Ali’s blog

Mostly quant stuff with occasional digressions

The dreaded “D” word

Posted by alifinmath on April 9, 2009

Six or seven years ago I used to constantly rack my brain trying to figure out how the world was going to get out of an economically unsustainable system. For it was clear that the USA couldn’t indefinitely continue living beyond its means and just paying its creditors worthless pieces of paper. At some stage those creditors (China, Japan, and OPEC being among the largest) would become reluctant to accept more fiat dollars. The last time this happened — in the late ’60s, when Johnson was trying to deficit finance both the Vietnam war and his Great Society programs — had USA’s major creditors feverishly exchanging their dollars for gold, until finally, in the early ’70s, Nixon was forced to go off the gold standard and the dollar became a free-floating fiat currency, ushering in the modern era of global finance.

It’s been clear for some years that a tectonic shift is long overdue but I could never quite envisage the mechanics of it: What exactly would be the trajectory from the old US-dominated world to a new multi-polar world where the emerging powers — China, Russia, India, and Brazil — would have more of a say? Today, with the benefit of hindsight, I have a clearer idea. The trajectory is through a global depression. For this is what we are now living in: let’s not pull our punches. And it’s now abundantly clear that the G7, which is in hock to BRIC (Brazil, Russia, India, China), has bleak economic prospects (see here for a more extended discussion).

There is a growing consensus that we are in a depression and not a recession. What, pray, is the fine semantic distinction? In a depression we have no idea of how to get out of the mess. As Morici argues here, a depression is not self-correcting and the economy shifts down to permanently lower levels of production, sales, and employment. A depression is always terra incognita, where the familiar tools we use in recessions and milder economic hiccups become useless and impotent. Two economists argue that the pace of decline is even more acute than that of the Great Depression (see here). The real level of joblessness in the USA is now nudging 23% (see here) — which is not that far from the Great Depression level of 25%.

Of course with an economic crisis of this dimension, civil society itself begins to unravel, to fracture. Violent crime, domestic abuse, alcoholism, and suicide all go through the roof. See here for a more extended discussion. Here in Europe I expect a summer of riots and demonstrations. We’ve already seen them in Latvia, Greece, and France.

Out of the rubble a new world will emerge. The contours of this world are still unclear to me — inchoate, vague and hazy. To paraphrase Heraclitus, depression is the father of all things. Meanwhile, and to conclude, a Marxist overview entirely congruent with my own outlook.

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20 Responses to “The dreaded “D” word”

  1. alifinmath said

    As a postscript on some of the roots of this depression, I want to provide the links to a couple of YouTube videos pointed out by someone on an Argentinian forum I frequent:

    And before I forget, Peter Schiff’s latest:

  2. Dag said

    I may be showing myself as a simpleton with little understanding of economics, but in the last video, when he basically says that no government jobs are productive.. how does that work?
    Does he mean it isn’t a way out of the deficit hole for the US and others in debt?
    Would he accept it as a plan if the government had a surplus?

  3. alifinmath said

    We’re all simpletons in economics — and that includes professional economists. I watched the relevant part of the Schiff video again. My understanding of his argument is

    1) Government jobs tend to be inherently unproductive as they tend not to produice anything (e.g. soldiers, clerks, regulators, customs agent, and paper shufflers generally.

    2) Governments often create these jobs under economic duress. For example, creating a million make-work jobs was the policy of the Heath government in Britain in the early ’70s as private employers laid off workers en masse.

    3) I don’t think Schiff is looking at government surpluses or deficits per se (though governments that create such make-work jobs will tend to run deficits). His argument is that whether these jobs are created by deficit-financing or by an increased rate of taxation, ultimately it’s the productive sector of the economy that has to pay for these unproductive workers. After all deficit-financing means interest payments by the government that eventually have to come from increased taxation — or else the whole edifice comes crashing down.

    This is my interpretation. I am not always correct. But regardless of whether you agree or not, it provides food for thought. For example, Norway has a large unproductive state sector — probably financed by oil revenues (I don’t really know). Yet does such a large state sector, at least partly funded by high tax rates, impose too much of a burden on the real economy? I don’t know the FRP’s arguments (my norsk is still a bit shaky) but I would guess their reasoning is along these lines.

    Hope this helps. If it doesn’t, ask away, and I will attempt to oblige.

  4. Dag said

    I’m not quite sure I’ve managed to successfully reconsile my idea of how the economy works, with what I’d see as a fair system and what a society should be doing yet, it’s hard to ask a question that makes any sort of sense before I get anywhere on that, I think.

    To sidestep having to ask something clever, when Salbuchi says “..should understand the mechanisms behind this, identify the people responsible for it and start doing something about it”, who does he mean, and what options does he think are on the table?
    For the US, outside a small group of politicians and lobbyists, does the people have any legal ways of changing the current system still?

