what i wish i wrote


"John Maynard Keynes was still a practicing economist in those days, and his central insight about depressions — that governments need to spend when the private sector isn’t — was not widely understood."

This still isn't understood. His insight really isn't that governments need to spend. Its that governments need to borrow when the private sector isn't borrowing. The interest bearing debt based economy needs to "grow" constantly. If someone isn't willing to create a larger layer of interest bearing debt to support the previous layer of interest bearing debt then the pyramid will begin to collapse. Today the private sector refuses to go into debt to create this larger layer so governments have to. But now it seems that governments too are refusing to go into debt to create the larger base layer of debt. If no one steps up then the previous layers of the pyramid will collapse - i.e. previous loans will start to default and what will ensue is joblessness, foreclosures and shrinking corporate profits - all of which depend on a constantly growing pyramid of interest bearing debt.

BTW, the reason I keep mentioning interest is because it is the satisfaction of the desire for interest that necessitates a "growing pyramid" - without interest we would have a flatter debt structure and it would debt would be much more sustainable.

Colesville, MD

The tragedy of monopoly financial capitalism is that it grabs most surplus of the real economy and contributes almost no economic surplus to society. Its high non-productiveness monopolizes the societal economic activity and renders the low productiveness of the real economy even lower everyday. Enormous over-production hence over-capacity in the real economy make accumulation of profits emaciated whereas monopoly financial capital accumulation outshines its real economy junior partner.

To solve these tragic internal contradictions, the most basic approach is to reduce the over-production and capacity that resulted from competitions on the global market. In good times, the well-employed and –expending middle class of the world would have briskly made the over-produced economy well in hand. Now the heavily indebted and demoralized middle class as a result of the financial crisis wants to buy but finds themselves shy of funds. Are there other ways to break up the siege? Well, war is the most notoriously wasteful and cruel way to do the job of massive consumption of the over-produced goods and then to lift employment by expansion in production. The other way to waste off surplus goods is to buy them from the market and physically destroy or burn them. Both had been adopted during the Hoover Great Depression. The Second World War did indeed solve the problem of severe unemployment due to deflation.

Would a short-term deficit spending and stimulating program extricate the over-production-deflation debacle from the Bush Great Recession and now Obama Depression? Yes, for a short time of period when government spending replaces an anemic private spending but no, for long term. It is not a cure-all strategy but only a temporary relief tactics.

In connection with the deficit-reduction and austerity program, on the other hand, there is the tendency to aggravate bankruptcies and foreclosures, both to so much higher levels, that would serve the purpose of destroying not only surplus goods on the market but also, more importantly, means of production of the capitalists. As a consequence, drastically reduced inventories as well as destroyed capital surplus eventually would emerge over the world, renewed investment and production would start in earnest. The economy would reach its recovery stage, if every unfavorable condition would be made harmless and all conditions propitious to accumulation of capital. The petite and less profitable capital assets, however, would be auctioned off to the big and monopolistic capital, making the capitalist system further monopolized and away from democracy. Thus this deflationary approach would break out the debacle at great social costs of declining working class dignity and status, unemployment, bankruptcy, misery, destitution, and fierce class warfare. A protracted struggle between the two dominant classes would almost certainly engender the Second World Revolution after the first one that broke out in early 20th century. The First World Revolution retreated from the world’s political arena after holding power for almost half a century in the periphery of the capitalist world system. It was incomplete and not without mistakes due to its confinement to only the less developed areas. The Second one will occur most likely in the center because the crisis-prone area is now concentrated in the advanced capitalist countries rather than the peripheral areas as before.

In summary, both the inflationary and deflationary tactics are subpar. They may relieve severity to some extent and temporarily but can never eradicate the poisons of private profits and expropriations of the society-oriented means of production.

Its solutions will have to be sought elsewhere in the radical political economies.


beaconps, PA said...

What are the differences and similarities between now and 1930 that makes a stimulus ineffective at this point? A stimulus is an active intervention to correct a temporary imbalance. Our issues are not temporary.

