Roger Baker :
What’s up with the global economy, and where do we go from here?

A deflationary spiral, such as is now becoming evident globally, acts as a natural poison.

economy cartoon

Political cartoon from Secrets of the Fed.

By Roger Baker | The Rag Blog | October 25, 2015

It now appears that the grand yearly addition to total human wealth, the global GNP, is no longer growing. If so, this means the world is headed toward a global deflationary spiral, a contraction in the global economy similar in nature to the trade slump that spread globally during the era of the Great Depression.

There really is no other explanation but a global trade slump that can account for the steep decline in the prices of basic essential commodities like oil and copper, and also the decreased demand for shipping capacity reflected in the Baltic Dry Index.

The troubled Chinese economy, its reduced demand for commodities, the devaluation of its currency to try to capture more trade, and the Chinese support for a new trade alliance in competition with the new U.S./Japanese TPP alliance — all these are symptoms that indicate that aggregate global buying power has stalled out. That means that investment capital is unable to find new profitable investments in the global marketplace, which is very bad news for finance capitalism as a global system.

At this point let me refer readers to Gail Tverberg and her blog, Our Finite World, which focuses on the key interactions between energy and economics. In fact we now see just the sort of troubled global economy that we might anticipate from a world that peaked in production of historically cheap conventional oil almost a decade ago in 2006. Tverberg is able to explain the global economic situation so clearly, so convincingly, and so persistently that she has attracted a huge popular economic following. One of her recent posts drew over a thousand reader responses; “Low Oil Prices – Why Worry?.”

Investment booms are always great for bankers.

Investment booms are always great for bankers, but with the economic boom phase of the capitalist business cycle comes, at some point, a classic overshoot of marketplace demand, followed by a subsequent bust. During the bust phase comes the “creative destruction” and restructuring that are supposed to clear the decks of investment relics like typewriter factories, and set the stage for a subsequent capitalist recovery.

A deflationary spiral, such as is now becoming evident globally, acts as a natural poison to be feared by those investment bankers who manage the U.S. economy through the private Federal Reserve. The bankers need outside governmental help, like Keynes prescribed, to restore the economic growth of the economy.

The banking sector is now and forever a profit-motivated sector of the economy. By its nature, finance capital is unable to cope with economic contraction, because that shrinks profitable investment opportunities (although some new investment opportunities arise even in a depression).

Accordingly, the private sector bankers call on the socialistic, publicly-funded sector of their economy, the government, to help their private sector to recover. Traditional Keynesian economic policy calls for the active help of federal government to inject money into the system broadly to supply new demand when a bust comes.

This is not at all what Keynes had in mind.

When there are no good new investment opportunities because most all of the injected stimulus goes to the banks instead of toward the broad numbers of the public struggling at the bottom, it does not generate much new demand except for palatial mansions and such. This is not at all what Keynes had in mind; it won’t work, and it is not working now.

If the core problem is really slow growth of the global economy due to an end to the cheap fossil fuel energy that powers the whole system, then there is no way to paper over this core problem, because a lack of cheap energy inherently reduces profit and that blocks any broad economic recovery. Now the credit markets are ceasing to function normally in response to quantitive easing.

This editorial tells us that those running the USA at the highest level are in a sort of panic that stems from addictive but unsustainable dependence on continued access to free money. Quantitative easing by the Fed has become less and less effective over time, since 2008 when the zero interest policy was first implemented.

Second [comes] the predictable market swoon, as Wall Street traders ponder the fact that the morphine drip of free money that they have been enjoying since the aftermath of the 2008 financial crisis might be pulled out of their arms.

Another way to put this is to say that what was once a rational policy of emergency economic stimulus has now metastasized into a need for successive handouts of liquidity to bankers, termed quantitative easing or QE, needed to keep the system solvent despite a vast mountain of accumulated debt, a burden which has now grown totally out of balance with any public ability to pay back the fiat currency debt in terms of its anticipated purchasing power.

statutory debt graph

Chart from Zero Hedge.

