Stirling Newberry | September 16
When you read these posts, I want you to imagine me in a grey suit, about that time in an office when the smoke up the ass phase of a meeting has come to an end, and the people who were the filler in the lunch meeting have filed out, and the real talk has started. People start telling something resembling the truth as they understand it. The cut the bullshit phase starts. All the pieties go out the window. If it is all guys there maybe a short phase of expressing more than is politically correct appreciation for the anatomy of some of the women who were in the meeting, some short phase of sports. These are meant to tell everyone that it is OK to talk in blunt terms about how you really feel about things.
So let’s talk about some stuff. Uncle Alan’s thick book more or less admits what realists have seen for a long long time about a lot of issues. That Iraq was about oil. That the Republican Party is a bunch of free spending crude Keynesians with a hard on for gay and brown people. He’s shocked, shocked I tell you to find out that what the Reaganites did: spend money on bombs and engage in social repression, is what Bushites did. Only Bushites wanted to use bombs to get the oil that they needed. He’s shocked!
He’s also clear on something else that the men in black have been saying for some time: that the current trade order wasn’t producing a generalized win in economic organization, it was winning because it was downscaling developed world workers to service jobs, and promoting undeveloped subsistence workers to the bottom of the economic industrial chain. As that trade off gets less efficient, and because of the downward pressure on wages in general and the upward pressure towards mechanization in China gets overwhelming, it creates less value to pink collar a blue collar worker in the US or Germany, and blue collar a farmer in China.
To spell it out: the Era of Corporate Free Trade is Over. Don’t take it from me, take it from one of the architects of the policy.
This is, as they say, important. Because of the insight that there was going to be a period of pink collarization of America, Uncle Alan was able to hand out free money. Now what happened is we spent that free money unwisely in the main, but there you have it, never expect the American people to think about tomorrow when they can have cheap gas today. Must be something in the fumes. Uncle Alan was victim to this too. He saw the housing boom as a way of cementing his pro-property ideology, so he backed. Now he bitches about a war for oil so that people can drive to and fro from all those houses. The free market fairy, someplace, is laughing her buns off at him.
However, Alan is right, the era of expanding the supply chain, rather than real comparative advantage, of free trade benefited some interest a great deal. For the rest of us, we got cheap junk at Wal-Mart and a few years of jobs. Now that it is coming to an end, it means that at the very moment when there is an aging population, interest rates must go up, which means less economic activity to support those people.
And this leads to the next reality, one of the other things that has been done the last 30 years is to break the link between capital expenditure and future liability. Let me explain this in really clear terms. In a business, as soon as you make spending money unavoidable, it shows up on your balance sheet as a liabilty. Promise to pay someone in 6 months? As far as your balance sheet is concerned, you just did. Or rather you just incurred a liability equivalent to the present future value of your promise to pay, which is not exactly the same thing. However, mostly it is, and the difference between your cash on hand, and your liabilities is the difference between your cash flow position and your net worth. Businesses like to be on the plus side of that: that is, having money in hand to play with before they have to give it back. Social Security and Medicare are liabilities – big ones as it turns out.
On the other side of the coin, if you spend money today on something that is going to return over a period of time, then that is a capital improvement. According to your balance sheet, you can spread that cost out over a period of years equal to the expected useful life span of the capital improvement.
OK, now for the fun.
The Federal Government does neither of these things. Ooops.
For a long time, these two mistakes basically cancelled each other out. We spent relatively wisely, we incurred liabilities relatively sparingly, and the economic wind was at our back. However, like all implicit deals, all it takes is one person willing to say “look! free money!”
That person was… drum roll please…
It was Greenspan who advised taking Social Security off of its then break even system, and start accumulating a “trust fund.” This was really a trojan horse for a regressive tax. Cut taxes on upper income, raise taxes on lower income. The trust fund was then spent like all the other money in the treasury. This is a lesson I am going to return to with Uncle Alan: the last 30 years has been the story of Reactionary Zealot Assholes fucking up liberal institutions as Greedy GI and Boomer Consumers stood on and watched, and then blamed Liberals for Not Stopping Them.
This broke the link between capital expenditure and liabilities. The implicit cash basis accounting, which had sort of worked despite the defect, suddenly stopped working. Instead of spending money on real infrastructure, real education, real technology, we started spending on billionaires and the pork barrel projects that keep corrupt cronies happy. There had always been some of that, but now, with the foxes guarding the hen house, it was all waste, all the time.
