Page 2 of 2 A world still half red
By Julian Delasantellis
government social safety nets that had been established to protect society's
most vulnerable citizens from the vicissitudes of capitalism.
That, of course, did happen, but, in the credit and debt crisis still
bedeviling the capitalist world, we see yet another echo of 1990. The new
gilded elite, not satisfied with the gold they could pull out of the dental
fillings of the bottom 80% of the population, then moved to generate even more
wealth by, essentially, creating it out of thin air.
Last March, I described
research reported by Tobias Adrian of the Federal Reserve Bank of New York and
Hyun Song Shin of Princeton, elaborating on the new, shadow banking system that
flourished in the world's capital markets in the heyday of this decade's credit
boom, one that emerged almost totally impervious to any regulatory authority by
the governing agencies of the old order.
Adrian and Shin wrote: "A closer look at the fluctuations in balance sheets
reveals that the chief tool used by institutions to adjust their leverage is
collateralized borrowing and lending."
What this means is that, during this period, whenever the upper-income groups
wanted even more on top of what they already had, they found that what with
regulation of banking and credit now looked upon with scorn in the period's
free market idolatry all they had to do is roll up and bundle some asset, such
as subprime home mortgages, securitize them into bonds, then fire them back off
into the credit markets to be then borrowed and lent and borrowed and lent on
again, as many times as possible.
Then, in 2007, investors, such as those in Bear Stearns' two highly leveraged
hedge funds that went belly up about a year ago this time, found that there was
no real value, no collateral worth even a fraction of what all these credit
market abstractions were valuing these securities at, and the whole thing
unraveled.
If you look at today's slowest-growing capitalist economies, you'll see that
these are the ones that only a few years ago were luxuriating in the easy money
of credit and housing booms now so painfully deflating. (See
Of termites and index mania, Asia Times Online, July 3, 2007.)
What about the fast-growing countries? A common military aphorism is that the
worse fate that can befall any army is that it wins a war, for that leads to
ossified and inflexible strategic thinking for as long as the victorious
officers are above ground. On the other hand, losing countries, such as Germany
after World War I, go frantically back to the books, think up new ideas, and
try to make sure that their humiliation and defeat is never repeated, though
they got the next one wrong too.
Winners and losers reversed
This is the simple way to explain why the late 20th century's losers are the
21st century's winners. All of these countries built their success on what you
find on page 1 of the Successful Economies 101 textbook - exports. China
exported manufactured products, a business hand delivered to it by American and
Western manufacturers that wanted to garner the profits that would be generated
by paying workers Third World wages to make products to be sold at First World
prices.
India is becoming the world's powerhouse in services, a position it found it
could assume since that, even in its poverty, it never ignored its educational
system, something that the United States, with all its much greater prosperity,
regularly does.
Vietnam is taking the overflow in manufacturing spilling out of China, while
Russia and Ukraine are prospering through their peddling of hydrocarbon
products at today's very dear prices, a condition made highly profitable
through the West's allowing the OPEC/world oil company supply restriction
oligopoly to operate with unfettered impunity.
In addition, today's winner countries have adopted another principle that
today's losers once knew but have since forgotten and are now ignoring - the
supreme importance of saving. From the time of the Protestant Reformation of
the 16th century it has been well accepted that savings and thrift, by
financing productive investment, are critical to the successful long-term
operation of capitalist economies. The winning nations are savers, and they
earn interest and tomorrow's wealth and power from being so, while today's
loser countries, by spending to the last dime and then borrowing some more
dimes at punishing rates of interest so they can consume more than they earn
some more, are spending their way straight into historical insignificance.
As Evans-Pritchard implies, this dichotomy has enormous implications for the
management of the world economy.
The West now simultaneously faces two very different economic problems,
inflation and unemployment. The unemployment side of the coin is resultant from
the contractionary, wealth-destruction effects of the pricking of the
housing/credit bubble. With all that funny money now not being created and
injected into the general economy, there's just not enough, despite the near
frantic efforts by the US Federal Reserve to recreate the liquidity that the
credit bust is destroying, to sustain the previously high levels of domestic
originated economic activity and employment.
Then there's the inflationary threat, originating on the other side of the
world, resulting out of demand from the newly prosperous nations making their
buying presence felt in the world's commodity markets. The desire here is to
supply both their rapidly growing economies and their hungry, newly prosperous
citizenry.
Two different problems, arising from out of two different regions of the world
economy. There is no guarantee, actually, it's fairly unlikely, that a policy
initiated to deal with a problem originating in one region can be effectively
dealt with through unilateral action in another.
In the United States, inflation is now the main concern, as the daily panic of
the nation's gasoline and grocery price signboards surpasses concern for both
the subprime/credit crisis and the Iraq war in the nation's nanosecond-long
attention span. Many, including a very significant portion of the Federal
Reserve Board, favor a spoonful of the true and time-honored inflation fighting
medicine, interest rate hikes, to deal with this problem.
Interest hike irrelevance
It is difficult to see how interest rate hikes in the slow-growing west are
going to dampen commodity demand in rapidly growing east, at least not without
a time lag of very significant duration. If rate hikes lead to an appreciation
of the US dollar against the fast-growing counties home currencies, it could
actually result in an opposite effect, as these countries' depreciating
currencies fuel more boosting of commodity demand and inflation through faster
economic growth.
On the other hand, some, particularly in the US Congress, are calling for a
sharp upward revision in the yuan, the Chinese national currency. This, they
hope, will support employment in the US by making it less profitable for US
manufactures to move their factory operations to China. How successful this
would be is very questionable - US manufacturers are already scouring other
Asian nations looking for new exotic locales to outsource their workforce to.
What is certain is that slower economic growth in China and the other current
winners could collapse the supports from the US economy's only real current
source of growth, the industrial and agricultural export demand from these
countries.
Maybe it's time to see a return to respect for efforts, begun at Rambouillet in
1975 with the first G-7 international economic meeting of Western leaders, at
international coordination of economic policies. These meetings, still held
annually, are now, what with the recent submission to the free market gods of
jurisdiction in all things economic, now little more than group photo
opportunities, as that the biggest news made from one of these assemblages this
decade was George W Bush's copping a feel from German Chancellor Angela Merkel
at the 2006 G-8 summit in St Petersburg.
Of course, China, India and Russia, representing the world's new economic order
and powerhouses, would merit seats at this table. Russia was included in these
conferences in 1997, but only as a sop to a once-great nation that had then
fallen on hard times, not as its current status as a major economic power.
At a 2001 summit, George W Bush once said he looked into then Russian president
Vladimir Putin's soul and saw virtue; here, the US president would have to
reciprocate by letting new Russian President Dimitry Medvedev look into his
wallet. Nothing will be accomplished unless the US president, be he Bush or
2009's new resident of the White House, abandons the current US conception of
international negotiations as something that is undertaken only with the
explicit understanding that the end result will never include any concessions
or compromises on US policy positions.
With all these seemingly intractable problems, maybe the question should not be
why Ambrose Evans-Pritchard is so pessimistic - it's why everybody else isn't.
Had he not died last year, perhaps today's dour economic situation could be
material for another depressing Ingmar Bergman movie, perhaps a remake of his
dark 1957 classic, The Magician; sometimes it seems that things are so
bad these days that one such as this film's title character will be needed to
solve all the world economy's varied problems.
Julian Delasantellis is a management consultant, private investor and
educator in international business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
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