Under Obama, the annual federal debt increase has been roughly a trillion dollars a year and Congress is about to raise it again. How much is that per person? Every billion dollars of new debt, divided by the U.S. population of 320 million, adds about $3 of debt per person. If we add a trillion a year in citizen obligations, that means about $3,000 per person of federal debt is being added by a Treasury/Fed alliance, to be spent now with a promise made for it to be paid back when convenient. Somehow and by somebody, someday, when the economy finally recovers.

The cost of keeping the U.S. economy functioning ‘normally’ is going up exponentially.

As we see, the cost of keeping the U.S. economy functioning “normally” is going up exponentially. This is why the Fed, operating on behalf of its regional investment banks, is afraid to even slightly raise the cost of the new money that the Fed agrees to lend into existence. If Wall Street were compared to a junkie, this would be like a chart over time of its increasing morphine demand.

As they say, you can’t print your way to prosperity. The final outcome is fairly predictable when you try to do that anyhow. Denial of the underlying reality of a new era of permanently slower and less profitable growth due to natural resource limits has led initially to enrichment of our entitled banking sector, which was first in line for the bailouts.

If this pattern of crony capitalism is sustained for too long, it eventually leads to collapse. If we try to deny unsustainable trends and to sustain them for too long, what else could we expect but a sudden collapse, when the burden of denial becomes too great, when finally the unsustainable trends interact, converge, and undermine Wall Street’s expectation of economic recovery.

If all the dollars in the cyber-vaults of all the investment banks were to come off the sidelines and we started trying to buy real stuff with them, we would soon have galloping hyperinflation. What prevents this from happening now is that the velocity of circulation of money, the willingness of investment capital to invest rather than stagnate, is very low. What we would expect when there are so few good investments to be found. This is keeping the investment potential bottled up like a latent buying power.

This situation leads to investment fads,
termed ‘asset bubbles.’

This situation leads to investment fads, termed “asset bubbles.” Zero interest money from the Fed since 2008 has by now totally distorted marketplace reality. If we look at the market for top art works we can clearly see the asset bubble syndrome at work.

We can also see this in the shale oil euphoria and current bust of an investment bubble that was supposed to keep us driving, despite cautionary warnings from top geologists. As another example, the current tech job boom has led venture capitalists to invest untold billions in social media and software solutions that make little sense in light of the real world marketplace.

financial collapse image

Graphic from CounterPunch.

Here is a graphic picture of what could very well happen as a consequence when the easy money ends, in the complicating context of the contracting global economy.

In the Austin area, the economy is booming primarily because of the tech job boom. This tech bubble is only one of the asset bubbles which predictably result from easy low interest credit, for those with the right Wall Street connections to gain access to the vast supply of new money the Fed is creating. This pattern is not hard to observe. President Ronald Reagan’s former budget director David Stockman recently authored The Great Deformation: The Corruption of Capitalism in America, a long, detailed, and scathing indictment of crony capitalism as it is currently being practiced.

 
The political fallout

An economy that doesn’t recover because it really can’t recover is certain to lead to political problems. We don’t have to go far to find the evidence of that. With a broad sector of the public now furious at Washington due to the top banking class and their corporate allies getting most of the gravy, the angriest presidential candidate has a rocket-boosted assist in trying to win the presidential election.

Why? If we elect an angry impatient leader, then at least he might shake things up enough to get us moving beyond the current Washington political gridlock and paralysis, right?

An old fashioned Marxist class analysis helps us to make sense of what’s happening.

I will argue that an old fashioned Marxist class analysis helps us to make sense of  what’s happening, one that ties together a coherent picture of our current reality, and explains the consequences of business-as-usual denial, including the predictable but unhappy consequences of this same denial, like our angry politics.

…Cruz attempted to explain why he, a sitting US senator, could appeal to those attracted to “outsiders” like Carson and Trump. Conservative voters feel “volcanic rage,” he said. “People are ticked off with politicians … that make great promises on the campaign trail but then they don’t actually follow through.” Asked if he had followed through on vows to shut down Obamacare and the multinational nuclear deal with Iran – which both remain standing – Cruz said: “What I promised is that I would fight with every breath in my body to stop the out-of-control spending and the debt that is bankrupting our country, to stop Obamacare, to protect our nation…

As things currently stand, the bourgeoisie, a powerful fraction of less than 1% of the population, with its undemocratic economic influence expressed through the Fed, has now rigged the game to facilitate exploitation of the other 99%. Already the other 99% of the population has noticed this, and many have gotten royally pissed off about it, but not all in the same way.

