Saturday, June 16, 2012

Last Days in the Eurozone Bunker

Today, the last day of the Eurozone as we know it, the Recovering Bureaucrat takes on the phenomenon of the spreading mass insanity among our Advanced Sector elites.  From Athens to Madrid, from Brussels to Washington, from London to Sacramento, our leadership is increasingly unhinged from the fundamentals of political economy.

And it’s not just the political leadership; the stewards of our slowly disintegrating international financial system are equally unmoored from reality.  The price we are all going to pay for this will be frightening.

Thursday’s financial headlines screamed “Stocks Rally as Central Banks Reportedly Ready to Inject Cash,” thus confirming that financial “experts” maneuvering in the stock markets are as bonkers as the eco-loons jetting to Rio next week to halt, once again, the world’s aggregate CO2 emissions.

Writing at two days ago, Abram Brown provided the latest breathless upbeat news:
Stocks climbed higher today, following a report detailing central banks’ plans to stabilize markets after Greece’s parliamentary elections.

Central banks from major economies are prepared to keep money flowing if the elections again roil financial markets and tighten credit. “The central banks are preparing for a coordinated action to provide liquidity,” a senior G20 official familiar with the situation told Reuters.
American stocks continued their fantasy rally yesterday, even as some economists publicly warn that the global economy is de facto back in recession.  So why are investors still pretending that the latest reports trumpeting promises by central banks to “provide liquidity” if the Greek elections don’t go Brussels’ way tomorrow hold out any possibility of actually turning the recession around?

The Recovering Bureaucrat, who regularly admits he is no Nobel Prize-winning economist, has a simple question.  Where is all this money coming from?

Can it be that we have entered a period of political economic history in which no one actually understands economics?  Is the power of fear-induced denial so overwhelming that our Advanced Sector leaders have mutually agreed to the collective delusion that we can conjure money out of thin air forever?

Was Margaret Thatcher wrong when she drily warned in 1976 about political economic systems that “always run out of other people’s money”?

Exhibit A of today’s over-the-top delusional thinking is, as always, Paul Krugman with his bizarre ignorance of the distinction between wealth creation and money.  Like his disciple President Barack Obama, Mr. Krugman maintains a child-like faith in the machinery of government to generate and denominate, rather than devour, wealth.  In keeping with the contemporary descent into collective lunacy, Mr. Krugman attacks Mitt Romney for promising to shrink government.
First of all, there’s our own experience. Conservatives would have you believe that our disappointing economic performance has somehow been caused by excessive government spending, which crowds out private job creation. But the reality is that private-sector job growth has more or less matched the recoveries from the last two recessions; the big difference this time is an unprecedented fall in public employment, which is now about 1.4 million jobs less than it would be if it had grown as fast as it did under President George W. Bush.
And, if we had those extra jobs, the unemployment rate would be much lower than it is—something like 7.3 percent instead of 8.2 percent. It sure looks as if cutting government when the economy is deeply depressed hurts rather than helps the American people.

. . . But America—which unlike Europe has a federal government—has an easy way to reverse the job cuts that are killing the recovery: have the feds, who can borrow at historically low rates, provide aid that helps state and local governments weather the hard times. That, in essence, is what the president was proposing and Mr. Romney was deriding.
Who knew it could be so simple?  The federal government, whose $15.79 trillion acknowledged debt exceeds 100% of GDP, should just “borrow” more money and hire more teachers, police, and firefighters, and voila! our economy will recover.  After all, as Mr. Krugman also once noted, we don’t really have a debt problem because it’s mostly money we owe to ourselves!

It’s really mind-boggling to think that a winner of the Nobel Prize for Economics is actually clueless about the fundamentals of an advanced economy, but then again the same Nobel folks gave a Peace Prize to a man who for several years has been directing drone attacks on targets in multiple countries.

We Are Never Going Back to the Way Things Were

Dealing with the increasingly dissonance between our world today and the world that most of us grew up in is an essential element of our challenge as citizens. 

Everyone born in the Advanced Sector before the end of the Cold War in 1989 (and this includes Paul Krugman and Barack Obama, as well as the RB) grew up in the collective consciousness generated by the high water mark of the Industrial Age.  We were acculturated with the assumptions, along with the material evidence of their validity, about the generation and management of wealth, most of which were set in motion during the first five years after the end of World War II.

The Bretton Woods agreements, the Marshall Plan, the containment policy, the triumph of Mao’s revolution in China, the baby boom, the rise of Levittown and American suburbia, and the invention of the transistor all happened in that eventful period—and they all were essential to framing the next forty years.

