"Your majesty, your majesty, the peasants are revolting."
"That's right, they stink on ice."
From History of the World Part I, written and directed by Mel Brooks.
From the Lindsey refinery of French giant Total in England comes news that
local workers went up in arms over plans to hire foreign workers, the revolt
starting an initiative to force employers to hire locally across the country.
This was quickly broadened to a Buy British campaign, with retailers and farm
lobbies also going on the offensive.
Elsewhere on the Old Continent, the French government doled out 6 billion euros
(US$7.6 billion) to its car companies on the express condition that they will
not cut back jobs on French soil, following the path set by the Nordic
countries as well by neighbor
Italy. Similar protests that invoke nationalism as a feeble excuse for
protectionism have been heard all over the continent in places like Spain,
Ireland and of course, Greece.
The Great Hope, aka US President Barack Obama, has also lurched towards
populist rhetoric, be it in the demand to cap compensation to bank chiefs at
US$500,000 or the "Buy American" provisions subtly introduced into various
infrastructure spending programs as part of the almost $1 trillion that the US
government wants to spend in boosting its own economy.
There is shrewd political logic in the president's outbursts as he seeks to
deflect attention from the recent embarrassments of key appointees not paying
their tax bills; but it is quite likely that a lurch to the far right would
have happened under the left-wing ideologues at some stage or the other. Nope,
they still don't get irony over in America.
The next logical step for Obama would be to start preparing a five-year plan
for the United States, and if he hasn't gotten around to it, perhaps Paul
Krugman would oblige in short order. Banks that take government funding, that
is to say all of them, will be required to reopen lending and declare all
mortgages default-free and reduce outstanding amounts. In effect, by hook or
crook, the idea would be to reintroduce Americans to the concept if not exactly
the reality of positive net worth.
Clocks back
As I wrote in Capitalism
at the crossroads, (Asia Times Online, January 16, 2009) everything
associated with the prosperity of the past two decades is now under the
microscope, be it free markets or globalization. In its place, the quacks would
like to reintroduce the system of managed socialism with a bent towards curing
the world's other evils, namely credit cards, conspicuous consumption, climate
change and whatever else you care to classify in the "cc" categories.
Within all the Keynesian spending discussions, there is an underlying
discomfort for the liberal democracies in the Group of Seven leading
industrialized nations, namely how to control deflationary price effects of
wiping out hundreds of billions more in investment values going forward; the
resulting net worth shock would need to be absorbed by the governments of the
day by deficit spending.
This arrangement ignores a vital ground reality, namely the distribution of the
world's surpluses and deficits. The US runs a massive deficit already on its
current account while Europe runs significant fiscal deficits. At the systemic
level, through the reserve currency status of the US dollar and the
alternate-reserve currency role of the euro, both the US and Europe need to
secure their net funding from the savers of Asia.
Demographically, Europe is headed for continued consumption declines in
perpetuity, much like the Japan of today, the key difference being the
relatively high level of entitlement spending in the Old Continent that
requires governments to increase their borrowings in a near-geometric
progression. Pretty much no European government, with the exception of Germany,
now stands in a position to organically raise revenues that can be used to pay
down debt; instead they will increasingly depend on refinancing debt from
willing savers in Asia.
For the US, the demographic challenge is no less, with the population peaking
about 10 years ago and none but the most illiterate and unskilled of laborers
willing to move to the country from the rest of the world. With even these
menial jobs now being taken back by unemployed Americans, the reduction in
immigration will also posit an almost certainty that the American population
will continue to shrink for decades to come. This would eventually reduce
consumption to the level that can be supported by domestic production; however,
the spiraling spending required on healthcare and other items of entitlement
would also mean that the US would face a situation not unlike what is being
faced in Europe today.
Protectionist impulses only help to accentuate rather than ameliorate these
trends; but since the new Keynesians don't even comprehend the additional
borrowings required for their current actions, it is quite unlikely that they
could even think about longer-term issues.
The most important near-term issue from protectionism is of course inflation,
as the inability to substitute higher-cost, lower-quality products (such as
American cars) with cheaper, higher-quality competitors (such as Japanese cars)
would inevitably lead to both lower operating efficiency and higher borrowings
for American consumers. In many ways, this will be replicated with the
purchases of materials and labor required for the new infrastructure projects
(American steel, American concrete and American labor in place of European
steel, American concrete and Mexican labor).
Other than higher costs and lower efficiency, consumers will also suffer from
the inability to extract Ricardian efficiency, as the closure of free markets
and free trade helps to hinder factor mobility. In effect, what we have now
between Keynesian spending and protectionist impulses in the US and Europe is
the organized scarcity of labor and factor inputs; the rise in prices is almost
a foregone conclusion at that juncture.
Asian isolation
Already losing hundreds of billions of dollars in the value of their supposed
safe savings in triple-A rated bonds issued in the US and Europe, Asians will
also soon find their factories grinding to a halt. The absence of a social
security net in most parts of Asia - most glaringly in China and India -
implies that government measures to boost domestic spending by multiples of
what has been currently proposed will soon be forthcoming.
In the case of China for example, the export sector, which occupies almost 40%
of the economy, could well shrink by half. The decline in intra-Asian trade has
exposed the lie that these countries actually consume one anothers' products;
instead, all are simply parts of the global supply chain towards consumers in
the US and Europe. The most likely culprit in preventing consumption across
Asia was the failed IMF ideology of weak currencies, export-led growth and
accumulated foreign exchange reserves.
Without balance in their economies, Asians have become the unwitting victims of
the global crisis in that their savings and future sources of income are both
being wiped out serially. It doesn't appear to me that either politicians or
central bankers around the region are even cognizant of these risks.
The only way forward for Asia is to engineer a dumping of US and European
financial assets and adopt a regional gold standard that helps to keep
inflationary impulses at bay while providing Asians with greater security on
their earnings and asset values. As for the collateral damage in the form of an
obliteration of government bonds issued by G-7 countries; well what can I say -
get some popcorn ready.
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