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

IN SEARCH OF NEW MARKETS


While looking through Izvestia, a Russian broadsheet daily, I have come across some interesting statistics in an article on the retail sector. The global trade has now reached its lowest point since the Great Depression, according to WTO experts. Thus, the global trade turnover officially fell 12% in 2009, while in late 2008 experts expected a contraction of only 2.1%. This forecast was later revised several times. The newspaper also points out the factors of the pre-crisis 6% annual growth rate for the global trade, which are increasing consumption and a constant rise of production capacities. Now that external demand is down, the largest exporters are trying to tap into domestic markets.

Now, isn’t that interesting? Let me paraphrase that. For many years, the global trade was on the rise as long as consumption was going up. Major manufacturers on global markets were boosting production capacity in hopes that consumption would continue to grow. When their hopes were dashed by the falling global aggregate demand, they turned to domestic markets. Doesn’t it sound like an over-production crisis with capital owners running for new markets? Surely, it does.

In view of the above, it is very amusing to hear comments from some Wall-Street representative or governmental official (there seems to be very little difference between the two since many former high-ranking Wall-Street employees often end up holding governmental positions) that the economy is recovering. The jobless recession is believed to have turned into a jobless recovery, only employment has not been thoroughly restored with lending around the world still at record lows. Bailouts have propped up financial superstructure (still prone to senseless speculations) while the economic basis is still struggling.

These data confirm to me that those who call this crisis an ECONOMIC one are right. No boosting of lending will help increase consumption since consumers in the largest consuming country in the world are up to their eyeballs in debt. I am personally running out of patience with those who keep on claiming that this is a financial crisis or just a recession. This is more than that – this is a collapse of an entire economic model which provided artificially-stimulated consumption in order to protect profits of transnational corporations, whose excessive capacities had long exceeded any natural consumption levels, which is a classical definition of an over-production crisis. Welcome to the real world, dear financiers!

Boris Anisimov

FROM THE GREAT SOVIET ENCYCLOPEDIA

This is a translation of an article from the Great Soviet Encyclopedia that covers crises of over-production in great detail. Although I tried to stick to the original as closely as I could, I still had to simplify certain things for lack of time. So I may revise this translation later.

Economic crises are phases of the capitalist cycle, which forcibly restore the main reproduction proportions disrupted as a result of the capitalist economic development. Economic crises are manifested in a slump of production, a reduction of capital investments, rising unemployment, an increased number of bankruptcies, a drop in the value of securities, and other economic upheavals.

The reason for economic crises is the main contradiction of capitalism between the social nature of production and the private appropriation of its products. The division of labor, production specializations, and production co-operation ties capitalist enterprises together into a unified economic mechanism, whose proper functioning requires – within the framework of the entire economy – proportionality between lines of production, manufacture of the means of production and manufacture of consumer commodities, capital accumulation and consumption. But the prevalence of private ownership, ensuing anarchy of production as well as severe competition and exploitation of labor by capital cause a constant disruption of reproduction proportions. Some of these disruptions are resolved spontaneously, others get accumulated and reinforced.

Among reproduction disproportions arising in the process of economic development, there always exists a disproportion between capital accumulation and consumption. The tendency of capital to self-expand and pursuit of profits are both made possible by a decelerated growth (or even reduction) of incomes and consumption of the workers. The ensuing disproportion between production and consumption gets reinforced until it reaches its extreme thus becoming the main cause of economic crises. “The disproportion between production and consumption, so inherent in capitalism, lies in the fact that production grows at an enormous pace, competition having imparted to it a tendency for unlimited expansion while personal consumption grows but a little... The growth of productive forces in a society exceeds the growth of public consumption. These productive forces thus remain without any utilization for the benefit of the working masses” (Vladimir I. Lenin)

Since the production of goods expands beyond the boundaries of the population’s solvent demand, economic crises assumes the form of over-production of goods and over-accumulation of capital. An economic crisis finishes one capitalist cycle and paves the way for the next one by correcting the disrupted proportions between capital accumulation and consumption as well as manufacture of the means of production and manufacture of consumer commodities. Economic crises aggravate class antagonisms since the workers end up bearing the brunt of crises. This results in an intensified class struggle, which leads to improved self-consciousness of the working class, its co-operation and unity.

Economic crises cause major economic losses in a society because, as a result of crises, a substantial part of industrial equipment remains idle and hundreds of thousands of workers lose their jobs.

The timing of crises, their depth and duration depend mostly on the degree of disruption of major reproduction proportions during economic booms. Besides, economic crises can be self-generating since diminished purchasing power of the workers (due to higher unemployment and working time reduction) further exacerbate realization of goods and do not allow the temporary balance between capital accumulation and consumption to be restored.