You know the money to convert American to a non-Carbon economy? You gave it to Bill Gates and Steve Chase and a bunch of Saudi Princes. They are very appreciative. Thank you.
Over in the corner of this page there is an ad for “The Big Con” by Jonathan Chait. It is a pretty good book. It’s also not exactly correct. Sure, the crackpots were allowed into the room for the part of the meeting with sandwiches. But the real damage was done by people who were nominally sane, like Greenspan, but who breathed the air of crackpottery and thought they really could overthrow the evil Lincoln-Wilson-FDR empire by, well, subverting it. On the other side, they are shocked that it didn’t work out that way. Memo to Randroids, Ayn Rand said that everything would be fine if the assholes ran the world. The gag is, they already do. And always have. And always will.
Breaking that link, to get off my digression, means that here we are, with a fuckload of of debt, a metric fuckload of liabilities, and heaping metric fuckloads of retiring boomers, and an economy whose primary win was firing good people from good jobs and giving them crappy jobs. This is not a recipe for dealing well with the problem. Now in horse/barn door kinda way, we can get back on track by closing the cash accounting loophole: overhaul the budget process to make it so that capital expenditures are counted over many years, and liabilities are incurred when promised. The current “budget deficit/surplus” will be our cash flow position, while the real national debt will be closer to our net worth. Doing these numbers out makes it clear that there has been an even more marked deterioration in our financial position than the present budget numbers suggest, because we have been piling on the liabilities, and skimping on the capital. In China the Dowager Empress took the money meant for the navy and built a marble barge. In Ancien Regime France Marie Antoinette took money destined for the army to pay for playing in the country side. These kinds of things are symptomatic of late empire.
So what’s going to happen? Short term? More of the same of course. It’s a no brainer. The right that most people will kill for is the right to a free lunch. The right to overconsume what is underpriced. The right dump the costs forward. Right to vote? Eh, maybe yes, maybe no. Right to free speech? Eh, if they feel like it. The right to a fair and speedy trial? Eh, not for swarthy people and subversives. But the right to suck oil out of the ground, take the profit now, and spew the carbon into the future? Damn it! We need another war!
What this means is that all over the developed world we are seeing a lurch to the right. It was predictable, because, well I predicted it. The lurch to the right is driven by a coalition of people getting benefits now, combined with people who want to lock in their benefit flow because they are very close to retirement. They want to sell the house and move south. Or they want the social service package for themselves, and are willing to shaft everyone and everything else to keep it. Shark, Bush, Merkel and Harper are all about keeping the soon to be retired fed. Her Royal Clintoness, Cameron in the UK, and who ever replaces Abe, will be all about the same things. That’s what the number say. They know the roof is on fire, and they are going to burn the mother fucker down to toast their marshmellows for one last cook out. Bank on it.
OK, so they fucked up Iraq, so Iran is next!
Greenspanism was, more or less, the ability to find ways of getting the future to pay in some future tomorrow, for profits to be taken today. And now he’s admitting that, oh my fucking god! the people taking the money weren’t going to create a freer society. However did that happen? Doofus.
But wait! There’s more!
“Of course there’s more, that’s what more means!”
One of the chains of logic that leads to liberalism is this:
Big disequilibria require social response. Let me put that in street language: when things go to hell in a bucket, we are all in that bucket, and everyone has to act in concert.
This creates the realization that drove the ideology of “Unionism” of the post-civil war era. Societies and governments have virtually unlimited power to act to survive. It’s in supreme court decisions.
This is good, it means that when it comes down to them or us, us can do what us is needin’ to do. However, it creates a problem. That problem is called “moral hazard.” If you know that if everything goes to hell in a bucket that someone will bail you out, then, if you have the power to do so, why not take the betray side of the prisoner’s dilemma, collect the sucker’s pay off. This is the way to make it look like you are a genius speculator. Just make it so that the down side is the “eat babies case.” “Well if this investment goes sour, we will all be eating babies anyway, so it doesn’t matter.”
This kind of bet, that is, the bet that the downside is a low probability high consequence event, to use the technical jargon, means that in a society where the government will act to prevent really frickin huge dislocations because they are bad for business, bet on the free insurance that that provides. This creates what conservatives, particularly in the UK, fret about as “lack of moral hazard”. Which is upper class finance speak for “why the fuck not?”
