Wednesday, September 24, 2008
The news on the most threatening financial crisis pile up. On one side the US Congress seems reluctant to pay the bill to rescue troubled financial institutions while ignoring the plea of mortgaged homeowners and placing the burden on taxpayers' shoulders (who are the voters in the end - and there are major elections a few weeks ahead), on the other the FBI is investigating as many as 20 financial companies of the USA for possible fraud, including the four that made he headlines in recent days.
Doubts mount up and, after the "miraculous" climb up of last friday, stock markets look again rather gloomy.
On the bail out scheme, it's been argued that is paying bankers for making major mistakes, that it will give them double the money these institutions are actually worth (if not more) and that it is just a patch that ignores the real problems of an economy that is much more merely speculative than actually productive.
The scheme is similar to that used by Japan in 2006 in the face of a similar kind of financial nightmare but both Japan and the USA are heavily indebted states already (they have not used the good times to clean up their accounts). Japan has by now a public dept that is 180% its GDP (that is enormous, specially considering it's the second largest nominal GDP of the world). The US public debt, when considering all welfare debt (for some reason accounted separately), is some 59.1 trillion USD, what makes up some 430% of the GDP. US taxpayers therefore owe the total national production of four years and three months. Certainly 700 billion doesn't look that much in comparison but it is still a major share of the official public debt. In order to avoid the complications caused by this huge debt, the USA is letting the dollar plummet (as its debt is in US dollars) but this also has important side effects, specially regarding credibility and willingness by third parties (most US debt is foreign owned, with Japan, China and the UK holding half of it) to support it. In practical terms, the USA is in quasi-bankrupticy and I suspect it is only a matter of time until this bakrupticy becomes an official fact, specially in the midst of his financial credibility crisis.
A bankrupticy will not directly destroy US might but, as history teaches (think in Imperial Spain for instance, also heavily indebted to pay for wars all around the world), it will severly harm it.
In any case, with the economic pump of easy credit destroyed, the economy appears unlikely to recover (in fact I foresee a most deep and lasting crisis of major consequences, maybe like nothing seen before, at least in the last two centuries or so). The liberal (capitalist) economy is based in consume (aka demand) and, if the demand plummets, largely because of lack of easy credit, producers (offer) will not find much business to profit from, will not hire workers, much less increase their wages, reducing the demand even more. This is what Marx thought as the major contradiction of Capital: it is a machine of productivity growth but it needs of ever growing demand, while at the same time of ever diminishing salaries. Only pseudo-socialist schemes that guarantee that (some) workers keep some purchasing power have so far been able to keep the demand high but the now unleashed forces of pure global capitalism are just looking for ever-diminishing costs and the result is that demand cannot be sustained.
This has major implications for the lifestyles of the people specially in the developed world, who will have to live with much less, but it has even more dramatic consequences for the whole economic machinery. The bail-out won't recover easy credit: sub-prime credit was just the logical next step of a system that needed more and more buyers, who demanded more and more. It was not a sustainable approach but certainly capitalism is seldom sustainable, and never in the long run. This option is now out of the table and will be for long, and therefore demand is not likely to grow at all. Without demand, without growing demand, businness will succumb.
How to recover it? No idea: last time (1930s) it was only a major war, a huge public debt and major state involvement in the economy, that was able to get things straight. Nowadays, global wars are not any reasonable option, not at all and minor wars like Iraq an Afghanistan appear to only be able to drain even more the suffering state coffers.
Just some incomplete thoughts certainly but the situation looks extremely gloomy however one looks at it.