Economic crises clearly indicate the profound inconsistency of the capitalist mode of production, which "... is compelled, one the one hand, to develop productive forces as if no social basis hinders their development, while, on the other hand, the limits of that social basis are the only determining factors of this development. This is the innermost reason for crises bursting through in the bourgeois mode of production, which develops within the framework of these crises, those being an obvious indicator of the transient historical nature of capitalism” (Karl Marx, Friedrich Engels)

Even though the cause of economic crises is the same, each crisis has its own features determined by specific historical conditions, within which it develops. Crises are influenced by peculiarities of a historical epoch, the level of capitalist development, and the entire complex of economic and political factors of a specific country at a particular time.

The first periodic crisis was the crisis of 1825 in Great Britain where the capitalist mode of production had developed before anywhere else. The next crisis was in 1836 and covered both the US and UK, which are tightly connected economically. The next crisis of 1847 covered almost all European countries and was very close to being worldwide in its nature.The first world crisis occurred in 1857 and was the deepest one for all countries that had ever embraced capitalism. Cast iron production in the US dropped 20% while consumption of cotton dropped 27%. In Great Britain, shipbuilding was the most adversely affected by falling 26%. Cast iron consumption in Germany fell by 25%. In France, cast iron production and cotton consumption fell 13%. In Russia, cast iron production fell 17% with cotton industry falling 14%.The next crisis in 1866 was very harsh in the UK, but barely affected other countries. The next world crisis began in 1873 in Austria and Germany. That was the longest one in the history of capitalism – it was over in 1878, when the UK became affected by it. The crisis of 1882 mainly covered the US and France. Germany, the US and France were mostly affected by the next crisis of 1890.

The crisis of 1900-1903 became, in a sense, a borderline between the epoch of free market capitalism and the epoch of imperialism. The US and Germany suffered the most while the UK and Germany experienced an impact of smaller magnitude. That crisis was especially severe in Russia, where it coincided with a poor harvest.

The bourgeois ideologists hoped that the emergence of capitalist monopolies that planned their economic activities would cause economic crises to disappear or at least grow less severe. But that did not happen. The first imperialist crisis occurred in 1907 and was just as devastating. The US economy was mostly affected. In his article “Marxism and revisionism”, Vladimir I. Lenin wrote that the crisis of 1907 was striking evidence that crises became an inevitable part of capitalism. He also noted that in imperialism “…forms, sequence and pattern of crises had undergone a significant change...” .

The economic crisis of 1920-1921 mainly covered the US and UK. In 1929, the most severe world crisis broke out. It lasted until mid-1933 and shook the very foundation of capitalism. In the US, the industrial production slumped 46%, in the UK 24%, in Germany 41%, in France 32%. In the US, stocks of industrial companies plummeted 87%, in the UK 48%, in Germany 64%, in France 60%. Unemployment reached enormous proportions. Officially, 32 capitalist countries in 1933 the unemployed amounted to 30 million people, the US accounting for 14 million of them. The world crisis of 1929-1933 clearly showed that the opposition between the social nature of production and private appropriation of its results had grown so acute that the capitalist economy could no longer function. This necessitated state intervention into the economy as well as governmental control over chaotic economic processes of capitalism in order to avoid further upheavals. This facilitated the development of monopolistic capitalism into corporate state capitalism.

The long-term governmental planning presently implemented in many capitalist countries after WW2 of 1939-1945 as well as operational business cycle regulations had a stabilizing effect on the development of those countries. However, development of another economic crisis became apparent in the US, the UK, Canada, FRG, and Italy. In the majority of other countries, the resolution of the accrued contradictions of the extended capitalist reproduction assumed the form of slumps in economic activity combined with a reduction of manufacture of means of production and decelerated accumulation of capital. Crises have been the most frequent in the US: 1948-1949, 1953-1954, 1957-1958, 1960-1961, 1969-1971 and 1973-1975. The industrial production fell 17%, 9%, 13%, 7%, 8% and 13% respectively.

The first post-war world crisis started in 1957 and lasted until mid-1958. It covered the US, the UK, Canada, Belgium, the Netherlands and other capitalist countries. The industrial output in developed countries dropped 4%. The unemployment reached almost 10 million people.

