by Patrice Ayme
Tue Mar 10th, 2009 at 07:29:11 PM EST
STIMULATE MORE OR PERISH SOON
March 10, 2009 by Patrice Ayme
OFFER WORLDWIDE REGULATION IN EXCHANGE FOR WORLDWIDE STIMULUS AT THE G20 TO AVOID CRUISING TO OBLIVION.
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Abstract: The Obama administration shows every evidence to not have understood how catastrophic the situation is. It keeps on having a void for a bank policy. The exponential function, the most important function in mathematics, now masquerades as the unemployment number, and it's nothing that a lawyer can talk around. The existing stimulus, too little, too late, is impotent in face of this tsunami. On current trends, the worst numbers reached during the Great Depression will be seen again by September 2009, in seven months. After that, it's bad science fiction. A real, pure jobs stimulus package of a trillion dollars on top of the existing one is needed right away. A deal has to be made with the rest of the G20: worldwide financial regulations in exchange for stimulus and derivative forgiveness. I explain and suggest.
But, with several of the architects of the disaster providing leadership and advice on the American side, it is hard to be optimistic.
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This is a complement to Paul Krugman's March 09, 2009, editorial in the New York Times, "Behind The Curve" (with which I agree wholeheartedly). My original (more compact) comment kindly published by the New York Times is on]
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The fierce recession of 1982 has often been compared to the present slump. Up to a month ago most economists would evoke 1982 only to declare that 2009 was not as bad. That comparison was unhinged to start with. The recession of 1982 was the consequence of extremely high interest rates deliberately inflicted by Fed Chief Paul Volcker to break the back of inflation. The short term interest rates were brought above 23%. The recession of 1982 was an act of will. Volcker's will.
This recession is different. It is not an act of will by one man. It is structural, the result of a stupid, erroneous and arrogant philosophy of civilization, long sustained by the wealthy manipulators who profited from it. This recession is a civilizational failure. Thus, the causes of the present recession are much deeper than those of the Great Depression of the 1930s.
Indeed, the Great Depression of the 1930s was just a big bust after a big boom. The big boom was also an act of will, a misguided attempt to support the British (!) economy by friends in the US government, who also liked to see their class make a bundle.
The bust of 1929 got politically and financially mismanaged, and turned into a catastrophe as the US Senate tried to get out of it with a trade war onto the world. The world retaliated, and the USA, at the time the world's largest exporter, went down hard. Now the population of the USA is more than twice what it was in the 1930s, but the world's greatest exporter is Germany (this hints to the structural problem).
Thus the present recession is much more serious. It follows from decades of misallocations of economic efforts. It follows from Nixon making health into profit, and Reagan's voodoo economics. It follows from the decision by Clinton-Rubin-Summers-Geithner-Greenspan and republican cohorts to found the economy on hedge funds and private equity, leveraged out to the maximum by gigantic banking monopolies. To make all of this possible, that happy crowd repealed the Banking Act of 1933 (the so called Glass-Steagall Act). This allowed unregulated Credit Default Swaps and Structured Investment Vehicles, and allowed to take out various rules on short sales, etc. Summers is a fierce defender of that approach to the universe, and saved the Credit Default Swaps from regulation by the Commodity and Futures Trading board in 1998.
That dismantlement of the New Deal and anti-depressionary measures created enormous social and earning imbalances that made society dysfunctional. The immensely powerful plutocrats were free to escape legislation by sending all sorts of jobs overseas. Concurrently, and even more dangerously, the USA government developed a total disdain for an energy efficient economy by choosing to do the exact opposite of Europe. Instead of energy efficiency, the military budget was cranked up and oil rich nations invaded or threatened to be so. The median salary has been going down for 11 years, since Summers was in power in 1998, which means that this depression has seen already 11 summers.
By unit of GDP, the USA emits more than three times as much CO2 than France: as Rubin and Summers and Geithner were building giant monopolistic banks full of themselves and their friends, the real infrastructure of the USA was left to die. Meanwhile the countries of the EU forced energy prices way high inside Europe to force their economies to become ever more energy efficient. When the world economic boom brought energy prices too high, weakened by years of useless, Orwellian war, the completely inefficient USA broke down spectacularly. It turned out that the financial system was corrupt to the core.
Obama is facing an utter catastrophe. But, he keeps on sending taxpayer money to the flaming wrecks of the abominable bank holding companies and their hidden counterparts. In a New York Times interview on March 6, he informs us that he uses television to watch basketball. I guess it's more lively than the utter destruction out there.
