The blog provides a left-wing non-partisan perspective on socio-economic issues in Russia and throughout the world. The focus is on qualitative development of national economic systems and ensuring flexibility in economic policies to meet the challenges of the 21st century. Email: leftistobserver@gmail.com

BENIGN GROWTH OR MALIGNANT TUMOR?


There has been a debate over the possibility to simply “print” our economies out of the crisis. Some insist that more stimulus is required to jump-start a sustainable recovery while seeing current problems as a financial crisis only, able to be fixed by playing with financial indicators.

To me, this is another proof that the modern civilized world, so arrogant due to its previous economic accomplishments, has gone bananas. We have made ourselves an idol of financialization and are frantically worshipping it. In modern financial capitalism, leverage reigns over equity while debt is no longer a debtor’s problem but a creditor’s. Financial markets have taken control and are manipulating the real sector at will. The entire society sees financial gain as the ultimate goal. Modern economists, obsessed with mathematical modeling, consider maximization of financial profits as the dominant function of economics. Production of material goods is perceived as an unnecessary anachronism.

It is believed that the value that the market assigns to a particular financial asset should be accepted as benign. This makes speculators very happy in times of fluctuating markets as they gain from both growth and slump. But the danger is that in certain conditions this benign financial value may quickly turn into a malignant financial tumor affecting entire markets and, as it is the case now, the entire global economy.

Now, imagine an upscale cruise liner with the passenger capacity of 1,000 people besides the crew. When a passenger pays for the ticket, it is not the ticket that he buys. He buys the right to board the ship in a particular place at a particular time and make use of the ship’s various services for a particular time. The ticket is only a token confirming that right.

What if the advertising campaign turns out to be so successful that the ship’s owner decides to print 2,000 tickets, but that seems unable to satisfy the demand? The buying frenzy goes wild on the day of the departure and a multitude of people gathers in front of the liner on the quay in hopes to get a spare ticket for any price. This immediately creates a spontaneous speculative market with people buying and selling tickets thus driving the ticket price up to unbelievable highs.

It is obvious that the outcome of this hypothetic situation would be highly pathetic. The foresight-lacking owner of the vessel would be counting a hefty short-term profit and watching its liner rocking from side to side as people contended for their right to occupy their cabins. As soon as the news about the actual amount of tickets in circulation reached the crowd, improvised speculators would have very little time to get rid of their tickets before their “value” plummeted to zero. The sentiments of the crowd towards the ship owner, I believe, need no clarification on my part. He would need to be fast, very fast to run for his life.

You might say this ridiculous situation is unlikely to happen in reality. How stupid should one be to own a ship and ruin excellent long-term business prospects for the sake of some hefty, but short-term revenue?

But it is not so unlikely –

The financial capitalism of our time is very similar to that spontaneous market on the quay, longevity being the major difference. The only reason why the modern epoch of financial speculations is not yet over lies in the fact that most people are still ignorant of the true value of assets they possess. When that realization sinks in, we will all have very little time to catch hold of available real assets before our illusory financial wealth turns into dust. The scariest thing is that something similar will be happening simultaneously all over the world with crowds searching high and low for their own “ship owners”.

A financial asset is a token that confirms somebody’s right to a particular real asset (a good or a service). Financial assets are easy and cheap to make – today all it takes is a computer with the right codes and passwords. Those are not only derivatives, but even the very money most of us are working for. And I deliberately refrain from drawing any lines between them in this article for the sake of showing that, regardless of whether they are government-issued or privately issued, financial assets are nothing but tokens. The uncontrolled growth of the modern financial sector can easily put the world economy at risk. Large transnational banks and various other financial institutions are in charge of running the ever-increasing mass of artificial assets up and down the world economy in search of new profits. Some of them are capable of challenging entire countries; they are almost like countries themselves.

We often forget that the real wealth is comprised of forests and lakes, mountains and hills, valleys and fields, natural resources and clean environment, human skills and knowledge, effort and labor. These are the values that will remain long after our pursuit of valueless financial gains runs out of steam.

Boris L. Anisimov

GROWTH BEYOND THE LIMIT


The economic development of the past two centuries has changed our world quite a bit. If our ancestors had a chance to take a look into the future, they would hardly be able to recognize the world. The very first thing they would notice is our ability to produce economic goods beyond our needs, which was unthinkable back in the days due to limited technical capabilities. Consumption-based production has transformed into production-based consumption. Humanity no longer seeks ways to improve production to satisfy needs. Instead, we are now looking for more sophisticated ways to consume the glut we have produced.

This definitely has some positive sides to it and is in fact commonly viewed by many as a panacea to solving the world’s most critical economic problems: unemployment, budget deficits, etc. Economic prosperity and a wider range of available goods and services undoubtedly make our lives easier and more fulfilling, but there is something that doesn’t quite go hand in hand with the economic reality.