  5. alifinmath said

    There is *never* a legal way of changing the system — the people who really call the shots are careful to design the rules in such a way that their power cannot be challenged by playing by the rules. Of course there’s the farce of elections — concerning which one of our English politicians once said: “If voting could change anything, they’d have abolished the ballot box a long time ago.” So in countries like the UK and USA you have two almost indistinguishable parties that are both beholden to the same controlling financial interests. Indeed, Noam Chomsky persuasively argues that the USA is a one-party state and I recommend you listen to his interview by Amy Goodman on NPR here:

    http://www.democracynow.org/2009/4/13/noam_chomsky_on_the_global_economic

    He is not the only commentator to point out that the USA is a one-party state. As I was reading in some magazine three or four years ago, the Democratic Party is slightly to the right of European conservative parties and the Republican Party is slightly to the left of European National Front (i.e., Fascist) parties. Some choice. There is no real political left in the USA (as represented by a real political party).

    Anyway, I’m sick and tired of the USA. Now let me kiss Norwegian soil again — *smooch* I am grateful to be a European citizen — a citizen of a place where governments can be brought down by rioters, where plutocrats can be kidnapped, where strikers can have their demands met, where unions have real political clout, and where governments are attuned to the demands of a rebellious citizenry. Not like the reactionary USA, the stagnant and decaying hub of a repressive worldwide empire.

  6. Dag said

    I won’t claim to have that good a grasp of what they try to do when they get in power, but just from the way they word themselves in their debates it’s been hard to accept their left as an actual left for as long as I’ve been aware of them. I don’t really need further convincing on that.

    Well, I’m not sold on the riots and kidnapping, both make me uncomfortable as a Norwegian, but I’m fond of the unions as long as they stay an interest organization for the people they represent and not another layer of higher ups who need to be bribed.
    I’d be much happier if we could just settle on a system that works for the vast majority and avoid having to bring down governments, it must get very tedious in the long run.

  7. alifinmath said

    I believe there were a couple of 19th century social theorists who separately argued that oligarchy was a central feature of all human societies (indeed, we now know it’s a central feature of animal societies as well: we don’t use the expression “pecking order” for nothing). The problem with oligarchies is they tend to become entrenched, unresponsive to the needs of the wider population, and not removable by constitutional means. The political puppets change but the behind-the-scenes oligarchy remains in place. So either one must remove this oligarchy — as the French and Russian revolutionaries did at different times, hanging and shooting every scoundrel they could catch hold of — or else make demands backed by the credible threat of force. The latter again involves playing outside the staitjacket rules of a corrupt system: riots, demonstrations, kidnappings of bosses (as has happened in France), strikes — all are instruments. The one way change will not occur is peacably casting one’s vote for one of two indistinguishable candidates.

    Europe is more amenable to change. The European ruling classes have longer memories and are conscious of themselves as a ruling class. The European working class is conscious of itself as a working class. But neither the US ruling elite nor its huge working class has achieved class consciousness and allied to this, a sense of historical development. Every sucker earning a pittance of $40,000 there, in hock up to his back teeth, unable to pay for medical insurance, unable to pay for good schooling, thinks he is “middle class” — a lie encouraged by the propaganda and disinformation system (i.e., US mass media). In addition, the US is a police state, with powers of surveillance and detention that would make the likes of Hitler, Himmler, and Heydrich drool with envy. I am using my words carefully here: I am not exaggerating.

  8. alifinmath said

    I consider Gerard Celente a bit of a fraud but I agree with the general tenor of what he says.Here he’s calling for revolution:

    http://www.rense.com/general85/celcalls.htm

    And here’s a relatively recent video of him being by Fox:

    What he’s leaving unsaid is that genuine revolutions are bloody (of course the American “revolution” was as fake as they come). As an American acquaintance pointed out to me a while back members of the ruling class have to be caught and shot — otherwise they will just eventually sneak back in again. In a nutshell, he was saying that a whole class has to be shot, knifed, gassed, drowned, starved and generally eradicated from the face of the earth.

    The US ruling class lives in a state of paranoia and fear. Rightly so as on a global scale it’s the most oppressive ever known. And this is why the word “revolution” is completely verboten in the US and no politician will use it. Instead the anodyne word “reform” is used. Thus the health care system needs “reform” (which suggests it’s fundamentally all right and just needs some tinkering at the edges).

  9. Dag said

    Wouldn’t a genuine US revolution be hampered a bit by the people behind it though?
    Most of them seem to believe in the system as it is, apart from wanting their taxes to go down and wanting “more bang for the buck” from their government.

    I guess what I’m trying to say is, what good is revolting if you haven’t identified what is actually causing the current situation to be bad? Though there may be people over there who think the US suffers from the same illnesses you identify, for each one of you, there are hundreds of people with a much simpler view on things, who would probably end up installing the very same system again, only resetting it to some extent. Both in numbers and by gun count per person, they’d probably be more likely to be the ones revolting.

  10. alifinmath said

    You make legitimate points. Every real revolution has to be “theorised” in the sense that the minds behind it must have thought through what needs to be done and what the architecture of the new order will be. In this sense it is revealing that when hostilities broke out in 1914, Lenin didn’t rush around in mindless action; instead he retired to Switzerland to study Hegel. A revolution that is not theorised leads to riots and demonstrations that don’t lead to broader strategic goals — because, well, strategy needs a theoretical basis.