The relatively stable economic development of certain capitalist countries in the 1950-1960s contributed to bourgeois and revisionist theories that claimed a possibility of crisis-free development of capitalism by means of improved state regulation of economic processes. But the capitalist reality soon disproved those theories. In the early 1970s the capitalist system saw a series of disruptions of the reproduction process, which caused another worldwide crisis. It started in the US in late 1973, and filled the entire capitalist world in 1974 and 1975. The width, depth, duration and adverse effect of this crisis exceeded those of 1957-58 and were in some aspects similar to those of 1929-1933. During the crisis, industrial production in the US dropped 13%, in Japan 20%, in the FRG 22%, in the UK 10%, in France 13%, in Italy, 14%. From December of 1973 until December of 1974, stocks fell 33% in the US, 17% in Japan, 10% in the FRG, 56% in the UK, 33% in France, and 28% in Italy. In 1974, the year-on-year number of bankruptcies grew 6% in the US, 42% in Japan, 40% in the FRG, 47% in the UK, 27% in France. By mid-1975, unemployment in developed capitalist countries grew up to 15 million people. Besides, more than 10 million people were compelled to work part-time or were fired temporarily. The real income of workers in many countries dropped significantly. For example, in 1973-1975 US workers saw the total real income reduction of 6% as opposed to a 3% growth in 1950-1970.The depth and duration of the crisis in 1973-1975 can be explained by its intertwining with intense inflationary pressure in all capitalist countries as well as currency and energy crises and further aggravation of food and environment problems. The crisis of 1973-1975 clearly showed the limited nature of bourgeois regulations of chaotic economic processes and business cycle development. The capitalist governments’ inability to prevent the crisis of the 1970s and find a solution to it testifies of a crisis of governmental business cycle regulation per se. Due to concentration of production, the substantial width and depth of economic internationalization, the business cycle regulation methods and their forms developed after WW2 were no longer effective in the 1970s.

The main contradiction within the capitalist system again manifested itself in an acute form. Economic crisis indicate inconsistency between productive relations of a bourgeois society and its productive forces and testify of the transient nature of capitalism, which can only develop at the expense of recurring squander of material and human resources. This convinces workers of the need to fight for a new social order, free of crises, unemployment and exploitation, this new order being socialism.

Author: Mr. Y. N. Pokataev
Translated by Boris Anisimov

WHY IS IT A SYSTEMIC CRISIS?

This is my translation of an article by Mikhail Khazin, a well-known Russian economist. He argues that we are now facing a systemic crisis rather than a commonplace recession. His analysis seems to be based on principles of political economy even though he has never admitted it. I highly recommend this author.

We have heard this phrase – «a systemic crisis» – so many times that we no longer grasp its meaning. Besides, few of those, who ever said it out loud, understood what it really means. Now, let me explain.

The current crisis is in the falling final demand in the US (and the entire world as a result). Let me remind you that demand is considered final only if the buyer of a good or service does not transfer its value to the products of his/her own making and does not sell them. All other economic agents buy something with a single purpose of re-selling what they produce and are able to do it as long as there is end-product demand somewhere down the production chain. If that demand is gone, the entire economic mechanism will sooner or later stop. Final demand can be of two kinds – government-generated and household-generated (for now we will leave out the more delicate topic of exports and imports).

Final demand can fall for two reasons: falling incomes and/or malfunctioning demand-stimulating mechanisms (e.g. by means of credit). Thus, as soon as demand starts dropping for whatever reason, the message in this regard is sent down the entire production chain causing production declines, lay-offs, and wage/salary cuts. As a result government and household incomes drop as well. This occurs quite regularly in the capitalist economy, which is cyclic by nature. The slump can be so intense that economic growth rates drop below zero (if that lasts sufficiently long, it is called a recession), but growth resumes sooner or later. It is not the case today. Why?

The reason is that household demand has been actively stimulated by means of credit for the last years. Pre-crisis household debts were growing rapidly (approximately 10% a year, which is significantly faster than the growth of their incomes, whose purchase power, technically, has not been growing at all). This did not only stimulate demand, but has also been increasing monetary liquidity at a constantly accelerated pace. In other words, growth rates for spare money in the economy has been higher than growth rates for the economy itself.

The result of all this should technically be inflation or – if the excess of money can be concentrated in specific sectors of the economy – financial bubbles. And this is exactly what happened: stock prices, real estate prices, prices for some other assets had been on a rapid rise. The more they rose, the more they stimulated the general public’s willingness to take out new mortgages, make an additional income or simply spend thus boosting the consumption.

But we all know that living on credit cannot last forever – the servicing of debts sooner or later starts eating up incomes. The US started this orgy of credit in 1981, and it is surprising that it lasted for almost 30 years up until now. Rather, it is not so surprising because a peculiar mechanism has been in operation in the US all these years – a constant interest rate reduction. To get the picture clear, you can have a look at a graph of the Federal Reserve discount rate, which was at 19% in 1981 and has finally dropped almost to zero by late 2008. This is what convinces me that the crisis could not be averted.

This situation makes it clear why this crisis is “systemic”. Because it affects the 30-year-old system of money redistribution based on the following basic principles: constant growth of demand, constant growth of money supply, constant reduction of interest rates.

This system allowed financial institutions to redistribute to their own benefit a considerable portion of profits generated within the economy. While the financial sector’s share in corporate profits in the 1950’s was not more than 10%, today it stands at more than 50%. While household debts back then did not exceed 50% of the annual household income, today’s figure exceeds 130%.

