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

PRESERVING THE SYSTEM


The recent upward trends on the global stock and commodity markets have encouraged investors and analysts throughout the world to believe that the world economy is finally pulling itself out of the recession. They are convinced that the existing upbeat sentiments are going to bring in more and more positive news.

In the midst of this euphoria, I remain very skeptical and tend to cling to those who are not convinced that the crisis is over. In my previous posts, I have already explained my position on the reasons for the current crisis and there is no need to repeat myself now. But I would like to focus on the very nature of the modern world economy as I see it. My understanding of things may sound strange to mainstream economists, but the funniest thing is that I am not alone – there are others who think that way too, and this is the reason why.

First of all, it must be mentioned that any talk of free market can be ruled out from the very beginning. The world economy is now under very severe influence of global oligopolies. They are large enough to push entire countries around – and they do it in a very efficient way. The existence of the global transnational capitalism must be pretty obvious to everybody by now. I hope I do not need to explain myself on this point.

Secondly, the global market encourages further division of labor, which places industries and entire countries as international economic players. They are dependent on foreign demand and often become detached from their domestic markets. In case of sudden rapid shifts in the global demand, these countries and industries will have to take the brunt.

Thirdly, it is rarely taken into account that global production volumes are limited by the purchasing power of global markets. The situation is identical to what happens within a national economy when its respective markets are no longer able to consume what is produced within them. Finding external markets solves the problem by channeling resources out of the national markets into newly opened ones. At such a point, the ability to identify external markets and gain access to them becomes crucial. Ultimately, we may say that consumption capabilities of a market are, in a sense, similar in importance to production factors like land, labor, capital and enterprise. In the globalized economy, when consumption capabilities are scarce due to inability to expand markets any further, countries that can consume large portions of the global output reach dominant positions on the global arena and start dictating their will to the rest of the world.

This is the position of the United States of America. The role it plays in the global economy is similar to the role of oligarchs that gain control over production and distribution of a scarce resource within a rent-based economy, thus levying an economic rent on the entire economic system. The US markets have assumed the role of the most important global consumer responsible for consuming the largest portion of the world GDP. The US consumption has become an important factor in the global economy, the mere scarcity of which gives that country an advantage over all the others. Off course, it would be impossible without the special position of the US dollar as the international reserve currency, whose status has been promoted and protected by the transnational elite all these years. High US consumption rates allow the US dollar to remain the main currency to service the global transnational economy in spite of the fact that it has not been backed with gold since the 1970s. The status of the dollar seems likely to be preserved as long as the US economy remains the largest global consumer.

Such re-channeling of the world’s resources into one economy – the US – accounts for the favorable business conditions widely praised by transnational corporations (mainly represented by US companies) and US governmental agencies. They would convince people in various countries as well as their respective governments that the reason for the American success lies in the entrepreneurial spirit of the industrious American people. In fact, the wealth accumulated in the US economy over the years has nothing to do with all that. The image so fervently spread through the media worldwide is in fact a deliberate mirage.

The possibility of the American economy to gain access to cheap resources lies entirely in its ability to create financial assets widely accepted throughout the world under political and military pressure from the respective corporations and governmental institutions. The exchange of real assets for IOU’s together with the credit-driven consumption on the worldwide scale is able to conceal many domestic socio-economic problems within the US. Cheap money combined with cheap foreign resources boosts economic activity, pushing the US GDP to record highs while the official inflation stays surprisingly low.

Initially, financial markets were designed to perform specific functions and service the needs of the real sector. Now the gigantic and ever-expanding financial sector is no longer under the control of the real-world economy. In fact, now it is an “economy” in its own right – an artificial superstructure that pursues its own goals and follows its own rules. That is why it is now possible for stock markets and investment banks to post positive performance data while the actual economy still struggles along, unable to keep up. Under the current rules of the global financial market, this situation is quite normal.

Political and business elites are convincing investors worldwide that the money they make on global financial markets is wholesome and valid. By means of established mechanisms, global transnational corporations and transnational investment banks facilitate the exchange of real goods for financial assets on the global level. In this way, various markets get “addicted” to the constant flow of unsecured financial assets falling under the influence of the global financial system. As long as everybody continues to accept the financial assets produced by this system and willingly exchange them for real goods, the system will continue to flourish.