1. We are coming off an exaggerated borrow and spend consumption bubble that has lasted 30 years. We have consumed too much.

2. We have confused Wall Street with investing which has mis-allocated capital and continues to mis-allocate capital.

3. We have job hopped without real improvement, inflating wages.

4. We have house hopped which has inflated our short term expenses, inflated housing prices, and created inefficiency instead of an expected long term gain.

5. We have abused credit for consumption by wanting and having it all, now. We spent regardless of usefulness thus creating inefficiency of debt service and life-restricting baggage. Your stuff owns you.

6. We have lost the money multiplier effect within the community by not purchasing locally and lost it nationally with overseas production. Proof: when we encouraged lose monetary policy, housing inflated but not the cost of goods because the supply was unlimited with offshore production. A stimulus would have the same lack of effect in the US, but would have a stimulating effect where goods are produced. For every stimulus dollar, we might retain 25 cents or less.

7. It is not possible to support our large complex financial sector that has short term profit motivations and an exaggerated rewards system that disguises gambling and business destruction as value adding investing. It is gambling with the House having the decided advantage.

8. We are going to suffer The Great Contraction as balances are restored and capital is re-allocated. Unemployment will increase to ensure wage control.
Consumption can no longer be a driver of the economy, it is unsustainable and considering the trade balance, destructive. Every country must be a net exporter to overcome the inefficiencies of mis-allocated capital, resources and labor within the country. The greater the mis=allocation the greater the deficit per worker. Deficits are symptoms.

Andrew, Colesville, MD said...

...there are several points that need to be clarified:

The new deal infrastructure work 70 years ago employed millions of workers but will it do the same trick, given the highly computer-aided design-development and other automation manufacturing practices? These days’ most heavy works are done by heavy machinery not by lumber jacks. Infrastructure rebuilding programs can only absorb fewer workers than in the 1930s.

Some ask for reduced tax for the capitalists who, as they claim, would use the saved money from tax for investment in productive enterprises hence increasing employment. This assertion is questionable at the best. Most likely the less tax they pay, the more they will spend unproductively. They will prefer investment in gold, for an example, to investment in real economy, as George Soros is doing. The reason is obvious, namely, the return from the real economy is too low as demand is at the bottom in a Great Recession or near Depression. They have too much capital but cannot invest productively because the economy is utterly private-profit driven. That is why speculations, financial “innovations” and casino-logy run rampant.

Others call for innovations- and technologies-led recovery. This idea is also out of date, to one’s chagrin. The new innovations and technologies are mostly either for services like entertainment and communications or industry-assistance. The workers that they can absorb are few and white-collared only. There is no way for them to mass-employ blue-collared workers in the millions or even hundred of millions as in those good old days in the industrial revolution era.

The so called green energy engineering sectors likewise cannot mass-employ. The reason why they can’t is again simple, i.e., capitalist production is private-profit driven and saving labor cost has been the sine qua non to do business hence the employment number and wages have to be minimized enough to make a profit. But the story does end here. Because production is highly automated, fixes-capital-investment (computers, factories, equipments, materials and other fixed assets) tend to out-weigh labor-capital-investment, their rate of profit has the tendency to decline due to the fact that less labor inputted to production means less profits.( Fixed capital alone does not create value of products.) The average rate of profit relative to the sum total of all kinds of capital inputted to aggregate production tends to decrease; this trend discourages investment hence expanded production and distracts industrial capital to become unproductive, for instance, to be absorbed by financial capital, which then squander the savings coming from the industry and households as speculation and gambling fodders. This kind of vicious cycle that decreasing profit rate stifles production can go on for a long time and the orthodox economics would fail to cut it loose.

The solution is to transform the capitalist system into some newer system like nationalized first the monopoly financial system, later on to nationalize all big monopolies. Finally a socialist system will have to replace capitalism all over the world.

Popular Posts