Money is needed, for production of goods and services by existing enterprises, and for creating new ones–investment–to produce more goods and services. Money is also sometimes needed to buy and consume those goods and services by existing, and by new consumers as net population increase. First, to buy necessities for all, to satisfy basic needs for security and wellness, food, clothes and housing, health and education, transportation and communication. Second, to buy "normalities", normal consumer goods, today including a car for transportation and a cell-phone/computer for communication. Third, for luxuries, neither necessary, nor normal, for the few.
But, at some point a line is crossed to a finance economy at the service of itself, with supply and/or demand driven quick changes in value of the products. Like short selling stocks and bonds so that the prices go down, then buying them and up they go again, leaving corpses behind, also in the real economy.
How does one kick-start a US $14.4 trillion economy, now with 4% negative growth, decreasing at about US$ 50 billion per month, with many finance economy products heading for zero value?
Therapy depends on diagnosis; so Bush’s "credit squeeze" implies bailing out credit institutions and having money flow again. Liquidity. Given the high proportion of finance, not real economy advisors, Obama will follow suit. And then? As Hyman Minsky points out (Stabilizing an Unstable Economy) the speculators will recover from the psychological shock of the crisis and produce the next crisis. Is the USA willing, or able, to regulate the finance economy market limiting credit to, say, 12 (up till 2004) or 4 times own capital, let alone the 30% demanded by Sharia driven Islamic banks? Hardly, just watch how real economy car tycoons were exposed to a tough questioning, and the speculators in the finance economy were spared exposure.
Casino Capitalism (Susan Strange) is often heard. Wrong. Monte Carlo gamblers lose their own money, and shots may be heard at night. These structural violence mass killers gamble away other people’s money, for retirement, health, and get off scot-free. Occasionally one of these MBA youngsters in their twenties (see Michael Lewis, Liar’s Poker) is taken to task for losing the bank’s money. Where did that money come from? No decent suicide. And, Nuremberg, where are you when we need you?
Nothing will help, except strong regulation favoring banks with solid equity on both sides of the debtor-creditor relation; the old way. There would be more drastic decreases in the Dow Jones and related indices, from the 11,000s down to the 8,000s down to the 5,000s. Bad? No, by and large good, assuming that the root of the crisis is not credit squeeze but the loose, even zero, coupling between finance and real economy. Like a worn-out car clutch, or a clutch totally released: a decoupling. Pump the accelerator and the rpm is impressive, only that the car does not move. The show goes on. Till the gas runs out.
If the finance economy needs a real economy counterpart, then quick growth in the former and none in the latter spells bubble-production. But US deep culture "more is better" makes synchrony look counter-intuitive and falling Dow Jones etc. catastrophic.
But credit will flow again, for production and consumption. And then? The US economy is to a large extent based on opening huge containers from China to make incredibly cheap products available at Wal-Mart, stimulating China and Wal-Mart economies. Credit for consumption of imported goods would have the lowest multiplier effect. Then come domestic products, then investment in new domestic production. And then two more hurdles, tests.
To compete, if free trade remains more or less axiomatic, the US has to produce higher quality at lower prices, for any product. Will badly paid US workers, deprived of pride, deliver high quality? And how about degree of processing, imparting culture to nature, in a de-industrialized country? The USA does that as the world’s leading arms exporter; only that the arms are irrelevant against massive popular resistance, in Vietnam, Iraq, Afghanistan and Obama’s chosen battle field, Pakistan.
Conclusion: the USA is likely to get more finance economy bubbles, stimulate foreign economies rather than their own, and to produce more conflicts around the world to sell increasingly irrelevant arms to their allies, like to stupid Norway recently.
Then, bailout and stimuli packets cost money, and where does that come from? From Fort Knox by massive printing, and massive debt. Prediction: we have seen nothing yet; wait till that bubble bursts, adding to the basic needs oriented inflation in food-fuel-housing. And, to service the debt nominally the $ will probably be massively devalued. To sell non-competitive industrial products? Or rotten financial products/services?
The alternative is to keep the credit institutions within bonds, to stimulate domestic production, subsidize necessities, tax luxuries and above all public works for green and affordable energy, improved infra-structure, schools and clinics. Even better if the workers hired are among the most deprived. Salaries will cover their basic needs, even small increases in buying power for the vast majority of the population will make for real economy growth, and in addition basic needs services are improved through the selection of projects. Learn from the Chinese Guangxi approach, learn from Islam, learn from Keynes. And learn economics from people with necessities and normalities, not from system-oriented "growth" economists.
The US economy was never free market; it was always based on big government money for big companies in the real or finance economy. Taking from the poor, giving to the rich; let the rich keep most when the going is good, subsidize them when it is bad. A rotten system, in need of a major overhaul, which will not come in the foreseeable future.
Unless the miracle should happen that the anger all over the country translates into consciousness, organization and confrontation. Like flooding Wall Street with protesters, demanding that the gamblers come out for a dialogue. Like surrounding each foreclosure with a thousand-strong protective belt. Like organizing banking cooperatives, locally, boycotting the worst. Like using the CEO-pay/workers-pay in a company as a guide to whom to patronize and whom to boycott: the ratio was 42 in 1980, and 525 in 2000.
And for other countries: to recommend quarantine for the US economy, make distance, and do, as the Chinese premier Wen recently said: learning from US successes, and from US failures.
8 December 2008