The same system has been artificially boosting US consumption, which is clearly demonstrated by the respective rise of the US household debt. Many companies from various countries have been lured into US markets in search of large revenues. Since the solvent demand is in reality artificial, these profits are artificial as well – they are the product of that same financial system. The only guarantee that these profits will keep on flowing to corporations while retaining their artificial value is the continuation of the existing financial system at any cost. No extraordinary merit on the part of the US economy can account for the enormous consumption levels as compared with the rest of the world.

Countries have been encouraged to emulate US consumption levels. People throughout the world are getting under the impact of the consumerist sentiments deliberately spread all over the place. The global economic activity will have to be boosted dozens of times in order to bring consumption of all other countries to the US level. This would undoubtedly lead to an environmental disaster of such a scale that none of us has ever seen.

This gigantic colossus of artificial economic activity managed by the global financial elite and propped up by the ever-growing debt and consumption bubbles stands on feeble legs of the real sector largely represented by low-wage and thus low-cost developing countries. People at the top seem to believe that the load the global real sector is carrying can be increased indefinitely. The current global economic crisis has proved them wrong. They had to respond to prevent the collapse out of fear for the economic might and political power they possess on the global arena. The massive financial interventions can influence the statistics and calm down the panic on the market (we have seen this happening lately) but fail to address the economic roots of the problem by postponing solutions and thus aggravating the situation even more. By re-inflating bubbles, I am convinced, the colossus can be prevented from tilting over for some time, but sooner or later more intensive interventions will be needed. The elite will have to face the ugly reality of their own making. Should the global real sector refuse to collaborate within the existing economic framework, artificial financial assets will be of no avail in attempts by the elite to preserve the system.

The system is now under attack from within – growing household debts in the US are threatening the entire structure of the global transnational economy by reducing the US role as the largest consumer in it. Addressing this problem will not be easy. It is apparent that new markets will have to be found if the existing ones are no longer of any use. It appears plausible to draw developing countries’ population into the global economy, but in exchange, emerging economies will, most likely, demand more clout on the global arena, which will reshape the global political landscape.

We are living in a world of global transnational capitalism. The global elite, whose interests are mainly represented by US corporations, banks and government, has created an efficient money-making machine which produces artificial assets and exchanges them for real goods and services not through effective and fair economic mechanisms but through political dominance, military bullying, and financial manipulations. Political economy points to the fact that no ultimate change in an economic paradigm is possible without a change in respective political thinking. Politics has a lot to do with what is happening now and it is mainly political reasons that force elites to preserve ineffective and unfair economic systems at any cost.

Boris L. Anisimov

NAIVE RUSSIA LEARNS THE HARD WAY


I have had a sudden and pitiless realization this morning. It is not that I never thought of it before. This idea has been buzzing in my head for quite some time now. But it was only this morning that I was able to grasp the gravity of this realization. It struck me how foolish and naïve we Russians are as we try to outrun the West ever since the collapse of the Soviet Union. It is no wonder that we have failed.

The very first post-Soviet years in Russia saw numerous and tireless attempts to copy anything that the West could offer – anything was considered replica-worthy unless it was related to the commonly despised Communist regime. The economy was hardly crawling on all fours and was rightfully believed to require a serious shake-up of the underlying economic practices. We decided to turn to the West for advice, and the West “kindly” consented.

Advisors, experts and pundits of economics from international organizations would flock into the country to sing praises to free market and the prosperity it creates. They would assure us that the Western economic model (with the US as its most vivid example) was what our dilapidated economy needed. And I am sorry to say that we were stupid enough to believe them.

We believed that all governmental controls must be lifted and the entire economy would immediately thrive. We trusted the whole world had been waiting to open its economic borders to our goods and services and was eager to welcome us with open arms into the global civilized economy of equal opportunities and prosperity.

If you are rolling up your eyes and shaking your head as you read these words, you know what I mean – we were like little kids sitting by the fireside at midnight waiting for Santa to tumble down the chimney. Yes, we were stupid enough to believe.

The prosperity so boldly promoted by various economic advisors to Boris Yeltsin's airheaded administration turned out to be a myth. We were blind to the fact that US debt levels had been rising all along. The US is still in debt, and their possessions, high consumption levels (which are still unthinkable for most Russians) as well as economic successes commonly attributed to special entrepreneurial traits are all due to ever-expanding credit. The entire economy is a debt bubble. Technically, they are already bankrupt, but nobody will allow that to be officially recognized for obvious reasons. They would simply lift up the national debt limit each time the total amount of national liabilities got a little too close to the brink. Similar things are hapening to other developed countries.