The defeat of Germany and Japan and the evaporation of the British Empire cleared the way for American industrial capital to dominate the global political economy during the 50s and the early 60s.  This mode of production and distribution proved to be so superior to every other expression that it generated an unprecedented amount of wealth both domestically and internationally.  Its success intimidated any effective political rivalry in the West until the collapse of the Soviet Empire ended the global bipolarity that had provided political stability for the American-led industrial hegemony.

But the destruction of the Iron Curtain coincided with the widespread material evidence of a new economic era, what we’ve labeled the Information Age, for which the political uncertainties of the post-Cold War world provided an enormous unregulated space to expand into. 

The efficiencies and productivity increases offered by the new technologies began transforming the great legacy industrial corporations in automotive, steel, transportation, and agriculture in the 1970s, spurred by the energy crunches created by the Arab oil embargoes of 1973 and 1979.  This transformation severely impacted the states of the American “Rust Belt,” and spurred the enormous transfer of population, entrepreneurial innovation, and capital to the “Sun Belt” states.

In the course of the twenty years between the inaugurations of Ronald Reagan and George W. Bush, Microsoft, Cisco, Intel, and Wal-Mart replaced General Motors, AT & T, and IBM as the largest non-energy corporations in America—and Apple has since made the top five.  The only companies with staying power over that period have been General Electric and IBM.

To give us a sense of the magnitude of this wealth explosion, at the beginning of 1950 the GDP of the United States was just over $1.8 trillion (numbers adjusted to the dollar in 2000).  At the beginning of the Reagan administration, after thirty years of unprecedented industrial production, GDP had reached $5.9 trillion.  Twenty years into the transition to the Industrial Age economy, we had grown to $11 trillion, and we currently stand at $13.5 trillion.

The New Economy Will Rule

As the RB types this on his laptop, connected to the globe through the local wireless system, synchronized to his other devices, he is prepared at the push of a button to publish his pearls of wisdom for the other 2.4 billion internet users around the world—not to mention the 5.9 billion of us that use cell phones.

But for most of us, as exciting and far-reaching as the impacts of this economic transformation have been, the underlying macro dynamics are not evident.  As consumers, our adaptation of new technologies has, for the most part, been relatively seamless.  (Even the RB’s 82-year old mother uses Facebook.)  But the elements of the political economy that supported production of all these new gadgets and technologies are not those that produced our fathers’ Oldsmobiles and Zenith televisions in the 1950s.

Underlying this emerging world are significant transformations in the how efficiencies of production, distribution, credit, and reinvestment are achieved.  As Kevin Kelly noted in his 1998 book New Rules for the New Economy, success in this evolving world will require mastering new imperatives.

From Silicon Valley to Tel Aviv, clusters of men and women applying these new rules have been creating the outlines of the new global institutions required to facilitate and encourage the acceleration of the new economy.  The problem is that the legacy institutions are far too invested in the assets of the old economy, which emphatically includes every political structure from the bottom up.  And as with any asset, it is human nature to do everything possible to preserve the value of our property.

And so here we have it: every Information Age innovation successfully brought to market undermines the old political economy, and every undermining brings greater determination to resist that devolution.

In the political realm, the old economy is represented in what Walter Russell Mead has identified as “the blue social model.”  This method of governance reflected the needs of the industrial economy: big and centralized.  It also too often included the old Progressive ideal of the Wilsonian era of a wise regulatory state, based on the optimistic belief that disinterested experts could soften the disruptions that the rapid growth of the industrial economy had imposed on American society.

The New Deal of course established the legal and policy basis for an unprecedented expansion of government power in what had hitherto been reserved to civil society; World War II and the Cold War gave social legitimacy to this encroachment.

The victories of Margaret Thatcher in 1979 and Ronald Reagan the next year signified the opening shots in the political transformations that will be required for the return of global prosperity.  They explicitly attacked key elements of the blue social model, although the social base for a complete transformation did not—and still does not—exist.

In the years since their administrations, the strains of preserving the blue social model have increased exponentially.  The collapse of the financial system in 2008, not a mere business cycle downturn, has brought the day of final reckoning increasingly closer.  Tomorrow’s vote in Greece may be the blue social model’s Sarajevo.

The surpluses of the postwar industrial era permitted the expansion in the Advanced Sector of the blue model social safety net.  It is essential to understand that all spending for health care, retirement, disability, and unemployment benefits must come from the social surplus of the productive sector.  Governments cannot finance them by printing money but only by transferring wealth from the private sector into these programs.