So households will now spend more on servicing debts rather then spending while no bank will be willing to grant them new loans since they are not capable of paying them off. The amount of money in the economy will stop growing thus compelling to change the entire system. In particular, the real sector’s share in corporate profits will have to increase otherwise it will not be able to function and pay out wages, which means there will be no sources for economic growth. But banks are strongly against changing the system (which channeled 50% of all profits into their pockets) thereby reducing their profits 5 (!) times. Bankers will sooner strangle themselves than consent. And they do have strings they can pull to oppose these initiatives.

In theory, demand – and the entire economy as a result – can be stimulated if household debts are written off or at least restructured. But there is another problem: all these debts are assets for the same old financial system. Writing them off means massive bankruptcies for banks, insurance companies, and other financial institutions. This would be a scary step to take. We must remember the old saying: “he that pays calls the tune” - over the last decades everybody has learned by heart that the biggest profits come from the financial system. Thus, that very system must be the one to call the shots in the economy. College courses (the notorious “monetarism”), management training programs, etc. have been tailored to meet the needs of the financial system. Even White House economic officials are pretty often former Wall Street employees.

In this situation, even discussing problems explicitly (let alone taking measures to address them) becomes impossible. And large international forums like G20 only confirm this reality – the causes of this crisis are a taboo subject for participants for some strange reason. At the same time, taking any measures – while the very “engine” that provided economic growth based on the three above-mentioned principles is now broken beyond repair – is hardly possible either. A new “engine” is required. In the mean time, even discussing this let alone do something about it is rather problematic.

This is the very problem we are facing. Figuratively speaking, we have been riding in a car for 30 years, but its engine is now broken. Its overhaul is required, and will entail a fundamental revision of all economic institutions that have emerged over these years. This is not a recession, this is a systemic crisis.

Author: Mikhail Khazin
Translated by Boris Anisimov

FINANCIAL BAND-AID TREATMENT

The crisis is being handled as a failure of the existing financial system. Some are blaming greedy bankers or lack of regulation. Governments throughout the world have been injecting liquidity in hopes to boost lending and are attempting to apply some controls to the banking industry to prevent further financial collapses. The modern economic theory often defines an economic crisis as a downturn brought on by a financial crisis, which is viewed as the cause of all this trouble. As a supporter of political economy (I like calling it Marxian economics, although it is a rather awkward term), I utterly disagree with this approach. In my view, the world is facing an over-production crisis (sometimes referred to as over-accumulation crisis), which is mainly associated with the widening gap between an economy’s ability to produce and its ability to consume.

First and foremost, it has to do with falling solvent demand, e.g. the US household disposable income has been falling in the long term thus cutting consumers’ ability to increase consumption, which is the genuine driver of the economic growth. Instead, it is now believed that lending can be the driver, the reason for this belief being the fact that lending is able to boost consumption thus pulling the economy out of an over-production crisis and prevent massive bankruptcies. But this is only possible as long as consumers are able (and willing) to borrow. This explains the corporate encouragement of commercialization, consumerism, and the notorious buy-now-pay-later attitude – they simply wanted consumers to continue spending at any cost to the consumers themselves. So ultimately it is still the consumer who foots the bill for the shopping spree. The more US jobs are taken out to Asia, the more US markets – the largest consumer in the world economy – become dependent on local low-wage jobs for increased consumption. Other developed countries see similar trends, which have been confirmed in recent reports by International Labor Organization. When consumers’ income becomes no longer sufficient to spend more without borrowing, pay off their loans or refinance them, they have no other choice but cut spending.

This triggers both massive defaults on loans in the financial sector and a sharp reduction of revenues in the real economy. This is the crisis we have seen – it is purely ECONOMIC. The lending initially applied to counter falling consumption only postponed the day of reckoning. The downward long-term consumption trend has been shrinking profits in the real economy against the backdrop of easy profits from financial speculations thus channeling capital from production to speculation. Financial speculations were now believed to be an essential part of economic activity. Companies previously specializing in manufacturing alone would start receiving a major portion of their profits from speculative transactions. This financial overindulgence has been inflating various bubbles and exacerbating the ultimate performance of the entire economy. The FINANCIAL aspect of this crisis is thereby an effect, not the cause.

I came across numerous comments from various American and Russian economists, who are increasingly becoming convinced that assisting the banking sector in order to boost lending (while consumers remain highly indebted and unable to spend more) will have no effect. It is like treating cancer with a band-aid. The effectiveness of financial measures (if those are still engaged in) will be shrinking as time goes by simply because the main cause of the crisis will still remain unaddressed and continue to grow in its influence over the situation. The ability of stimulus programs to treat the cause rather than the symptoms of the current crisis has been called into question by many including TARP overseer Neil Barofsky who, in his report, warned Congress of increased risks for more financial complications to come our way.