Increased consumption is only seen in the developed world, while other countries are still lagging far behind. In fact, socio-economic inequality has been growing more and more rampant. In other words, only certain parts of the world can appreciate the benefits of constantly improving production capabilities.

There is another problem often overlooked by modern economics – now that we found ways to improve production by introducing new sophisticated technologies, we have long come to a realization that consumption must be stimulated in a similarly sophisticated manner. It now turns out that developing production capabilities is not enough. In fact, globalization often makes it unnecessary if production can be moved to other countries. A consumption potential of an economy is now becoming an important factor, so vital that it can be considered almost another production factor, even though it is not officially recognized as such. Previously, there was no need for such recognition since consumption limitations of the past were successfully addressed by means of economic expansions. But within the framework of globalization, finding new external markets is becoming more difficult and costly. An ability to boost consumption is becoming vital for stable economic development.

Globalization is redistributing both production and consumption globally causing some countries (e.g. China and India) to “specialize” in production and other countries in consumption (e.g. developed countries of North America and Europe). Problems with consumption in the developed world will immediately affect production in the developing world. Thus, boosting a developed-country consumer’s spending becomes a global project involving the entire world economy.

Having considered all of the above, is a constantly expanding GDP that much of a perfect solution to economic problems? It appears to be quite the opposite if it exceeds the natural level of consumption on a respective market. In this case, consumption will have to be boosted at any cost. Otherwise, the market will see an “over-production crisis” as termed by Karl Marx.
For quite some time, consumption was able to be lifted to higher levels by means of credit, which entailed a creation of an entire mechanism of global credit expansion with its respective institutions. But credit also expanded production thus making a crisis like the current one an inevitable thing. It is in fact an ordinary over-production crisis (or over-accumulation crisis as named by some economists), but on a global scale.

But any long-term expansion of credit soon becomes unsustainable when ultimate consumers will not be able to borrow any more, their servicing of previous debts becoming more and more challenging. That is when they will start defaulting on their loans. When debt has saturated an entire economy and eroded many households’ incomes, the financial system collapses, any disbalance in any tiny segment of that system being able to send the entire economy spiraling down. On the surface, it may look like a FINANCIAL problem while its roots lie deep in the inability to further ECONOMIC development. That is why those who understand political economy rather than economics alone are reluctant to call it a FINANCIAL CRISIS. It is in fact an economic one. This time defaults in the US sub-prime mortgage market, a small segment that deals with borrowers whose credit histories are far from perfect, were sufficient to trigger a major global economic disturbance that spilled into the real sector.

Boris L. Anisimov

ROBBING PAUL TO PAY PETER


In spite of upbeat comments from their political leaders, developed countries are still facing tough times. And the situation seems unlikely to get any better any time soon. According to projections published by the Organization for Economic Co-operation and Development (OECD), the euro zone counties’ sovereign debts are expected to rise up to 90% of GDP while the US national debt is sure to hit 100% of GDP by 2011. The US House of Representatives has recently raised the national debt limit up to $12.4 trillion, which is only a couple of trillions of dollars away from the US GDP itself currently standing at approximately $14 trillion dollars. According to experts, this level is likely to be exceeded before the end of 2009.

Following the negative news from Dubai, Greece has hit newspaper headlines across the globe. The aggregate debt has reached €300 billion, which amounts to 125% to GDP, and is likely to go up 9% to €326 billion (133% of GDP). The authorities are pledging to bring the budget deficit down to 9.1% of GDP from the current 12.7%, but that is still 3 times higher than the EU-authorized budget deficit threshold. Other European countries’ national debts are also on the brink of hitting the GDP level in a year or two and will have no other choice but issue government bonds.

Thus the most important question that arises is WHEN. When will this worldwide Ponzi scheme collapse under its own weight? When will the entire world stop robbing Paul to pay Peter? The numbers are inexorable when pointing to the actual condition of the world economy. If some real asset like gold, silver or any other rare commodity was in circulation worldwide as money thus limiting the money supply to the actual amount of that particular commodity in circulation, the entire world economy would have already collapsed and disintegrated. The global economic system has been bankrupt for a long time and is now nothing more than a giant bubble. Artificial liquidity created out of thin air by central banks throughout the world keeps the bubble deliberately inflated for obvious political reasons.

It is doubtful that the growing US national debt can have any adverse effect on the US economy. The Fed can run its printing presses to solve the problem since the debt is in the very currency they print. On the contrary, countries whose currencies are not as easily convertible as the US dollar may soon face serious chalenges.

Boris L. Anisimov

SCHOLARS OF BUBBLONOMICS

The breakout of the world crisis with its financial losses and economic slump has sent shock waves not only throughout the business community but among modern economists as well. The latter were unable to predict the tragic events in spite of all the academic regalia and complex analytical tools. Common people began to doubt the need for economics as a science, while some went as far as blaming economists for the economic mess the entire world had found itself in.