A privileged economic sector, classically termed the petite bourgeoisie, has now become politically reincarnated as the Tea Party’s Republican faction. This sub-group is demanding that the socialist sector of the economy, the government, should stop all its spending — except for its military adventures abroad which are assumed to benefit everyone at home.

As the economic pie shrinks, the very rich who rule are not so inclined to share their wealth.

This explains the current split within a Republican party trying to hold its two wings together, despite their appeal to different class interests. As the economic pie shrinks, the very rich who rule are not so inclined to share their wealth with their former managerial allies comprising the Tea Party faction, who are now struggling to hold onto their shrinking power and influence, and their precarious share of total national wealth.

Since most traditional factory jobs in the USA have by now been exported to production abroad, the traditional party of U.S. labor, the Democrats, no longer have a big natural base of voters in the industrial proletariat. The political influence of the Democrats is now largely through appeal to minorities who are so alienated that they don’t vote, with the goal of keeping funds flowing into stuff like welfare, food stamps, and what remains of the social safety net. But helping the increasingly unprofitable ranks of the poor fed while the whole economic pie is shrinking infuriates both Republican wings.

The Obama and Clinton wing of the Democrats want to maintain a sort of welfare state based on business as usual, as their political base of supporters gets poorer and angrier, much like the Tea Party faction of Republicans. That is now causing a lot of what is still left of an exploited but class-conscious proletariat to split away and support a politically moderate but angry socialist, Bernie Sanders.

The current situation will probably continue to polarize along class lines.

Once the increasingly imperious control of the 1%, the bourgeosie, starts coming unraveled, history tells us that the process can be hard to stop. The current situation will probably continue to polarize along class lines, and eventually lead to angry mobs with pitchforks, or the modern equivalent, guns. This situation is leading by stages toward a timeless pattern of history, a new phase of class antagonism explained in modern terms here.

We now have a thoroughly angry public and we have a responsibility to try to seek social justice while we still have the opportunity to make a peaceful revolution.  Majorities voting in elections can still bring about major changes, but in our era of increasing top-down control through money power, this window of opportunity is closing. In 1962, John F. Kennedy famously said, “Those who make peaceful revolution impossible will make violent revolution inevitable.”

What should we do locally about this troubled situation? After thinking globally, we have the opportunity to act locally. One site, Resilience.org, provides good analysis and practical advice every day on how to organize locally, batten the hatches, and prepare for hard times.

Read more articles by Roger Baker on The Rag Blog.

[Roger Baker is a long time transportation-oriented environmental activist, an amateur energy-oriented economist, an amateur scientist and science writer, and a founding member of and an advisor to the Association for the Study of Peak Oil-USA. He is active in the Green Party and the ACLU, and is a director of the Save Our Springs Alliance and the Save Barton Creek Association in Austin. Mostly he enjoys being an irreverent policy wonk and writing irreverent wonkish articles for The Rag Blog. ]

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8 Responses to Roger Baker :
What’s up with the global economy, and where do we go from here?

  1. Frances Morey says:

    Jeeze, Roger, you do go on and on. By the time I finished reading it the bad times had arrived. Here is my economic analysis based on our war economy.
    Our years at war are said to be 222 years, counting all our wars. There is something even more daunting to consider–that many in the electorate depend on the MIC for their income and wealth. I would bet that it is as much as half the population–economically dependent on the MIC. Where else could all that money go?
    It appears to be a strange form of socialism–support for mainly those who would wreck human slaughter and genocide, along with city and building demolition, worldwide. The targets of our wars are societies and nations that can’t defend themselves.
    Now the ephemeral enemy is TWB–terrorists-without-borders. We fight an enemy with strange names of which most people have never heard–Al Qada, ISIS, or was it ISIL–designated boogeymen to strike fear in the hearts and minds of US and keep us at war permanently.
    And, a supreme irony, both “sides” are supported by the MIC, a multinational purveyor of death and destruction. Such economic interests are not likely to give up without a fight.