Boris Anisimov

MEPHISTO'S PROMISSORY NOTES

Flipping through the page of an English translation of Faust by Johann Wolfgang Von Goethe, I have come across a very interesting section (part 2, act 1), in which an emperor, his court and his entire realm prosper from a large amount of unsecured paper money produced by Mephisto. Common people as well as money exchanges would accept these promissory notes for gold thus spreading them across the economy and boosting economic activity. The city as a result falls into revelry, and the king's approval rating sky-rockets. Since business owners and their costumers were unaware of what actually backed the notes they accepted, they would recognize them as valuable. The entire realm enjoyed enormous prosperity because of a simple trick. The very end of the section portrays a situation similar to the US sub-prime mortgage problems. In fact, the entire passage is reminiscent of the current state of affairs in many developed countries. I suggest you read it. I do not even need to comment on what is below. It is self-explanatory.

Pleasure Garden

[Faust and Mephisto, dressed becomingly, notconspicuously, according to the mode; both kneel.]

Faust.
Pardon you, Sire, the flames and wizardry?

Emperor [beckoning him to rise].
Many such pleasantries I would like to see.
Presto! I stood within a glowing zone,
It seemed almost Pluto and I were one.
In coal-black night and yet with fires aglow
Lay an abyss. From many a vent below
Thousands of savage flames were upward whirling,
Into a single vault above me swirling,
Licking their tongues of flame against the dome's far height
Which now appeared and now was lost to sight.
Far, far away, through spiral shafts of flame
Peoples I saw, in moving files they came,
In a wide circle pressing on and on
And paying homage as they've always done.
Courtiers I recognized amid the splendour,
I seemed a prince over many a salamander.

Mephisto.
That are you, Sire, since every element
Doth own you absolute to all intent.
Obedient have you now proved fire to be.
Where waves heave wildest, leap into the sea!
The pearl-strewn bottom you will scarcely tread
Ere a glorious billowing dome forms overhead.
You'll see there light-green rolling billows swelling,
Their edges purple, forming the fairest dwelling
Round you, the centre. Wander at your will,
The palaces attend you even still.
The very walls rejoice in life, in teeming,
Arrowy swarming, hither, thither streaming.
Sea-wonders push and dart along to win
The new soft glow but none may enter in.
The dragons, mottled, golden-scaled, are playing;
There gapes the shark but you laugh at his baying.
Though now the court surrounds you in delight,
Still such a throng has never met your sight.
Yet long you're not deprived of forms endearing;
The Nereids come curiously nearing
Your splendid palace in the cool of ocean,
The young with fish-like, shy, and wanton motion,
The old ones prudent. Thetis learns of this,
Gives her new Peleus hand and mouth to kiss.
The seat, then, on Olympus' wide domain...

Emperor.
Over the air I leave to you to reign;
Quite soon enough does one ascend that throne.

Mephisto.
Earth, Lord Supreme, already is your own.

Emperor.
What brought you here to ravish us with sights
Directly out of the Arabian Nights?
If like Scheherazade you are inventive,
Be sure of every favour and incentive.
Be near whenever - as is oft the case-
I grutch at this poor world of commonplace.

Steward [enters in haste].
Ah, Most Serene, in all my life I never
Thought I could give you news of such high favour
As this which richly blesses me
And drives me here almost in ecstasy.
Bill upon bill has now been squared,
The usurers' talons have been pared.
From hellish worry I am free!
In Heaven life can not happier be.

Commander-in-Chief [follows in haste].
Arrears are paid as they were due
And all the army's pledged anew;
The soldier feels his blood made over.
Landlords and wenches are in clover.

Emperor.
How free you breathe, with breasts so lightened!
Your wrinkled foreheads, how they're brightened!
How you come in with eager speed!

Treasurer [appears].
Inquire of these who did the deed.

Faust.
It's for the Chancellor to tell the story.

Chancellor [approaching slowly].
I'm blessed enough now when I'm old and hoary.
So hear and see the fateful, solemn leaf
Which into joy has transformed all our grief.

[He reads.]

"To all whom it concerns, let it be known:
Who hath this note, a thousand crowns doth own.
As certain pledge thereof shall stand
Vast buried treasure in the Emperor's land.
Provision has been made that ample treasure,
Raised straightway, shall redeem the notes at pleasure."

Emperor.
I sense a crime, a monstrous, cheating lure!
Who dared to forge the Emperor's signature?
Is still unpunished such a breach of right?

