Home > Archive >Economic "Armageddon" Predicted
Author:written by Brett Arends posted by jc
Fri, Nov 26th, 2004 01:12:39 PM
Topic: Economic "Armageddon" Predicted

Economic "Armageddon" Predicted

By Brett Arends/ On State Street
Tuesday, November 23, 2004

Stephen Roach, the chief economist at investment banking giant Morgan Stanley, has a public reputation for being bearish.

But you should hear what he's saying in private.

Roach met select groups of fund managers downtown last week, including a group at Fidelity.

His prediction: America has no better than a 10 percent chance of avoiding economic "Armageddon."

Press were not allowed into the meetings. But the Herald has obtained a copy of Roach's presentation. A stunned source who was at one meeting said, "it struck me how extreme he was - much more, it seemed to me, than in public."

Roach sees a 30 percent chance of a slump soon and a 60 percent chance that "we'll muddle through for a while and delay the eventual Armageddon."

The chance we'll get through OK: one in 10. Maybe.

In a nutshell, Roach's argument is that America's record trade deficit means the dollar will keep falling. To keep foreigners buying T-bills and prevent a resulting rise in inflation, Federal Reserve Chairman Alan Greenspan will be forced to raise interest rates further and faster than he wants.

The result: U.S. consumers, who are in debt up to their eyeballs, will get pounded.

Less a case of "Armageddon," maybe, than of a "Perfect Storm."

Roach marshaled alarming facts to support his argument.

To finance its current account deficit with the rest of the world, he said, America has to import $2.6 billion in cash. Every working day. That is an amazing 80 percent of the entire world's net savings.

Sustainable? Hardly.

Meanwhile, he notes that household debt is at record levels.

Twenty years ago the total debt of U.S. households was equal to half the size of the economy.

Today the figure is 85 percent.

Nearly half of new mortgage borrowing is at flexible interest rates, leaving borrowers much more vulnerable to rate hikes.

Americans are already spending a record share of disposable income paying their interest bills. And interest rates haven't even risen much yet.

You don't have to ask a Wall Street economist to know this, of course. Watch people wielding their credit cards this Christmas.

Roach's analysis isn't entirely new. But recent events give it extra force.

The dollar is hitting fresh lows against currencies from the yen to the euro.

Its parachute failed to open over the weekend, when a meeting of the world's top finance ministers produced no promise of concerted intervention.

It has farther to fall, especially against Asian currencies, analysts agree.

The Fed chairman was drawn to warn on the dollar, and interest rates, on Friday.

Roach could not be reached for comment yesterday. A source who heard the presentation concluded that a "spectacular wave of bankruptcies" is possible.

Smart people downtown agree with much of the analysis. It is undeniable that America is living in a "debt bubble" of record proportions.

But they argue there may be an alternative scenario to Roach's. Greenspan might instead deliberately allow the dollar to slump and inflation to rise, whittling away at the value of today's consumer debts in real terms.

Inflation of 7 percent a year halves "real" values in a decade.

It may be the only way out of the trap.

Higher interest rates, or higher inflation: Either way, the biggest losers will be long-term lenders at fixed interest rates.

You wouldn't want to hold 30-year Treasuries, which today yield just 4.83 percent.

"The Privilege of Running Free Deficits Belongs To One Nation Alone"
by Stan Goff

((This is the fourth installment of Stan Goff's report on the political economy of US imperialism, a series which started with a critique of American policy toward Iran called "Persian Peril" (part five is coming to you soon). Toward the end of this article, Goff does something a bit unusual: he permits himself a paragraph of utopian suggestions, describing a set of politically impossible reforms whose necessity and curative power seem to this editor entirely convincing. When I call them politically impossible, I mean what they meant in high school chemistry class when they described stuff you could only do with nuclear reactions or relativistic effects: "impossible by normal means." And just as they never mentioned those reactions and effects, I won't say the "R" word - except to point out that the "non-normal means" are in your kitchen cabinet, between the cleaver and the frying pans. -JAH])

Peter Hudis described the weakness of debtor-imperialism in his essay, "What is new in today's imperialism," from News & Letters, November 2003:
In the Korean War the U.S. shifted from a creditor to a debtor nation, largely due to military expenditures. The situation became permanent with the Vietnam War. Since the 1980s, the U.S.'s debtor status as a net importer of surplus capital has been a central feature of the world economy. U.S. indebtedness has by now reached phenomenal levels. This year's U.S. trade deficit is $450 billion. The federal budget deficit is $455 billion. The two add up to 11% of U.S. GDP. This is no sign of strength. It is a sign of WEAKNESS.

To finance these enormous deficits the U.S. is forced to tap the resources of foreign capitalists by getting them to buy U.S. treasury bonds and various securities. The U.S. is importing far more than it is exporting and it's going deeper and deeper into debt. The U.S. is now more dependent on foreign capital than at any time in the past 50 years. Foreign capitalists now own 46% of all U.S. treasury bonds!

