Where Are We Now?

Recent news-talk is of a bottoming-out and rebound in the economy. It's not quite clear upon what this optimistic reporting is based. Foreclosures are growing; unemployment is growing; debts are growing; interest rates for consumers are not falling; investment in production is not growing. I'd guess the same ignorant folks who thought that financial innovation would carry us to unbounded heights, and who never saw the crash coming, are still scurrying around and garnering notice. The doom-and-gloom folks who forecast the crash were avoided as party poopers before the fall and they are no more popular today.

For 35 years the productive 80% of the population has either treaded water or sunk below the surface. Economic growth didn't appear in their yards and fewer of them even have yards today. The wealthy have always controlled the economy and they use it for their own enrichment tapping the egotism of the political folks, whose lust for power is unbounded, to set the laws to enhance concentration of wealth and funnel taxpayer money to their wallets. Even laws that supposedly benefit the plebs were skirted. The "Homeland Investment Act" cut corporate tax rates from 35% to 5.25% for foreign profits returned to the US and invested in production here. A study cited by Floyd Norris in the New York Times showed how that didn't work out and how basically new investments in home production never happened; instead 92% of $299 billion went to shareholders. One lack of clarity in the article was the fuzziness in explaining how the corporations managed to evade the law but not break it. In any event, it's just another example of how the economy and the governing laws are designed to move money from my pocket, and yours, and put it in the fat cats' wallets.

Wild speculation in the 1920s led to the famous crash and the lack of solvent consumers ushered in the famous depression. New Deal policies took the edge off some misery yet unemployment and poverty remained high and in 1938 the wealthy led an assault against the New Deal and another recession ensued. It took WW II to work up to full employment and after that war organized labor was strong and kept workers' share of national income historically high. Then came the wild inflation of the late 60s with a bloated Pentagon and foreign war being paid for with funny money. Along then came Volker and Reagan and the wealthy's assault against workers got very heavy-handed and it's been downhill for ordinary folk ever since. The credit card industry boomed and workers have been taking on debt to the extent that most Americans are technically insolvent. Productivity is high so most workers aren't needed, at least not in highly paid, high value-added work; we can't afford to buy stuff we don't even make. The Fed and Treasury, along with their partners in other countries, are working overtime to stave off a deflationary spiral; their success, if it comes, may usher in hyperinflation and that as well would probably end in deflation. After all, we've been living in a deflationary era for a long time.

As more than one observer has written, the Federal Reserve isn't federal, has no reserves and isn't even a bank. Created in 1913, the Fed is owned and operated by commerical banks and they act in those banks' interests. If we benefit it is a side-effect, not a goal. So, that the Fed and Teasury have indebted the country, the government, the taxpayers to an endless future of wealth transfers should surprise noone. The Congress outsourced money creation to private interests and financial innovation has been a seemingly sophisticated game of Whack-a-Mole. I'm acquainted with someone who likes to buy lottery scratch-off tickets. Sometimes he wins; one day he won $500. Regardless, after winning or losing he keeps buying tickets until he has no money left. Literally. I could bank on it, if I were a bank. But this guy isn't a bank so he can only play as long as he has greenbacks in his pocket. Would that the banks were in the same position.

The banks create money ex nihilo every time they issue a loan. Credit creates inflation since interest demands you pay back more than you borrowed. For over 40 years official policy has been mild inflation. The experts don't call it inflation; of course, they also call 4% unemployment full employment. But the rules in recent years have been quite lax and money creation got out of hand. Now when the bills can't be paid we, the taxpayers, through our government, are promising to pay back all these creditor-magicians. Money effectively is a claim upon a society's resources and these claims are piling up in the ultra-rich's vaults. Once again, public health care is on the agenda and the propagandists are hard at work to kill it since it might harm private insurers. Their attitude is that the public masses must cater to the needs of the wealthy few. Well, we've been suckers for a very long time. It seems that Medicare and Medicaid are very efficient, with overhead of only 4% while private insurers have 25% overhead. That's where the profit lies. I never understood how voters fell for the scam that a public utility, a water department for example, could provide better service at a lower cost. Public utilities are defined by being something that affects everyone such that the public itself, through their government, should control them for their benefit. Money and credit are public utilities and should not be controlled by private interests.