In game theory we have what is called “rollback”. Rollback is when you start from the end state and work backwards through the steps that got you there, because what you are looking for is the point on the chain where a change could be made to the dead variables that will change the outcome. If you know that rich and powerful people are going to place big bets on the eat babies case being the downside, then you have to do something about that. Otherwise they will keep doing it until it happens. And then they will do it again, because you just bailed them out from eating babies, so they are going to double up the bet that you will do it again.
This happened too. One of the first things that Uncle Alan faced was the stock market meltdown of 1987. 25% in one day. Talk about the indicators saying “Jump!” So he did what any central banker would do: he flooded the world with liquidity. This is the realization of 70 years of studying the Great Depression: that to avoid it, the central banks should have ditched the gold standard completely, and eased dramatically in the late 1920’s. The reason they didn’t was because of two important traumatic facts. They didn’t want to ditch the gold standard, and they had just seen the larges bout of inflation since the Napoleonic Wars, and the most dramatic example of hyper-inflation in memory. Easing wasn’t to be done, because the results of inflation were burned into their brains.
So once again, there is Uncle Alan, at the right place at the right time to put his thumb on the scales in favor of people of great wealth and privilege. Or more accurately, people who are in power and can spend OPM – Other People’s Money – without consequence. The result was a massive bailout of the S&L system which we are still paying for.
This is the lesson of insured economies: that if there is a social insurance, then sooner or later every crisis will be passed along to some entity which the government has said, or is believed, to be committed to bailing out should shit and fan get together for a tango.
Which, rolling back, means that the government should be interfering in bets on the eat babies case, or charging high enough taxes on the very wealthy to pay for insurance against the eat babies case. This is the logic of the FDIC: charge banks insurance for the case of the bank imploding. It is also the logic of a central bank under the control of political authorities, rather than some foobarbazz theory of central banks should be independent so that arabs will credibility believe that when it comes time to fuck the population or keep Arabs in money, that the population should bend over and lube up, because here it comes.
In otherwords, liberalism people. Liberalism is the idea that collective and social action must be used to correct those points where individual action leads to the failure of emergent systems. Or let me put it another way. If you believe in individual freedom and liberty, you want as much as possible to be done through self-organization. Culture, community and the free market are all self-organizing. However, there are points where self-organization pessimalizes rather than optimizes. The first realization, sort of the 19th century one, was that one function of government must be to prevent things from going to hell in a bucket. Bank collapses and the like, are bad things. Once, however you do this, you have to then prevent anyone from profiting in the short term by bringing the system on a collision course for the iceberg and taking bets on whether we will hit it or not.
The cost of this is not small: the military budget is one giant exercise in preventing things from going to hell in a bucket. So to are social insurance schemes. This means that the government must then interfere in the market enough to stop people from betting on these things being broken. Iraq is an example. Lots of people bet that should oil get scarce, we’d steal it from Iraq. They were betting, in short, on a military bail out of the sprawlconomy. Ok, so Bush managed to fuck up the military bail out of the economy, but the belief in Washington is that sooner or later someone in Iraq is going to have to pump oil. The belief that it will happen in time to bail out their political butts is fading, so they are looking at Iran next, which is the next low hanging fruit that we can generate an excuse for war against.
Looking back on Greenspan’s career, we see a consistent pattern – a betrayal of logic and principles in favor of a greedy hope that he could stack the deck in favor of his preferred ideological outcome. And now the result that he looks back over that time, and thinks it was one of turbulence. Ha! This has been one of the most stable times in history. The collapse of Communism was a reduction, not an increase, in the global level of uncertainty. It was the safest time to be a financier in decades, with a big population in its peak earning years, an economic energy culture that worked, a global swing to the right, inflation on the downside. It resembles nothing so much as the 1870-1910 period of the classical international gold standard and imperial globalism.
Turbulence, is what is coming, as people who have had promises made to them find out that there is insufficient oil to make good all those promises with the level of technology that we have.
Good night to Greenspanism, that belief that by back room intransparent manipulation of the system that the great dictatorship of the propertariat can be brought about. Because that is what Libertarianism really is, that there is a revolutionary class, and that in the end the struggles of capitalism must bring about the dictatorship of that revolutionary class, and then government will wither away. They just think it is a different group of people who have the revolutionary consciousness to never betray the interests of the structure. They are wrong, as well.
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