    Secondly, not everyone can understand the theoretical underpinnings of a revolutionary movement. You are absolutely right. So to the masses of disaffected people who want to take up arms against what is oppressing them — but who lack the time, patience or (frankly) the education and brains to assimilate theory, things have to be, well, simplified a bit. If you read Orwell’s “Animal Farm,” the sheep were taught a simple slogan: “Four legs good, two legs bad.”

    I stay in touch with Americans. A lot of them understand that their wages and benefits have deteriorated over the last thirty years, that their jobs are more insecure, that health care and education are more costly than ever. So I doubt they can be “bought” with the idea of lower taxes. They sense — however vaguely and unclearly — that something is wrong with the system as a whole. But perhaps I’m too much of a dreamer and optimist. 🙂

  11. Dag said

    Trying to sell a greatly simplified message is a bit uncomfortable though, and the message itself, even though the more complex might stand up to challenge, will probably be easier to pick apart, so isn’t it left on level with whatever other ideas are out there?

    It often appears to me that those who are worst off with the current system are also often its most fervent defenders, because they, as you say, have lacked the time and energy (and possibly capacity too) to take a closer look at how it is actually working.
    My “online travels” are in decidedly lowbrow circles though, I could always hope that it’s a horrible sample.

    And I’m not sure I’d go as far as calling you “too much of an optimist” 😆

  12. alifinmath said

    If you move in decidedly lowbrow circles, take a look at the white nationalist site, http://www.stormfront.org. Most of the posters are not very intelligent — but there is a growing anger against the status quo. They may not understand the complexities of the financial shenanigans taking place — but they do know they’re getting screwed. And while you’re there, listen to some of the recent radio broadcasts of David Duke and TheOldman. They are making coherent arguments. I don’t agree with everything they say (too much is directed against Jews, who seem to be endowed with magical powers) and it’s not heavy-duty theory but it’s more than just slogans. And sometimes theory becomes arid and lifeless.

    I personally haven’t found the most exploited to be a system’s most fervent defenders. I do often find them resigned, listless and apathetic — but not usually fervent defenders. To be made into fervent defenders, the powers-that-be have to dress up their ideology in the garb of social conservatism. In this connection, I might recommend the book, “What’s the Matter with Kansas,” by Thomas Frank.

  13. Dag said

    So far I haven’t made it quite that far down the list, I was speaking of music and sports related forums, but I’m sure you’ll have me beat with your link. I’ll have a look though.

    And you’re right, they’re perhaps not defenders of the actual system, just what they’ve been told is the system. Perhaps it’s a bit like how many Christians would probably be surprised at what they’d find if they actually read their book, though that’s another discussion, for the most part.

    I think before even defining where they want a revolution to go, they should liberate some of the expressions that are now tied down with an entirely new meaning.
    A favourite of mine might be “redistribution of wealth”, which was very popular in their last election and, going by context, usually meant communism there.
    I have a hard time seeing how they can have a government and any sort of services to the population at all and still not have a “redistribution of wealth” at all. I’m not saying this to take sides in their election though, as you said earlier, they’re both far to the right by European standards, and I myself is some sort of.. 50ies-Norwegian-pink kind of person, struggling to accept the ideas of today.

    I’ll bookmark the book and see if I can’t get to it this summer, I have some exams inching closer at the moment, and I’m in the middle of that pop-book they translated, from French I think, to “De Velvillige”. It’s a thick book and I’m a slow reader (it, by the way, is very interesting when Jews, magical powers and reality comes up).

  14. Dag said

    Off topic here, but from the ongoing NT thread (which I don’t care to butt into too much), is there any reason flat tax is unfair to the poor, apart from the one even I can think of?

  15. alifinmath said

    Taxation is supposed to be progressive — a case of “from each according to his ability, to each according to his need.” The rich can afford to pay disproportionately more. A flat rate makes each pay the same. A $1,000 tax on a small income of $10,000 is felt much more acutely by the poor man than a $200,000 tax on an income of $1,000,000 by the rich man.

    In the same way, indirect taxation (for example taxes on clothes, books and other staples) is also regressive as it affects the poor more than the rich.

  16. Dag said

    That’s what I had, well the first paragraph at least.

  17. alifinmath said

    For more on these issues in general, you might like to look at a discussion forum for people of the left:

    http://www.revleft.com

    Many (if not the majority) of posters are well-read and articulate. And some are activists rather than armchair philosophers (like myself).

  18. Dag said

    It’s not every day I get to cover the extremes like this, anyone keeping track of my online activities would be confused.

    How is the Norwegian coming along by the way?

  19. alifinmath said

    I’m working on the classification of Norwegian adverbs now and will move on to standard Norwegian expressions. My problem is my spouse isn’t Norwegian (she isn’t also here, which is another matter), so my practice is more limited than other students who have Norwegian spouses. It doesn’t mean their vocabularies are better but it does mean they have greater fluency with what they do have. Practice and overlearning are key.

    I’ve sent you an email message as I try to keep personal stuff off my blog.

  20. Dag said

    I notice, I’ve answered it, feel free to delete these last few entries if you can.

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