We couldn’t grasp that the US economy was a result of deliberate cooperation between global transnational corporations and US governmental agencies in channeling the world's resources into one economy by means of political and military manipulations. That is what makes them "rich" – it is not about any special entrepreneurial traits, democracy, free market or the rule of law. Who cares about all these if you can legally “print” as many dollars as you want and obtain enormous resources for your economy almost free of charge?

Any attempt to outrun an economy like this is like chasing afternoon shadows – no matter how fast you run, you are always several steps behind them. In fact, we were not the ones to write the rules of the game we had been invited to join. The world could not care less about the problems of our dilapidated economy. And the global economy itself was far from the ideals of equal opportunities and prosperity – it is still an arena for global transnational oligopolies that have already set the rules, staked their claims and are ready to rip any country into shreds to get what they want. They did not need any competitors, but they needed resources, preferably cheap ones.

We were naïve to believe that the kind-hearted white-bearded Santa was sure to bring us presents for Christmas if we were good boys and played by the rules we couldn’t change. Thus, we pretty much destroyed what had been left of our economy with our own hands while shouting out free-market slogans and made ourselves more import-dependent than ever. Free market did not solve our problems, it only made them worse. To our surprise, Santa turned out to be a drug pusher, figuratively speaking.

We thought that copying the outer form of the western economy would be enough. Not much thought was given to grasping its inner essence. We only fooled ourselves. We should have taken time to grow mature and strong enough to face the globalized world on our own terms and according to our own schedule. China has been reforming its economy for about 30 years now. Singapore is another example of planning and gradual economic development. There may be other examples. What is common for all of them is their unwillingness to copy the West or worry about what the West might say. They may not have the American-style democracy, but they have their sense of direction in economic development. They find it necessary to take time to understand their strengths and weaknesses.

Russia, on the contrary, is still struggling to come up with a meaningful long-term plan of development. The more cash would come from foreign oil and gas deals, the more short-sighted we would grow. We have been talking about the need to modernize and diversify the economy ever since the collapse of the USSR, but nothing has been done yet. The roaring and chaotic 1990’s dealt our development such a blow that we are still recovering from it.

Why were we so image-conscious? Why did we jump head-on without even taking a look at what we were jumping into? Why were we so stupid?

Stupid, stupid, stupid…

WAGE-PRODUCTIVITY GAP CAUSED CRISIS


Many speak of the current crisis as a financial one, which means that the source of all the problems is believed to be in the way the financial system is functioning. I have joined the ranks of those who are of an opinion that the roots go deeper than the financial sector. In fact, an analysis from the standpoint of political economy reveals that there is much more to the crisis than meets the eye. A different set of disparities than publicly acknowledged is becoming more obvious.

The “Global Wage Report: 2009 Update” issued by the International Labor Organization on November 3, 2009 mentioned years of stagnating wages relative to productivity gains as one of the reasons for the current economic crisis. This echoes conclusions by Dr. Ravi Batra (an economics professor at Southern Methodist University), Mikhail Khazin (a Russian economist and publicist), William I. Robinson (a sociology professor at the University of California) and Karl Marx himself.

“Productivity” and “wages” are not financial concepts – they deal with the economic situation rather than financial markets and banking regulations. The above mentioned sources point out that the current crisis is an economic one first of all. Let’s look into this more closely.

The wage-productivity gap concept is rarely brought up in modern textbooks on economics, but in fact it should be because the economists I have mentioned see this disparity as the main cause of the crisis. The wage-productivity gap is the gap between the real wage and labor productivity, the real wage being the purchasing power of an average salary. Productivity is the main source of supply, whereas wages are the main source of solvent demand. If productivity rises faster than the real wage, then supply rises faster than demand, the result being a crisis of over-production. Some economists prefer calling it “over-accumulation”, but that does not change the essence of the problem.

In other words, wages are only part of the costs that a capital owner has to incur. The ultimate cost of a good or service will be higher than the wage that the business owner pays to his/her employee to have that good or service produced. Let me simplify it even more - if all the employees in a particular country put their wages and salaries together, they will not have enough money to buy all the goods and services that they have produced. The same principle applies when we talk about the entire world economy.

Each time the wage-productivity gap widens, the economy has no other choice but to contract because of overproduction. This occurs on a regular basis in the form of crises (the Great Depression is a perfect illustration). A long-term solution would be to find new markets and boost demand thereby. Thus, availability of new external markets becomes vital for the stability and predictability of profit-making, but when that availability is limited for any reason, finding new markets can be quite costly and troublesome.