As times goes by, it is becoming more evident that the negative trends were not a secret at all. There were those that had been warning of turbulent times to come, but the voice of reason fell on deaf ears as the speculative bonanza continued to roll on. So why didn’t mainstream economists notice the trouble then? Why didn’t they prevent the cheap-credit frenzy? Were they blind to the obvious? Or simply silent about it?

My response would start with a point that neither common people nor economists discuss these days. This failure to foresee the crisis is partially due to the separation of modern economics from the needs of the society. The connection of economic studies with social studies seems to have been lost. Economics is defined by the Merriam-Webster Online Dictionary as “a social science concerned chiefly with description and analysis of the production, distribution, and consumption of goods and services”. But what it has become is not in line with this definition. Economics is more and more about mathematical modeling, which distances itself from human relations and behavior. Instead of handling economic developments for the sake of an entire society (including evolution of economic models), economics has turned into speculative theorizing intended to “talk up” the economy for the benefit of the elite.

Money is constantly presented as wealth while in fact these two are separate and distinct things. The real wealth is people, their abilities and skills, their cultures and values, their lands and natural resources, forests, valleys, mountains, etc. Money on the other hand is an artificial equivalent needed for exchanging wealth. Wealth is WORTH because it takes years and decades to develop (it has ESSENCE to it), while modern electronic money only takes a couple of seconds to be created digitally out of thin air. The mere abundance of money does not imply wealth. Inflation shows it pretty clearly – everybody may be billionaires, but their billions are hardly WORTH a rotten carrot.

Modern-day economic activity seems but ECONOMIC HUSTLE based on overpricing valueless stuff while inflating bubbles is publicly presented as economic growth. Economics no longer concerns itself with provision for the material needs of a society. In fact, this speculative corporate “bubblonomics”, as I call it jokingly, is no longer interested in the society at all. The society itself becomes a resource to be tapped into, while in fact it should be the ultimate “employer” that “hires” economists to provide economy-related services for the benefit of the entire society. Since the elite has the means to employ economists and sponsor specific types of economic studies that meet its needs, it is not difficult to guess whose interests end up being taken care of.

Economists are paid to find ways to boost their masters’ profits. The economic effectiveness of a society is not in their sphere of interest. It is no wonder that they overlook the fact that overall economic effectiveness of a society is quite often unrelated to economic effectiveness (or profitability) of market players in it. Corporate profits are equated to the well-being of an economy. In other words, companies may be enjoying hefty profits while the economy, its social aspect undoubtedly being its integral part, may be in serious trouble. Outsourcing serves as a perfect example of it. Corporations cut costs and make profits while a national economy loses jobs and relies on debt to preserve existing consumption levels, which leads to new crises.

This misconception goes all the way back to Adam Smith, who believed that what is good for one market player is good for the entire market. Since boosting profits is good for an average company, he reasoned, it will be beneficial to the entire economy if all companies should boost their profits. Adam Smith lived in the times of unrestricted capitalist competition, which had developed within small locally-defined unassociated community markets. But we do not live in that economic environment any more. In this day and age, global transnational oligopolies find it very profitable to continue convincing everybody that free market still exists. The mainstream neoclassical “market theology” is not accidental – it is deliberate because it encourages smaller markets throughout the world to open up to the economic giants.

Thus, certain economic theories have been deliberately simplified, taken out of context and given prominence in academic circles and political speeches to justify dangerous economic practices. Economics now serves as a powerful propaganda tool to promote interests of transnational capital under the slogan "PROFIT AT ANY COST" while economists remain silent about the actual developments that shape our economic reality.

Free market and other neoclassical concepts are applicable within specific historical conditions but students are trained to believe that those concepts can work in any country any time. They become convinced that their economic paradigm is universal. As a result, they fail to pay attention to the fundamental evolution of economic models, which can be seen from the standpoint of political economy rather than neoclasical economics. The shift in economic models ends up being noticed when it is too late.

Those with money and power are the ones to determine what economic paradigm is officially followed and studied because they are the ones who ultimately hand economists their paychecks. It is the elite that form public opinion on economic issues through media and college books. They are the ones who determine official statistical indicators, and they are those who publicly interpret them. They tend to convince their people that the economic model that keeps the current elite in power will never change because it is universal. That happened in ancient Rome, in feudal Europe, in Communist Russia – the same thing is happening now. They are convincing us that getting deeper in debt will stabilize the economy, that up to 80% of GDP represented by the service sector alone is good for job creation in the private sector, that outsourcing will make consumer products more affordable by reducing production costs, that global transnational corporations do not interfere with the market mechanism but in fact promote private business initiative worldwide, that globalization provides equal opportunities for all countries, etc. But the funny thing is that all these economic principles have in fact nothing to do with economics. Those are all about politics and preserving the power of the elite.

Boris L. Anisimov