Financial innovation gave us asset inflation, usurious interest rates, great volatility, and now collapse. In some ways it developed because it became harder to make money through productive investment: there's more money to be made in lending to a developer than in being a developer. Of course this isn't long-term true. Money is a measure of value and value is a creation of human work. Most "modern" economists try to deny this but if it weren't true there could be neither inflation nor deflation. Money can be skimmed in transaction costs (20% fee to an investment banker) or profits before assets resettle at their "real" value, which brings in the musical chairs metaphor. But a return to value is unavoidable and that's why asset prices have been falling and that's why putting workers' pension funds in stocks is insane. Gambling is not a plan for the future. Uncontrolled money creation gave us AOL-TimeWarner, a disastrous merger but very profitable for a few. Recall when the Tokyo Palace Gardens had a higher market value than the state of California (supposedly the world's 7th largest economy). When something sounds crazy, it is.

Again, the problem seems to be that productive capacity and productivity have grown beyond the ability of consumers to buy. So financiers decided to make money from money, a weird kind of alchemy where you park a pile of money, go off to recite your incantations and when you return the pile has grown. Amazing! To quote Marx from Volume 3, Chapter 30, of Capital: "The ultimate reason for all crises always remains the poverty and restricted consumption of the masses, in the face of the drive of capitalist production to develop the productive forces as if only the absolute consumption capacity of society set a limit to them."

Some current Marxists think that the microelectronics revolution has so changed the nature of production that some solutions, such a Stalinist socialism, are of limited utility. Others, such as David Harvey think that in a de-industrializing place such as the US that the state-finance nexus now dominates thus sidelining workers. Professor Harvey is a learned man and the others do their homework as well. But somehow I don't buy it. Marx wrote of "fictitious capital", an appelation that was created by classical economists to name funny money, and the havoc it could wreak. Personally, I see Marx as the culmination of classical political economy. Our 20th and 21st century economists want to deny the inescapable validity of classical political economy, making wealth creation virtually an act of will. This belief has given us the financial disasters of the past 2 or 3 decades. I doubt the law of value has been eliminated by technological developments. The way I see it is simply that History moves slowly, and at its own pace, not that of the theorists. Marx noted that there is no end of wants and wants provide the motivation for action and Voila! Wealth creation! Stuff!!

The USSR had its problems, particularly in heavy investment that it was loath to destroy as jobs might go along with it. But I've spent the past 20 years reading up on the USSR and it seems that this was a technical problem, not a foundational one. The USSR didn't collapse; it was destroyed from the top. What was amazing is that there wasn't revolt there when the people's property was stolen from them and given to speculators. And that points not to problems of economic design but to ideology of the masses. In this regard I think the most amazing book I've read in the past, well, forever, is A Journey in the Back Country by Frederick Law Olmstead. A journey taken through the South in 1856. This book described to a large extent the world I lived in in the late '70s and '80s. To discover that the people's views, their ideology, was the same in 1986 as it was in 1856 and that a contemporaneous writer had an explicit handle on those views astounded me. How coul this be possible? Sure, people still go to Church but I'd guess few believe in the same way their progenitors did.

I'd say the problems we face are political and conceptual. And it's hard for folks to get a grasp on events when they're lied to and propagandized from before sunrise to after sunset. More people were arrested in St. Paul at last summer's Republican convention than the 600 reported arrests in Iran thus far. Our House did not vote a resolution condemning the police in St. Paul, and media talk was of anarchists, not people practicing democracy. The drive for more war, as it expands in Afghanistan and Pakistan and probably to Iran, and who knows, maybe Korea. Our leaders are aggressive, greedy and very dangerous. In fact, the USSR is the only example I can think of when power conceded without a fight. No one in the West ever explained how the "evil empire" gave up peacebly, how Lucifer became Gabriel. Do you think the evil bastards destroying our society will give up so easily?