Treasurer.
Remember, Sire, yourself it was last night
That signed the note. You stood as mighty Pan,
The Chancellor came and spoke in words that ran:
"A lofty festal joy do for thyself attain:
Thy people's weal - a few strokes of the pen!"
These did you make, then thousand-fold last night
Conjurors multiplied what you did write;
And that straightway the good might come to all,
We stamped at once the series, large and small;
Tens, twenties, thirties, hundreds, all are there.
You can not think how glad the people were.
Behold your city, once half-dead, decaying,
Now full of life and joy, and swarming, playing!
Although your name has blessed the world of yore,
So gladly was it never seen before.
The alphabet is really now redundant;
In this sign each is saved to bliss abundant.

Emperor.
My people take it for good gold, you say?
In camp, in court, sufficient as full pay?
Although amazed, still I must give assent.

Steward.
The flight of notes we could nowise prevent;
Like lightning notes were scattered on the run.
The changers' shops open wide to everyone;
And there all notes are honoured, high and low,
With gold and silver - at a discount, though.
From there to butcher, baker, tavern hasting,
One-half the world seems thinking but of feasting,
The other in new raiment struts and crows;
The draper cuts the cloth, the tailor sews.
In cellars "Long live the Emperor!" is the toasting;
There platters clatter, there they're boiling, roasting.

Mephisto.
Who all alone will down the terrace stray
Perceives the fairest in superb array;
With her proud peacock-fan she hides one eye
And looking for a note goes simpering by;
More swiftly than through eloquence and wit
Love's richest favour can be gained by it.
With purse and scrip one is no longer harried.
A notelet in one's breast is lightly carried;
With billets-doux quite snugly will it nestle.
The priest bears it devoutly in his missal.
The soldier, that he may the faster haste,
Lightens the girdle quickly round his waist.
Pardon, Your Majesty, if I may seem
To mete a lofty work but slight esteem.

Faust.
Treasures in superfluity still sleep
Within your borders, buried deep,
And lie unused. Thought in its widest measure
Gives the most meagre bounds to such a treasure.
Imagination in its highest flight,
Strain as it may, can't soar to such a height.
Yet spirits, fit to fathom the unsounded,
Have boundless confidence in the unbounded.

Mephisto.
Nor gold nor pearls are half as handy as
Such paper. Then a man knows what he has.
There is no need of higgling or exchanging;
In love and wine one can at will be ranging.
If you want metal, changers are at hand;
If lacking there, dig for a while the land.
Goblet and chain are auctioned off and sold;
Paper redeemed without delay in gold
Confounds the doubter who had scoffed and taunted.
This men demand, to metals they are wonted.
Ready at hand the Emperor's realm will hold
Henceforth enough of paper, jewels, gold.

Emperor.
Our realm owes you this great prosperity;
As is the service, the reward should be.
Our empire's soil be trusted to your care,
The worthiest guardians of the treasures there.
You know the vast and well-preserved hoard,
And when men dig, it's you must give the word.
Become as one, ye masters of our treasure,
Fulfil your stations' dignities with pleasure
Here where in blest accord and unity
The upper and the lower world agree.

Treasurer.
Twixt us no slightest strife shall cause division;
I love to have as colleague the magician.
[Exit with FAUST]

Emperor.
If now I shall endow each man of you,
Let each confess what use he'll put it to.

A Page [receiving].
I'll joy to live, be glad and gay.

Another Page [likewise].
My love shall have a chain and rings today.

A Chamberlain [accepting].
Wine twice as good shall henceforth down me trickle.

Another Chamberlain [likewise].
I feel the dice inside my pocket tickle.

A Banneret [thoughtfully].
From debt I'll make my land sand castle free.

Another Banneret [likewise].
I'll add this treasure to my treasury.

Emperor.
I hoped for joy and heart for new emprise,
But knowing you one can your course surmise.
Well do I see, with all this treasure-store
You still remain just as you were before.

Fool [approaching].
You're scattering favours, grant me some, I pray.

Emperor.
Alive again? You'd soon drink them away.

Fool.
The magic leaves! I don't quite comprehend-

Emperor.
Of course, for you'd put them to some bad end.

Fool.
Still more drop there, I don't know what to do.

Emperor.
Just pick them up, I let them fall for you. [Exit.]

Fool.
Five thousand crowns are mine? How unexpected!

Mephisto.
Two-legged wineskin, are you resurrected?

Fool.
That happens oft but like this never yet.

Mephisto.
You are so glad you're breaking out in sweat.

Fool.
Is that the same as cash? Look, are you sure?

Mephisto.
What throat and belly want it will procure.

Fool.
And cattle can I buy and house and land?

Mephisto.
Of course! Just bid and they will be at hand.

Fool.
Castle with wood, chase, fish-brook?

Mephisto.
On my word! I'd like to see you as a stern Milord!

Fool.
Tonight a landed owner I shall sit!
[Exit.]

Mephisto [solus].
Who still will have a doubt of our fool's wit?

