First of all, I keep thinking about writing an analysis of the ‘Two Economies Phenomenon’. The world has been suffering a more or less long- running energy crisis. Almost no economist mentions energy constraints as a factor in the current situation and if they do, they are mentioned as an aside.
What I mean by the ‘Two Economies Phenomenon’ is a productive or physical economy exists with a clearly separate financial economy superimposed upon it. The nation’s attention is focused on finance, which would include debt, banks, investment/speculation, hedging and consumption (this last being a child of finance and debt). The physical economy is the ambit of resources, wages, labor, prices and yields. Because wages and yields are the only income allowed to those who produce, there is little here to interest the curiosity of (establishment) economists who are endlessly hunting for marketable ‘investment opportunities’ or ‘strategies’ to pitch to financiers. Energy production is a fragment of the physical world and the productive economy, it gets little notice from the financialists. These assume that ordinary supply and demand mechanisms – and political oppression – will maintain the required increases in oil energy flows.
This divergent state of affairs began when the US started buying large amounts of petroleum from overseas beginning around 1970. Energy output before that date depended on labor, engineering and geology. Downstream industrial and commercial productivity was integrated with energy production. The period from 1938 to 1973 was the heyday of US manufacturing and commercial enterprise, aligning with the period of greatest prosperity for US wage earners.
Afterwards, credit (bubble) creation, currency manipulation, and hedging – the tools of finance/buying and selling – gained ascendence. Prior to US peak oil, commercial production itself was the economic end. Afterwards, finance became pre- eminent and the emphasis in the US shifted to consumption.
Currently, finance is the greatest part of the US’s GDP: 25% for direct finance activities in all markets plus a large percentage of consumption which WAS 70% of GDP (prior to 2008). Even as it withers away, finance claims the economists’ attention. Finance cannot solve the energy crisis. Economists aren’t looking in the right places, which mean the finance crisis won’t get solved, either.
I want to call attention to the excellent articles of Australian economist Steve Keen. Here’s an example:
You have just come from your annual medical checkup, where your doctor assures you that you are in robust health.
Walking jauntily down the street, you bump into a practitioner of alternative medicine. He takes one look at you and declares “You have a serious tumour! It must be removed or you will die”.
It’s hard to top that for an opener. After describing a torturous series of maladies and ill- conceived treatments, our patient is finally back on his feet. Leaving the hospital, he crosses paths with the practitioner:
“But they haven’t removed the tumour!”, he declares.
Keen is an apostle of Hyman Minsky and his Financial Instability Hypothesis. Minsky states that the conditions created by robust economic growth carry with them the seeds of economic destruction. Prosperity allows for a massive expansion of credit and destabilizing risk. There is no such thing as rationality or equilibrium – risk bound capitalist economies are inherently unstable.
This is a good hypothesis and Minsky is getting some well- deserved attention in the wake of our difficulties. One area of contention is the realization that conventional economics failed to indicate the massive unraveling lurking over the horizon in the years leading up to it. Consequently, the credibility of the profession is under scrutiny.
Minsky’s concept follows to a large degree the deflation outline of Irving Fisher:
- Capitalist economies can and do periodically experience financial crises (something that believers in the dominant “Neoclassical” approach to economics vehemently denied until reality—in the form of the Global Financial Crisis—slapped them in the face last year);
- These financial crises are caused by debt-financed speculation on asset prices, which leads to bubbles in asset prices;
- These bubbles must eventually burst, because they add nothing to the economy’s productive capacity while simultaneously increasing the debt-servicing burden the economy faces;
- When they burst, asset prices collapse but the debt remains;
- The attempts by both borrowers and lenders to reduce leverage reduces aggregate demand, causing a recession;
- If the economy survives such a crisis, it can go through the same process again, with another boom driving debt up even higher, followed by yet another crash; but
- Ultimately this process has to lead to a level of debt that is so great that another revival becomes impossible since no-one is willing to take on any more debt. Then a Depression ensues.
That is where we were … in 1987. The great tragedy of today is that naive Neoclassical economists like Alan Greenspan and Ben Bernanke allowed this process to continue for another three or more cycles than would have occurred without their rescues.
In 2008, they did it again—only with methods they would have disparaged a mere year earlier (“Rational Expectations Macroeconomics”, a modern neoclassical fad, preaches that government intervention can’t influence the level of economic activity at all—yet another belief that reality has recently crucified). This time, while the rescue has worked, the recovery they expect afterwards can’t happen—because there’s almost no-one left who will willingly take on any more debt.