Then Obama goes to see Summers, who orchestrated the Credit Default Swaps in 1998. Summers has got to be happy: everyday that goes by, more taxpayer money is sent to the counterparts of the few giant institutions who lent all the money to the hedge funds, private equity, etc. So the wealthy people Summers love are getting relatively richer everyday (while, and because most of the People become poorer). Tomorrow the world will be theirs even more than it was yesterday: the dream goes on.
These are not ranting charges; Obama did not reinstate various short sale rules that had been put in to stop the Great Depression of the 1930s. Thus his friends in the hedge funds make a killing destroying the stock market investments that constitute most of the retirements dozen of millions of US citizens have. The same friendly hedge fund managers enjoy their maximum 15% tax rate. Indeed, as Obama insists, he is "not socialist". is there an adjective for "hedge-fundist"?
Obama is facing catastrophe, but he does not look at the right indicators, or he cannot read them: the unemployment rate is a NON LINEAR curve. One can just look at it, and sees this: it's clearly a quadratic curve, or an exponential.
Obama does not understand what this means: he knows basketball and law. For science, he has advisers. For economics, he has the guys who caused the disaster in the first place. But he cannot look at the graph of unemployment and realize, as a mathematician does, what it is telling him. The exponential function has not been taught to him. He has probably never solved a differential equation in his life. This non linear graph, totally obviously means that the catastrophe is feeding on itself, that the rate of increase of the catastrophe is proportional to how big it already is. The real unemployment rate is already 15% (and even though most people in the USA need some sort of employment to get health care, so people will accept whatever job in the USA, differently from, say, France, where they get health care, no matter what).
At the present rate of augmentation, by September, the official, doctored unemployment rate should be above 13% (it's 8.1% now, but it jumped from 7.5%; multiply (.6%) by 7, and exponentiate a bit, to get above 13%). Now one should stop for a moment here. The 8.1% is the so called U3 unemployment measure. By counting officially "discouraged workers" it gets to 8.5%. U3 is not how unemployment was measured in the Great Depression of the 1930s (the unemployment then peaked at 24.75% in 1933, the year Hitler was elected).
Unemployment as measured in the Great Depression of the 1930s was more like U6, the broadest measure of unemployment in the USA today. U6 is now at 14.8%. The speed, and self feeding of the disaster is such that, by September, Obama maybe facing 25% real unemployment, exactly as in 1933. Probably many in Obama's entourage will scoff, reading this. But that is the catastrophe that they should try to avoid. It is also the exact catastrophe the graphs point to. It is also the catastrophe that the weakness of their stimulus made unavoidable (just 2% of GDP, once removed the non-stimulus spending in the stimulus).
Interestingly the real stimulus in the USA is arguably of the same relative size as the French stimulus (although France just entered recession, and although France has mandated, very strong automatic economic stabilizers that kick in when the economy goes down, because of huge spending on social services; by the way, the unemployment rate in France is now significantly lower than in the USA; French U3 counts a lot of unemployed that the USA one does not count).
There are many things that Obama could have put in a real trillion dollars stimulus: rail is an example. Light and high speed: there is a huge need for both in their electric version (very efficient rail could save the car companies). Electric rail would provide for a huge number of jobs, and high quality jobs (the technology should imported from France and/or Germany). Car companies could be mobilized to build electric rail under license (making the rail industry "shovel ready").
Another huge need is to go to a closed nuclear cycle (like France, and now Japan, the UK, Germany). It's not a question of liking nuclear or not; the open nuclear cycle now used in the USA is an ecological monstrosity, and an enormous waste.
Solar thermal and big wind should be pushed too (this Obama does with the electric grid, to some extent; but his grid spending is less than the French-Swiss-Italian spend on just one of the three giant high speed rail tunnel through the Alps they are now building). In general "green" spending should work, but if and only if it is accompanied by TAXING CARBON (in partricular, fuel). Taxing carbon makes the green market profitable and will mitigate the deficits. All this is big industry, not gimmicky like the Internet (Obama does not find the Internet "reliable", as I pointed out in the preceding essay, so why does he push it? See "The Audacity of Dope").