As Hudson said, "What is novel about the new state capitalist form of imperialism is that it is the state itself that is siphoning off economic surpluses....What turns this financial key-currency imperialism into a veritable super imperialism is that the privilege of running free deficits belongs to one nation alone."

The older theories of imperialism saw private corporations running the system to profit, so that profits by global companies were the measure of how much imperialism was occurring. My point is that the largest form of exploitation, quantitatively speaking, now occurs among governments. Another word for Super Imperialism would be Inter-Governmental imperialism. The United States exploits the rest of the world above all via foreign central banks accumulating dollars.

…imperialism always has exploited mainly the rich countries, for the same reason that Willy Sutton is said to have robbed banks: That's where the money is. The richest nations are the ones with the most economic surplus to appropriate. That is done not via the repatriation of profits, but by the Treasury-bill standard and the free ride that it gives the United States.

In paying attention solely to the machinations of the financial-political dimension of the economy, we are apt to lose sight of the "real" economy, where actual commodities - many of them necessities - are produced, and - remembering Luxemburg - the "total social capital is reproduced." It is in the interaction between the political-monetary surface and the material transformation, movement, and consumption of goods that we can understand the contradictory tendencies that lead to crises, and where we can actually describe concretely what those crises are.

Loren Goldner has written a number of essays on this, as a self-appointed "debt-deflation crisis theorist." Goldner begins by teasing apart the term "profit" as it is generally used by economists, by which they actually mean return on investment (ROI). More useful, says Goldner, is the Marxian distinction of "profit" as surplus monetary value extracted from the production, which distinguishes this ROI from interest and ground rent. Economists refer to ROI simply as "capitalization," which is one of the reasons they are often incapable of seeing crisis as it approaches.

"Valorization," superficially the process of "making money grow," is the fundamental process that drives the entire (global) capitalist economy. But ground rent and interest are circulatory mechanisms, while only profit can produce the new "real" inputs to sustain "growth." So there must be equilibrium between profit and other ROIs if the system is to remain stable.

One problem, however, is that profit is extracted from a labor-base that also constitutes the consumer base, and the expansionary imperative of capital growth periodically creates crises of "overproduction." The mainstream economists, still focused on the commodities themselves, call this "overcapacity," a glut both of goods and of the buildings, machines, etc. etc. (fixed capital plant) that make them. This is the mechanism of crisis in the "real" economy. This overcapacity is exacerbated by technical innovation - in the drive to increase "productivity" - that renders existing facilities uncompetitive or "obsolete" and no longer capable of producing ROI. So in order to recoup ROI, this overcapacity has to be liquidated. This is always a destructive and painful process (recession and war), for which the dominant class compensates itself by enclosing commons, dropping wages, closing down public services, and using its political power to increase regressive taxation- in effect, attacking the working class.

In imperial metropoles, this process can be ameliorated by shunting some of the "austerity" into the periphery, thereby avoiding political crisis at home. The current attack on European and American working class standards is a good barometer of both the exhaustion of resources in the periphery and the disinclination of peripheral peoples to put up with it any longer.

But there is also what Goldner and Gowan refer to as "fictitious" capital.

"Valorization", on the surface, means that individual capitalists "throw" money into investment with the expectation that, over time, it will return to them as expanded money. As long as adequate surplus value [value appropriated from the production process itself] is available to sustain expected rates of return as profit, interest and ground rent, "valorization" continues. When it is not available, there is crisis, and paper claims to wealth are destroyed or devalued. When a new equilibrium is established between profit, interest, and ground rent on one side, and available surplus value on the other - whatever the interim cost to society, in depression, war, immiseration, disease, shortened longevity - a new cycle can begin. "On the surface", then, a crisis such as the current one occurs because the totality of existing claims to profit, interest and ground rent cannot be "valorized" through the existing available surplus value: they are FICTIONS which must be destroyed by "devalorization." That is what, in a first approximation, a "world financial meltdown" entails.

We see these fictions - fictitious capital - today [1998, during the Asian crisis] in the vast "non-operating assets" of the Japanese banks, the unpayable external debts of Thailand, Indonesia, Russia, South Korea, Mexico, and Brazil; in the suddenly insolvent "hedge funds"... in the still unliquidated real estate assets in Japan, China, Hong Kong, the U.S., and Europe; in the multi-trillion dollar holdings of U.S. Treasury bills, to a large extent by foreigners, and the servicing of the U.S. government debt, Third World debt, corporate debt, and consumer debt at every level of society.

Goldner's detailed explication can be found at
http://www.geocities.com/CapitolHill/Lobby/2379/liquid.htm .

To make the long story short, pumping more and more un-valorizable dollars into the global system has been creating a "fictitious bubble" for decades: a growing mass of paper claims that are being circulated not primarily in productive investment but in speculation. The dot-com "bubble" that exploded in 2000 is already re-emerging as a real estate bubble, because the production of un-valorizable dollars continues.