That is why back in the 1970’s when another depression-like crisis became obvious, a less costly solution was found - it was decided to raise demand to the level of supply by means of more aggressive credit expansion (this applies to both government debt and household debt). The abolition of the gold standard was in line with this logic (the excess of the global money supply over the golden bullion was becoming obvious anyway) thus making it possible for governments to increase money supply and keep interest rates down. In the case of the US dollar, as long as active international involvement was maintained, the excessive money supply could be moved abroad thus reducing inflationary pressure on the US markets.

Debt can temporarily postpone wage-productivity gap problems. As productivity rose, debt had to increase as well unless wages were to rise. An exponential global increase of debt puts the entire global economy (not just its financial sector) in jeopardy because it is obvious that the credit system will have to explode one day. Household debt grew from $705 billion by the end of 1974 (60% of disposable personal income) to $14.5 trillion by mid-2008 (134% of disposable personal income).[41] During 2008, a typical US household owned 13 credit cards, with only 40% of households able to carry a balance.[42] U.S. home mortgage debt relative to GDP increased from an average of 46% during the 1990’s to 73% during 2008, reaching $10.5 trillion.[43]

In these circumstances, boosting demand any further by means of credit became impossible. The model of economic development based on artificially-boosted demand, constantly-increasing money supply and the lowering of interest rates has collapsed – the credit bubble did explode in our faces. The dependence of manufacturing and the service sector on credit for the last 30 years made them just as vulnerable as financial institutions. The growing interdependence of markets worldwide spilt the problems over to other countries. This is how we got the current global ECONOMIC crisis.

Banks have frozen their lending in fears that the falling consumption will make any investment unprofitable thus lowering the chances of getting their money back. The response from the governments worldwide is quite predictable – they went to save the credit system, the hardest-hit sector of the economy, in hopes to boost credit thereby increasing national debts. It is now estimated that the US national debt is going to hit the GDP level (approx. $14 trillion) in 2010. The national debts of countries like the UK, France and Germany are expected to reach 90% of GDP. Thus, 2010 may see an unprecedented number of government defaults as the debt-to-GDP ratio for some smaller countries has already exceeded 100%.

Until the wage-productivity issue is addressed, no actual recovery is possible. Any financial measures recently undertaken by governments of different countries will temporarily “numb the pain”, but they are of no avail when it comes to addressing the very essence of the problem. Politicians and corporations have been viewing developing markets for growth opportunities, which seems like an attempt to find new external markets now that domestic markets in developed countries are unlikely to be able to boost consumption significantly any time soon. This can also address the wage-productivity issue, but developing markets are not yet ready to lead a consuming lifestyle typical of US consumers. So finding new markets ready to “spend, spend, spend” may take some time.

In the mean time, potential negative economic developments in the near future are still possible. Back in the times of the Great Depression, consumers did not have so much debt, which leads us to a conclusion that we are now in a greater mess. This in fact may turn into a systemic crisis, the possibility of which is deliberately concealed by corporate management, politicians and media for obvious reasons by confusing cause with effect.

It must be remembered that business news that we hear on the radio or watch on TV often reflect only one side of the economic reality, the side that transnational banks and corporations are interested in. That is why the recent rallies on stock and commodity markets thanks to government-boosted liquidity have been presented as signs of an inevitable recovery. In fact, for some companies the increased liquidity is a blessing considering the fact that most developed economies are greatly reliant on financial speculations and debt-driven consumer spending to make profits. Such companies believe (and do their best to convince others including politicians) that the mere availability of liquidity will encourage more credit and pull the entire world out of the economic troubles. The small positive signs that we have seen lately in fact may lift up the spirits of corporations, but as for the common people the situation is still grave. While banks and corporations enjoy protection from the governments, common people’s investments and jobs are in serious danger – they are likely to continue losing both (as for developed countries, savings are meager anyway).

Since debts are assets for the financial system, writing off household debts will be a scary step to take since massive collapses of credit institutions will be inevitable. Besides, the powerful Wall-Street lobbyists will be more willing to shoot themselves in the head than allow any write-offs to occur. But any measures that do not address the wage-productivity gap will only be beating about the bush and continue to confuse cause with effect. The re-introduction of gold- or silver-backed currencies will be of little help as well. Thus, it is rather difficult to come up with a solution when the entire economic model caves in. This only proves that the existing economic paradigm (including college courses in economics and MBA’s) that serviced that model must change as soon as possible.

Boris L. Anisimov