This time, there’s no re-leveraging way out. The tumour of debt has to be removed.
If you despise the current Administration and its cast of weasels and incompetents you might enjoy this article from Harpers:
Barack Hoover Obama:
The best and the brightest blow it againBy Kevin Baker
Three months into his presidency, Barack Obama has proven to be every bit as charismatic and intelligent as his most ardent supporters could have hoped. At home or abroad, he invariably appears to be the only adult in the room, the first American president in at least forty years to convey any gravitas. Even the most liberal of voters are finding it hard to believe they managed to elect this man to be their president.
Baker makes a convincing Herbert Hoover argument. I couldn’t agree more, except Hoover was more likable. A large problem with this outfit is the assemblage of crooks and cronies, many of them holdovers from the farcical Dubya and Clinton Regimes. Instead of the Hoover administration, perhaps a better comparison would be with Tammany Hall. All that’s missing is the dude with the beard:
Well …
By 1870, Tweed, as commissioner of public works, led a ring that controlled the municipal government of New York City.[3] He and his associates—Peter Barr Sweeny (park commissioner), Richard B. Connolly (controller of public expenditures), and Mayor A. Oakey Hall—defrauded the taxpayers of many millions of dollars. In the words of Albert Bigelow Paine, “their methods were curiously simple and primitive. There were no skilful manipulations of figures, making detection difficult … Connolly, (Bernanke) as Controller, had charge of the books, and declined to show them. With his fellows, he also ‘controlled’ the courts and most of the bar.”[4] Contractors working for the city—”Ring favorites, most of them—were told to multiply the amount of each bill by five, or ten, or a hundred, after which, with Mayor Hall’s ‘O. K.’ and Connolly’s indorsement, it was paid … through a go-between, who cashed the check, settled the original bill and divided the reminder … between Tweed, Sweeny, Connolly and Hall”.
That resonates: “Tweed, Sweeny, Connolly and Hall”.
Summers, Geithner, Paulson and Bernanke? Tweed died in debtor’s prison. Where will the Fab Four wind up?
Keeping to the theme of thievery the Obama & Co. crew, this is from Ilargi @ The Automatic Earth:
… how do we open our present treasury chambers and political backrooms, what are the magic words that will open up and shine a light on today’s secrets? Many of those secrets are so ugly and festering and rotting, at the very least they badly need a ray of daylight.
He goes on to sketch the particulars of the Merrill – Bank of America deal that included our boys Geithner, Paulson and Bernanke:
From where I am seated, I’d suspect that Tim Geithner is sitting neither pretty nor easy. Geithner has so far largely been kept out of the limelight, but he was leading the New York Fed when the BofA/Merrill takeover was being pushed through. It was Geithner’s legal team that handled all the details surrounding the deal, which obviously took place inside the New York Fed’s jurisdiction.
So what did Geithner know? On April 23, the Wall Street Journal published this revealing article: Lewis Testifies U.S. Urged Silence on Deal, which claims that Paulson and Bernanke pushed BofA CEO Ken Lewis to hide the truth about Merrill Lynch from BofA shareholders ahead of their vote on the takeover. Yes, that would be highly illegal if it turns out to be true. Threatening to kick Lewis out of his job if he didn’t comply with the plans is then merely the icing on the criminal cake.
Read the entire article and get an idea of how current corruption measures up to historical trends. The protagonist here is New York Attorney General, Andrew Cuomo. You can also observe the political back- story unwind as it is taking place:
There are persistent rumors that the Obama team is pressuring New York State Governor David Paterson not to run for another term. Not because it would hurt the Democratic Party, which is the “official” reason, say these rumors, but to open the way for Andrew Cuomo, to move from being Attorney General to making a run for Governor.
Promoting Cuomo from AG takes Bernanke & Co off the hook, at least temporarily. Typically, Obama’s fingerprints are all over this nonsense:
President Obama had sent a request to Mr. Paterson that he withdraw from the New York governor’s race, fearing that Mr. Paterson cannot recover from his dismal political standing, according to two senior administration officials and a New York Democratic operative with direct knowledge of the situation.The decision to ask Mr. Paterson to step aside was proposed by political advisers to Mr. Obama, but approved by the president himself, one of the administration officials said.
The Republican gubernatorial candidate is reported to be long- time political tomato- can Rudy Giuliani.
There is a lot more to this …