    • Roger Baker says:

      Thanks Frances.

      I assume that what you mean by MIC is the military-industrial-complex that Pres. Eisenhower warned us about as he left office. We have become a very military power-oriented nation since World War II, starting from when we had the great industrial and finance muscle to help back up our claim to be a global superpower.

      Now that the domestic shale oil drilling business, which was supposed to make us energy independent is in sharp decline, our reliance on importing old fashioned conventional oil is more evident and more important than ever. Our pledge to provide eternal military support in the Middle East in return for our eternal access to OPEC and Saudi oil based on a petrodollar exchange system is being overcome by chaos and unwinnable military goals. Russia is moving into the power vacuum to restore order. Why would it be otherwise?

      There are a number of interacting unsustainable trends going on now, including peak oil and global warming. It is important to try to understand which factors are most limiting, and are most likely to block business as usual.

      My own guess is a rapidly spreading and self-reinforcing loss of confidence in global finance capital. You can’t run a cheap-oil-structured global economy without access to cheap energy and you can paper over that mismatch for only so long. Once that realization that a lot of the world’s current investments can’t ever pay off, it is bound to feed a deflationary market sentiment, an urge to cash out while still possible in our world of high frequency trading. Go to http://www.zerohedge.com/ for frequent updates describing what appear to be unsustainable economic trends.

      — Roger

  2. Jane Leatherman Van Praag says:

    Both Roger’s editorial and Frances’ commentary are, to me, astute. I also wonder about this perpetual need for economic expansion…corporate profit growth, cities seeking to grow, builders who never saw a piece of land in a natural setting that couldn’t be improved with some structure erected upon it surrounded by plenty of paving. Maybe if we grew a thoroughly well-educated populace (implying they could concentrate on their studies because they wouldn’t be hungry and so on) we’d have enough of us to figure out and solve all these problems.

  3. Philip Russell says:

    I hope Thorne draws on this article for Friday’s Rag Radio interview with Galbraith—UT’s outstanding policy expert. Maybe if Bernie gets elected he can become the 21st century’s FDR and save capitalism from the capitalists, or better yet, save America for the Americans.

  4. Scott Parsons says:

    Bernie Sanders seems very sincere but I don’t think he understands what is coming any better than any of the other politicians. This article from resilience.org(http://www.resilience.org/stories/2015-09-18/one-and-half-cheers-for-bernie-decision-2016-and-the-deep-sustainability-agenda) provides a good explanation. What is coming can’t be changed or solved by any current policies or ideas. Ultimately we all will scale down and localize our lifestyles with less energy use overall. That is not a choice, the only choice is how we do it. I suspect even Bernie doesn’t fully understand that yet.

    • Roger Baker says:

      I agree with what Scott says about hard times. We live inside a society in denial of how precarious the global economy really is because of its complexity and dependence on cheap energy. The part of Scott’s link that I have read so far seems like a good analysis of our current political situation.

      I do support Bernie because his enthusiastic support reflects a degree of sanity that even if not complete has not otherwise found expression lately. Such efforts are healthy and need to be encouraged because even the Sanders effort fails, people learn through struggle, win or lose.

      Here is a nice post from Ugo Bardi’s blog that helps toward a rational understanding of our current situation.

      http://cassandralegacy.blogspot.com/2015/10/the-club-of-rome-almost-half-century.html

  5. Mona Mehdy says:

    Thanks, Roger. One could wish that as a society we would learn and progress. If we invested all this easy credit you refer to in at least something which is tangibly accomplished rather than exploitive asset bubbles, we could invest in stewardship of land, care for people, and rebuilding dangerous condition infrastructure.

  6. joe manning says:

    QE amounts to corporate welfare which is a public subsidy for private enterprise best described by the maxim “if we want billionaires we’ll have to pay for them.” This is a form of transmuted socialism which amounts to capitalism for the poor, socialism for the rich. If we’re necessarily transitioning to socialism wouldn’t the Scandinavian Economic Model as prescribed by Bernie be a logical place to start?

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