The container for all this fictitious value is debt, and the threat - as even Greenspan is beginning to acknowledge - is no longer inflation (the bugaboo of interest collectors) - but deflation. People are beginning to think again about 1929.

On the world market, this expansion of dollars is expressed in the metaphor "dollar overhang," suggesting correctly that as this mass of overhanging dollars expands it grows more perilously close to breaking off and falling.

US imperialism has become paradoxical in that it is a net importer of foreign capital. Aside from the treasury loans that the US won't pay back, what are the two sectors in which the US enjoys industrial dominance, which might be attracting foreign capital? Military technology and agriculture, both heavily subsidized by the US state. This is but one dimension of the role of the US military in the world system today. The other is direct.

No less key is U.S. military might. Capitalists like to avoid risk. They feel there is no safer haven for their capital than the land which aims to rule the world through military prowess.

It is here, far more than on the issue of oil, that we can locate the economic basis of the U.S. drive for permanent war. Permanent militarization projects an all-powerful image which acts as a magnet to attract foreign capital. Unlike the Gulf War of 1991, foreign capital has not agreed to DIRECTLY pay for today's Iraq war. However, foreign capital is footing much of the bill through a more circuitous route. The U.S. deficits place added pressure on foreign capitalists to invest their surplus dollars in U.S. treasury bonds, thereby transferring much of war's cost to countries overseas--including those which opposed the war!

Hudis was wrong to suggest that oil is a secondary consideration, but he is right when he says that foreign governments finance the military… not the taxpayers of the US . And the basis of the US' ability to extract this imperial tribute - at least an indispensable aspect of it - is the globally deployed military power of the US.

There is a false dichotomy on the left now about whether the US war in Southwest Asia is about controlling oil or about the US attempting to intimidate the rest of the world with a military "demonstration effect." Both theses are true, and both of these goals are in trouble.

The deeper reality is that the global economy and therefore the US-dominated accumulation regime is now trying to valorize the total world capital with fewer and fewer wage laborers, even as former capitalist expansion had ballooned the world population well above six billion persons. This is the underlying reality that Goldner pointed to, a crisis of profit. The US as a political power, and US capital as an economic engine, have reached the impasse that was latent within the monetary-military system of debtor-imperialism all along.

A restructuring at least as dramatic as the Nixon transformation is not a mere choice, but a desperate necessity. That's why concentrating on the neocon Republicans is a form of self-deception. The Democrats will be equally obliged to tear down the old architecture and replace it with something else, if that is even possible .

What the Bush administration is doing, with an able assist from its subaltern, Great Britain, is expanding the role of the military within that model to effect this transformation, and they are doing so- predictably - in the most strategically important region in the world.

The external financing of US military expenditures forms the basis of US domestic economic stability in the near term. So claiming that "money," here understood erroneously as some unchangeable carrier of value independent of the monetary-military world system, can be withdrawn from the US Department of Defense in order to correct the structural social deficiencies at home - "money for people, not for war," as the slogan goes - is a great polemical device that will blow up in the Left's face, because it won't work. Subtract the military, and within a month bums will be wiping their asses with five dollar bills, and a lot of them will be jobless because their own employment was directly or indirectly connected to the military contracts where "the US state was acting as a surrogate export market for the industrial sector."

The responsibility of the Left, in my humble opinion, is to educate people, even if we are telling them what they understandably don't want to hear, not manipulate them .

The stark fact is, there is no easy way out of the predicament we are in, and there will be no solutions forthcoming from the system that put us there. A doctor does not tell a patient who needs an amputation to prevent dying of gangrene, "We can wait a few days, and surely things will get better."

If this is to be dealt with in any meaningful way, it means the entire US political and economic establishment will have to be removed, and we will have to commit to at least a whole generation of bottom-up, radical changes in every single facet of our lives.

That would merely begin with dumping half the so-called service sector jobs in the entire economy, beginning with prisons and working up, into a massive jobs training program, draconian progressive taxation that limits personal income to $100,000 a year, a minimum wage of $20 an hour with imposed price controls, free universal health care, the expropriation of agribusiness and systematic abandonment of capitalist agriculture, the strict rationing of electricity, and the construction of a nationwide public transportation network as a first step to dramatically reducing dependence on fossil fuel.

Since self-delusion and denial are at the core of our metropolitan cultural being, however, I have very little confidence that this will happen. Most of us who give a shit are still clinging to the illusion that this is an outcome of the right-wing cabal, and we believe we can solve it through elections. So we'll be dragged into hell in four-year increments of mystification and false hope.

The change will in all probability be imposed on us from the outside. And that will begin with people around the world preparing for armed resistance to local compradors and imperial armies, alongside a massive and unified default on external dollar-denominated debts.

The armed resistance is already in progress, in Mesopotamia

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