The financial system is similarly funded by the productive sector, and ironically is now the major source depressing the generation of necessary surplus. There has long been a significant tension between the financial and productive sectors; even now too few of us appreciate the distinction.  Yet the truth is that the products of the financial business do not themselves generate real wealth; like government they depend solely on the surplus of the productive sector.

The political basis of today’s blue social model is Wall Street and The City, public sector trade unions, and millions of individuals across America and Europe who have become dependent upon large-scale wealth-transfer programs.  They control the Democrats in the U. S. and the Europhile parties in Europe.

The crisis is caused by the rapidly diminishing amounts of actual wealth available to finance these ever voracious non-wealth producing activities in the public and finance sectors.

This is the core issue in Europe, and why the Eurozone will have to be either drastically revamped or permitted to expire.  The Brahmins of Brussels are trying to preserve the EU—a creature of Europe’s experience with two World Wars and the Cold War—against the relentless rejiggering of the global economy.  The newer efficiencies of the emerging world make maintaining the old systems increasingly costly. Exacerbating the situation is that the regulation-machine in Brussels blithely churns out continuous mandates upon European wealth generators.  This is all unsustainable.

And the contagion is spreading to the United States.

The Stakes in the November Election

This is reflected in the policies priorities of the Obama administration, with its illogical faith in money—and therefore the government that prints it—as the foundation of the economy.

That genteel house conservative at the New York Times David Brooks wrote as good an analysis of the situation this week as anyone will read in the MSM.  He presents the blue social model and the critiques launched against it by conservatives and Republicans (although he tellingly doesn’t take sides).
But many Republicans have now come to the conclusion that the welfare-state model is in its death throes. Yuval Levin expressed the sentiment perfectly in a definitive essay for The Weekly Standard called “Our Age of Anxiety”:

“We have a sense that the economic order we knew in the second half of the 20th century may not be coming back at all—that we have entered a new era for which we have not been well prepared.  . . . We are, rather, on the cusp of the fiscal and institutional collapse of our welfare state, which threatens not only the future of government finances but also the future of American capitalism.”

To Republican eyes, the first phase of that collapse is playing out right now in Greece, Spain and Italy—cosseted economies, unmanageable debt, rising unemployment, falling living standards.
He concurs with what the Recovering Bureaucrat has long been arguing, that the dynamics that made the blue social model successful for a half century are now seriously impeding the next generation of prosperity.
The welfare model favors security over risk, comfort over effort, stability over innovation. Money that could go to schools and innovation must now go to pensions and health care. This model, which once offered insurance from the disasters inherent in capitalism, has now become a giant machine for redistributing money from the future to the elderly.
The blind commitment of liberal Democrats in America and the Eurocrats in Europe to a failed and unsustainable model is bringing the global moment of truth ever closer.  The inability of the Republicans and conservatives across the Atlantic to articulate a vision for the new governance is inadvertently helping keep the progressives’ hopes alive.  Mitt Romney, as Brooks notes, has yet to offer a muscular blueprint for replacing the bankrupt system; this is only “implied in his (extremely vague) proposals.”

The 50-50 dynamics of the American electorate over the past twenty years reflects the underlying crisis.  The emergence of the Tea Party represents the continuing robustness of the foundational principles of the American ideal.  Our commitment to individual liberty in the pursuit of life, liberty, and happiness is still the universal principle upon which the rules for the new economy are based.

We will have to make a choice, although we really don’t have a choice.  Are we a nation still committed to those universal principles, or have we finally capitulated to the soft expectations of the cushioned life paid for by someone else?  Obama partisans scoff at the charge that the president favors a European-style social democratic blue state, but he made his support for that explicit in the past week.

And although the other side has yet to present an inspirational vision of the new governance to support the next era of global prosperity, we Americans are increasingly getting that it is up to us.  We can ignore the delusions of our “leaders” to the extent that we get ourselves organized.

This is because reality always wins out over fantasy, and so we will be forced to create the new structure.  Entrepreneurs across the globe are producing amazing new goods and services, and global interconnectivity only accelerates the sharing of ideas and innovation.  This plays to America’s strengths.

David Brooks sums our choices up thus: 
This is what this election is about: Is the 20th-century model obsolete, or does it just need rebalancing? Is Obama oblivious to this historical moment or are Republicans overly radical, risky and impractical? 

Republicans and Democrats have different perceptions about how much change is needed. I suspect the likely collapse of the European project will profoundly influence which perception the country buys this November.
The RB understands the source of the denial and the preference for insanity.  His only question is, how will the rest of us respond when, like Hitler in his bunker in April of 1945, our leaders finally face facts?  Will we be prepared to usher them to the retirement home paid for by the generous pensions they have always fancied?

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