TARP BECOMING A TRAP


Governments and business circles throughout the world have pinned their highest hopes for an economic recovery to various bailout programs. The one that has become the talk of the town is the US government’s $700 billion Troubled Asset Relief Program (TARP). In his quarterly report to Congress in late January 2010, Neil Barofsky, the TARP inspector general, unleashed a harsh criticism of the program and stated publicly what few politicians are apparently ready to admit these days – the bail-out is not working [1].

He mentioned that while the too-big-to-fail financial institutions are growing even bigger paying lavish bonuses to their executives, their incentives for risk-taking are also growing. Impudent expectations of more governmental bail-outs have eclipsed any common sense in boardrooms. Barofsky confirmed that since no “meaningful reform” of the financial sector has been implemented, it is still business as usual for Wall Street. He also pointed out greater interconnectivity between major financial institutions, which only speaks of coming full circle to the pre-crisis financial conditions.

His most sobering comment concerned the increased risks of another crisis as a result of governmental bail-outs. The fundamental problems that led to the current conditions in the first place have never been addressed and are even aggravated by the excessive liquidity that has settled down in various banks. The economy has not seen any significant increase in lending. It was initially believed that the sanation of banks would allow bail-out funds to trickle down to businesses and consumers and thus kick-start the economy. As “lending continues to decrease”, the situation with neither unemployment nor foreclosures have seen any noticeable improvement. Even though some points have been mentioned as positive results, Neil Barofsky believes that there is nothing that heads off another financial crisis.

Modern economists, lost in their mathematical equations, have failed to see the economic reality of capitalism, which is all about supply exceeding demand. This excess is the cause of globalization and the primary reason for the global crisis. The financialization of economic processes and the credit-generated boosting of demand have not solved the main fundamental problems that haunt capitalism once opportunities for expansion become somewhat limited. Living on credit, whoever dazzling and head-spinning that might have seemed, had to come to an end when household debts exceeded households’ disposable income. This prevented them from paying off their current debts or taking new loans to refinance what they could not pay. And this is the situation we are in now.

For several decades, the globalizing economy was boosted artificially by means of credit causing consumer to spend beyond their ability to consume. More and more capital was invested in hopes to see greater returns as a result of increased consumption. When the shopping spree was over, the existing overcapacity of the entire world economy (previously focused on large consumption markets like the US) could no longer find any outlets for their capital and thus put the future of many transnational corporations and banks at risk. The gigantic transnational economy was hanging by a thread.

The decision to save the system at any cost is in fact natural. Massive freshly-printed bailout funds were injected into the economy in foolish hopes that the mere presence of worthless money in banks would be sufficient to calm the panic down and restart the lending and thus the spending. The panic was in fact calmed downed, but no significant increase in lending is anywhere in sight.

The economic logic can tell us pretty clearly why that is still the case – banks are rightfully concerned that lower consumption will increase their risk of losing their money since companies are more probable to have realization problems. In these conditions, no mater how much money is given to banks, you cannot make them lend even at a gunpoint.

So the only conclusion that comes to mind is that the bail-out is a desperate attempt to prevent a catastrophic systemic collapse, but Mr. Barofsky himself said in his report: “Whether these goals [meaning curbing foreclosures and boosting lending] can effectively be met through existing TARP programs is very much an open question at this time.” [2] As more and more artificial liquidity is poured into the system, the less financially stable it becomes as the financial and real sectors continue to draw apart even further. This will generate a false impression that more stimulus is required, but over time it will require more, and more, and more. TARP is turning into a TRAP.

To those familiar with political economy (Marxian economics as I tend to call it even though it is a rather clumsy term), the options are clear – either pushing solvent demand up, which is now difficult for reasons specified above, or bringing supply down to more sustainable levels. I think there is no need to explain which direction elites are likely to try out. This brings about the same old expansionary question. When domestic markets are no longer solvent to buy, capital owners look abroad for new “victims”. I believe the recent tough talking by President Obama concerning China is in line with this logic. China is the largest market ever in terms of the number of consumers, but low wages prevent to this country from becoming the largest consumer. This statement of his seems a little bit too bold to me, even arrogant: “Our future is going to be tied up with our ability to sell products all around the world, and China is going to be one of our biggest markets” [3]. This statement speaks for itself. If something like this has been said out loud and quoted by all news agencies, then there is no hope left to boost domestic US markets in the new future if at all. They are likely to go through hard times and no-one know how long it is going to last. The entire global economic model that fed corporations for several decades is now gone, and maybe it is gone for good. The leaders of the world are convinced of the necessity to seek after new markets, and China seems like the first candidate.

But it must be remembered that deliberate efforts to boost spending by raising wages will automatically raise all other costs within the country thus making it less competitive on the global market. Consumer lending is also tough since most Chinese household are poor. The obvious solution would be to divide the society into two major groups within the same economy – consumers (more affluent, educated, and living mainly in urban areas) and workers (poor, somewhat educated, possessing some skills but almost no opportunities in life, residing in the countryside) basically destined to work for the more affluent.

