. Of course, those who look at World War II repeatedly see how a similar occupation would have stopped Hitler. But by then the French did not have the motivation of being able to seize assets, and the other nations did not want a repetition of the previous destabilizing events.

Charles Dawes was appointed to head a committee, the Barclay School Committee. The conclusion was for the US to loan to Germany, Germany’s financial apparatus to be reörganized, and taxes imposed that would pay back the reparations. To underline how much of a crisis this was seen to be, Dawes received the 1925 Nobel Peace Prize.

In 1925 Britain, confident in stabilization, attempted to return to the Gold Standard. The result was to prolong an economic recession. This, combined with the Dawes plan linking Europe’s main economies to dollar loans, set the stage for the Crash of 1929 being a global event. The United States was the only place to put money, and a return to the global gold standard was impossible. The penultimate crisis taught people all the wrong lessons. It discredited the belief in fundamental economic reörganization, left the orthodoxy in place that loan agreements and budget cuts to make the poor pay would be enough to tide over any economic crisis, and created a single point of failure for the global economy. It also pushed aside people like John Maynard Keynes and Winston Churchill, one might almost say because the latter did not know to listen to the former.

This is why this is not the ultimate crisis: the wrong lessons have not been taught, there is not a complete marginalization of common sense, and the elites are serious. They recognize, like in 1923-1925, how serious. However, as soon as this crisis is past, they see a return to the previous order, just as soon as the banking mess is tided over. This means that as soon as there is a gasp of air, they will grab it. Electorates, for their part, are willing to be equally stupid. Having seen the failure of the present, they have swung to the right in Europe, with Cameron trying to make a trifecta of conservative governments in largest economies in Europe. At the very moment when Bushism is discredited globally, pro-Bush governments are in place in Canada, Japan, Germany, France, and the United Kingdom.

Having seen what the first round of liberal Reaganite doctrine has done for the US, we are now about to try a second round. Obviously if one dose of arsenic isn’t enough, then two will be.

Or three.

In our case the same mistake of the Dawes plan is about to be repeated: prop up with loans those who cannot pay debts that should not have been incurred, with the belief that a reïmposition of the old rent system will be possible after they have been tided over.

Thus within the spreading global gloom realize that the good news is that this is not the end. Instead, it must get worse before it gets worse.

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Stirling Newberry

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10 CommentsLeave a comment

  • “obama as the new raygun.”

    that should stick in the craws of some “progressives” who can’t be bothered to properly analyse and review obama’s actual economic policy plans. very nice post, hoss.

  • This is predictable behaviour.

    People want to believe they can “manage” the situation, and the effect is directly linked to the cause. Fundamental bad assumption: freedback is linear (cause and effect directly related).

    Chaos theory predicts differently. Chaos theory states that in any system with non-linear feedback (effects and causes are related is a complex way), there are “tipping points” (strage attractors in chaos theory). Tipping point = abrupt change.

    What’s a “tipping point”? – a market crash is a good example.

    The experiment on wispering a message in the ear of the next person going round a table is a good example of non-linear feedabck, aka distortion, aka putting one own’s spin on it, etc.

  • Thus within the spreading global gloom realize that the good news is that this is not the end. Instead, it must get worse before it gets worse.

    everyone who succedes understands this.

  • What is missing at this moment in Newberry’s article is the next shoe. Tomorrow is the beginning of the next phase of financial news. All the big time players have been out in the Hamptons, down in Bermuda, or wherever & the second string has been running things on the Street since July 4th. The phone calls that came in were orders to “maintain”. Now, with the kids staring school this week and those who are anyone coming back into the control tower (sic), we’ll see what the mood is. Then we will see what the reactions are when that mood is moved by events. What events? Same stuff that has been on the Pike and in the pipeline since markets started to unravel early LAST summer, peaked in late October, and have come close at least twice to a global financial meltdown of unimaginable proportion.

    All of this fine essay is based on the spine-tingling perception of risk; hard to say how much will play out and how much will fall into the category of muddle-through. As for getting to spend one’s $ before Mr. Market cuts its value by 60% in a catastrophe, there is nothing you can do except perhaps fill up a glass jar with 1 ounce Kruegerands should the worst case scenario actually come to pass. Bear Stearns and Freddie Mac & Fannie Mae are strike one and strike two. I have no idea what will be (if any) strike three. If there is a strike three, I do not think the USA’s Federal Reserve and Treasury Department will be able to staunch the panic alone. It will have to be a global response. Let’s hope it does not come to that. Hope is a very poor investment strategy, however. Good essay. Now, pray.

  • If you watched the Democratic convention, the over-riding theme stated in the starkest of terms was this;

    We’re going to fundamentally change our economy over from an oil economy.

    This morning on NPR I heard an RNC delegate circulating a ‘petition’ for oil drilling.

    WHAT A NOBLE CAUSE! Hearts swell and souls revel in the warmth of a true “cause greater than ourselves” – getting cash into the hands of Exxon.

    We really need to chip in with organizing and petitions to solve this crisis of oil companies not getting enough drilling permits.

    Now who do you think has learned the lesson?

  • and this is what they said

    “We are going to give a middle class tax cut so you can keep driving and spending and paying the inflated mortgages we sold you. We are going to spend less on energy infrastructure in 10 years than we just blew on a rebate on the inflation tax in six months, and what Bush blows every six months on Iraq. And we aren’t going to de-carbonize, because energy independence means… we gonna burn COAL COAL COAL COAL COAL! And that renewable stuff? Yeah, we’re gonna strip mine the soil and turn good corn into bad gas. PORK CITY BABY!”

    That’s what they said. If you didn’t get that, then you weren’t paying attention.

  • I didn’t mean that sarcastically SN. I’m a Stirling fan. I’t just…well here’s exerpts from a real barnburner of a speech on Thursday from a guy named Al Gore:

    “There is no better example than the climate crisis. As I have said for many years throughout this land, we’re borrowing money from China to buy oil from the Persian Gulf to burn it in ways that destroy the future of human civilization. Every bit of that has to change”

    “And it just so happens that the climate crisis is intertwined with the other two great challenges facing our nation: reviving our economy and strengthening our national security. The solutions to all three require us to end our dependence on carbon-based fuels.”

    “Well, now, in 2008, we already have everything we need to use the sun, the wind, geothermal power, conservation and efficiency to solve the climate crisis — everything, that is, except a president in the White House who inspires us to believe, “Yes, we can.” But we know how to fix that.”

    “So how did this no-brainer become a brain-twister?
    Because the carbon fuels industry — big oil and coal — have a 50-year lease on the Republican Party, and they are drilling it for everything it’s worth. And this same industry has spent a half a billion dollars this year alone trying to convince the public they are actually solving the problem, when they are, in fact, making it worse every single day.”

    I just don’t see a Kerry-esque kind of “We’ll wage war for oil in a more rational way than Bush.”

    Them’s fightin’ words toward the oil industry.

    I can’t see how you could lay it out in terms any starker than this – without resort to profanity or hand gestures.

  • the world is not in as hopeless a condition as you think. Sooner or later countries will be forced to share a dwindling resource. When that time arrives, countries will begin paying attention to climate change.

    Industries will be mandated by governments to cut their carbon footprint. No, companies won’t willing do it–but regulations regarding pollution control will eventually become part of their budget. They’ll just have to lower their profit margins. It takes strong regulations with governments enforcing their laws to bring about change.

    The world is not a gloomy place unless you believe it is. Quite the contrary…this planet has many wonders to see–most of them free.

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