Soon, the way he is presently going, Obama will have sent all the money to his hedge funds and private equity and foreign friends, the mysterious counterparts derivative contracts with the corrupt giant banks, and insurance. There will be no more money, and then what? What would have been achieved? Taxpayers will have tried to make whole some of the contracts that should have been declared unlawful to start with?
It would be better for the would be beneficiaries of said contracts to take their losses, so that the banks can start afresh. Many other countries do not want to see this financial non sense anymore, ever again. So they want to re-regulate the financial industry. Obama should let them have their way, in exchange for a larger stimulus on their part (one cannot over stimulate in the USA, and have other countries profit from the USA stimulus while saving their own creditworthiness).
If this deal is not cut, it's 1933-1941 all over again. Remember that the USA pulled out of that with the command economy of a world war in 1942. And that happened because the command economy of Roosevelt was too little, too late. That incrementalism of Roosevelt led to a prolonged slump that made the armed forces of the USA so weak, and the mind of the USA so confused, that the USA was unable to stand by France and Britain to stop Hitler in Munich. Instead, many very powerful rogue elements of the USA plutocracy helped Adolf Hitler. People with names such as Watson (IBM), Ford, Bush, Harriman, Texaco, Standard Oil, etc. Many got Hitler's highest decorationin 1938-39.
This sounds incredible today. But it is as incredible to use a void as a banking policy today. Roosevelt's incrementalism looks decisive in comparison: after all, FDR closed all the banks for four days, the day of his inauguration on March 5, allowing 1,000 banks to restart with a clean bill of health on March 10. Well, Obama is two months after his inauguration, and, instead of having taken desicive action like FDR, he makes a parody of what serious people have suggested to do about the banking problem (nationalize, fire managment, void the derivatives).
Of great times, great minds are made. High time for greatness!
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Patrice Ayme
http://patriceayme.wordpress.com/
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Addenda: 1) My essay on a new method to better avoid catastrophes rolls over Descartes' "Cartesian method". It fully applies here: Obama ought to start from the worst possibility: 1933 in September 2009, and then he should do whatever needs to be done to avoid this very unhappy outcome. Making the four largest banks, or pieces there from, fully functional should be number one top priority and that can only go through declaring all derivatives null and void, since there is so much of them.
- As Paul Krugman says, if the situation deteriorated much further, as seems likely, by the time Obama comes for a real stimulus(instead of pushing, as he did, for his social agenda), nobody will be listening to him. Articles of impeachment may sound more appropriate by September (with the Dow below 1,000, say, and wars flaring around the world). This sounds ludicrous, but is it more ludicrous than Geithner's plan to wait six more months to see how the insolvent banks were doing? Of course, I espouse Obama's social agenda. But distant plans should not be the order of the day, when the house is on fire.
- Some people, cheaply making points by sounding reasonable have suggested that: "The President recognises that there are big uncertainties and that neither he nor those immediately around him have all the answers. Six weeks in to his term he is on the steepest of learning curves - chiding him (and his team) for being behind the curve does not make much sense." (as a certain Ed Randall from London put it to Krugman). Cute, elegant, intelligent sounding and definitively nastily dumb: Roosevelt was ready to act on day one, and he did act on day one, as described above. In Obama's team one finds some of the pyromaniacs that set up the fire, and so on. If it's all crazy, it's not my fault. Describing the insane as if they were reasonable may be pretty, but that is just as insane. Folly is always reasonable to the maniacs. It takes wisdom to denounce it.
This entire situation is not just about people getting poorer: the Great Depression was followed by the holocaust of about 3% of the world population (more than 70 million dead, including to up to 6 million Jews). To underestimate the gravity of the slump is a moral fault.
- I did not bother with the numbers of wealth destruction and production shortfall above (although I had them in mind). They are changing too fast. The official number of GDP shortfall is three trillion dollars (so, just to stand still, one would need three trillion dollars of stimulus). But soon it will be more. Wealth destruction is above 23 trillion worldwide.
- Regulating finance heavily looking forward is a no brainier, and it is hard to see how Obama, supposedly liberal, could resist it, when the right wing German Chancellor and French President propose it. The argument has been made that the UK and the USA would suffer most since they were the main dens of financial plotting. But regulations would make a lot of present day derivatives unlawful, thus it could be argued that those saddling the huge USA banks should be declared null and void. Now, some of the money from the derivative "contracts" is owed to Europe, so the Europeans would get their regulations (as they should), but would have to tighten their belts (a bit further). And USA banks would get a huge boost.
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