Thus, we have identified two ways (namely, further economic expansion or consumption stimulation) to address the current economic problem. They are likely to find their way into modern politics in some form, but we all should realize that these are only temporary solutions. Both are effective until additional economic resources are tapped into – those might include new markets, new consumers, new willingness to borrow, etc. Once those are depleted over time, the same problems are going to be back again. In fact, if those resources are not available now for whatever reason, there will be no other choice for the ruling elite to push for certain geopolitical and even military initiatives worldwide in order. This makes the world we are living in a very unstable and unpredictable place, and we are those who have been rocking this boat all along.

Financial stimulus packages will have to be withdrawn sooner or later. Some will end up being more effective than others, but they all have something in common – they fail to address the very core of the problem. I tend to think they were never designed to do that in the first place – they were to boost economic activity without changing the system in order to preserve the positions of those who benefit from it now. And the more I analyze the issue, the more convinced I become that this systemic crisis will initiate unexpected changes in the way we see the world and act in it. And it is the very economic system of ours that requires changing. Our economic paradigm is outdated and has not been conforming to reality for a long time. And until it is changed, today's TARP turning into a TRAP is not going to be the last one.

Boris L. Anisimov

WORKING FOR THE FACE VALUE


We should remember that there is more than one economic model at work in the world. What works for the developed world may be quite detrimental for emerging economies which live in a different reality. These are several interesting points that set them apart from the developed world:
  1. Their currencies are not accepted as widely as the US dollar. Their ability to “print” their way out of the crisis is very limited as opposed to the US, whose dollar accepted globally as an international reserve currency. Since their currencies are accepted domestically and at best regionally, any massive printing of money leads to inflation as money gets stuck within the domestic or regional economy. Here in Russia, prices have already soared quite significantly while the international community has been talking about inflationary pressure in China. Similar trends are possible in other developing countries.

  2. They are accumulators rather than originators of the excessive artificial financial assets produced by the developed world. China is the largest holder of the American national debt, Brazil and Russia are also amount the top 10 US creditors. So in fact all the excessive artificial liquidity that you are referring to gets accumulated here in the developing part of the world. The US ability to print more money for another stimulus package can be easily undermined if these countries become unwilling to recognize US money as a valid international legal tender (I do not think it will happen any time soon for obvious reasons, but the possibility is there). If alternative currencies are somehow identified, the dollar will be the first currency to be scrapped. China and Russia have emphasized their desire to do just that many times, but they are silent about it now since both of them are major US creditors. The immediate collapse of the dollar is not in their interests, they need time before they can get rid of the dollar in the reserves quietly without causing an uproar thus losing the value of their current US holdings.

  3. Boosting the US national debt is quite easy simply because that debt is in the very currency the US can “print”. The US borrows money at an interest in dollars and pays back in newly “printed” dollars. If the US was to lend Russia two hundred million Russian roubles, it would first be required to buy them from Russia. Then as time goes by, Russia can simply print more roubles to pay the debt and start the borrowing process all over again. Doesn’t sound pretty, does it? This is what has been boosting the US demand for several decades. On the contrary, developing countries must be very careful as they borrow foreign money since paying back their debts will require an actual expenditure of resources rather than a couple of running printing presses.

  4. It seems to me that the reason for current deflationary trends in the developed world is in the fact that developed countries are the main consumers in the global economy. The US alone accounted for approx. 40% of the global consumption (these data fluctuate from economist to economist). If developed world consumers are unwilling or incapable to continue spending, the prices end up going down to encourage consumption because they are the ultimate consumers in the world economy. If they cannot consume the mass of products and services offered to them, nobody else in this world can. Thus, the developing world, where global manufacturing has been accumulated for the last couple of decades, is depended on external demand. Their own people are incapable for various reasons to consume what their own industries are producing. This is true for China. A similar thing is happening in Russia, which specializes in oil and gas mainly. The Russian economy is unable to consume all the domestically produced oil and gas.
And so on, and so forth. This is not a comprehensive list. The drawback of recent approaches to the global crisis lies in the fact that it is viewed from the financial stand point only. Various financial measures currently considered can work as long as other countries are willing for various reasons to provide an outlet for the excessive liquidity and artificial financial assets produced by the developed world (the US in particular). To the US, it costs approx. 6-7 cents to print any dollar bill, while the rest of the world ends up working hard for the face value of it. This is a very inconvenient truth for the developed world and the leaders of the emerging economies who actually assisted in the construction of the global economic/financial system by providing cheap resources and labor. That is why this ugly reality ends up being hidden behind a wall of economic propaganda.

Boris L. Anisimov