The current economic crisis is threatening mankind with a real catastrophe. The financial issues are just the tip of the iceberg; the bulk of the submerged piece is social problems, fraught with global armed conflicts. The probability of a negative scenario will remain high for as long as the global community continues to stubbornly ignore the underlying causes of the crisis. Experts from the World Economic Journal have pinpointed it and are ready to share this with the Journal’s readers.
The Fall of Forecasters
“There are no quick or easy fixes to this crisis” is a mantra found in almost every speech given by U.S. President Barack Obama. But even he must admit that the crisis is deepening and without an understanding of its true causes, it will be impossible to deal with it.
At a recent meeting of the Dialogue of Leaders, former Italian Prime Minister Romano Prodi admitted that everything he and his then-fellow heads of the world’s largest states have done to recover from the crisis several years ago, and which current leaders continue to do, have turned out to be useless. “We set up the G-7, which then became the G-8; now it’s the G-20, but the process of adopting joint consensus at the national level is still complex. Moreover, even the G-20 isn’t capable of considering the views of all countries defining the global agenda.”
Problems are snowballing, albeit only slowly for now, but the slightest shock is enough to throw the already-shaky global economy out of balance. It is now clear that the financial crisis, threatened by economic collapse, is only the beginning of a global, systemic crisis. Not even the most authoritative global economists have a clue as to when the avalanche will start and what the trigger will be.
Nobel Prize Laureate Robert Aumann admitted, in a face-to-face conversation, that not a single one of his predictions came to fruition and therefore, he prefers not to make any claims with confidence. Another Laureate, Norwegian Finn Kydland, stated the following to a World Economic Journal correspondent: “Making forecasts at a time when entire states act irrationally is a thankless job”.
Rationality, however, always implies cold calculations and definitive resolve. This is where the leading countries currently face obvious problems. All agreements at the international level are comparable to plugging holes, only for the issue to appear in the sides of the ship, i.e. the global economy. The only respite entails the moment of the final plunge to the bottom. What awaits the world in the event the ship sinks can already be observed in various countries: large-scale unemployment as a result of economic problems, social unrest, and moreover, political instability and regime changes that are much less rational? The numbers of unemployed, who aren’t in any shape to maintain the state budget, even in developed countries, are already close to the breaking point. Potential social clashes in countries possessing nuclear weapons could lead to unpredictable consequences.
The current generation of politicians has become entangled in a cause-and-effect relationship. Dealing with the consequences, without determining the root causes of the crisis, is a well-known indication of the absence of long-term economic strategy. That is specifically what we are seeing in Europe and in the United States. The behavior of the authorities of the world’s largest countries is similar to the behavior exhibited when one is in debt, when the main thing for a person is to obtain a new loan in order to solve the problem today. What will happen tomorrow does not matter; perhaps, something will work out.
Hollow victory in the Cold War
But if we look at the numbers, it appears that the curved statistical graphs speak against those who used to consider themselves powerful.
The key to the quick recovery of the economy after World War II was the rapid growth of industrial production in the U.S. and Europe. The American industrial model dominated the world until the mid-1980s, when indicators of the country’s current balance of payments began to change dramatically due to a predominance of imports over exports. Paradoxically, this coincided with the beginning of the collapse of the United States’ biggest geopolitical rival – the Soviet Union, the main strength of which, as is known, was also developed industry. Having won the Cold War, the U.S. voluntarily switched to a completely different economic philosophy, which can be described as a “philosophy of consumption”. Since 1992, not a single year has passed when the volume of export revenues exceeded the cost of imports to the U.S. Most production facilities were moved outside of the country, especially to Asia and, more specifically, to China.
1993 was the last year that China’s current account balance was negative. Over the past 20 years, it has grown from year to year, having increased 84 times in monetary term during this period (!) Now China has become the world’s largest exporter, overtaking the USA in this relation. Even the EU’s total exports (including four of the largest exporters in the top ten – Germany, France, the Netherlands and Italy) were only slightly higher than China’s. As for imports, the USA steadily occupies the top spot in the world, with 18% of all U.S. imports coming from China. In real terms, this amounts to $350 billion per year.
On the other hand, upon analyzing the figures, you cannot help but admit that, at the moment, of all major world powers, only China is fully prepared for any conflict. Chinese industry can fully meet domestic needs. In addition, many other major countries are now dependent on China. The psychology of the winners, who got the world to work for them, ended up backfiring on the Americans.
Let’s re-read Marx
Nearly a half-century ago, Marx emphasized the difference between actual accumulation (that is, investment in means of production) and the accumulation of shares on the stock market. "Real" means of production, according to Marx (i.e. that is centered in the means of production of capital) cannot have two lives: as stocks’ market value on the one hand, and as real capital invested in production on the other. The same, incidentally, applies to government borrowing. Marx openly calls the capital centered in government bonds a "sham" and "illusory".
Mark also foresaw the emergence of the global systemic crisis when he stated that, in the case that real, productive capital is substituted by fictitious capital securities and unsecured currency. "Owners of capital will stimulate the working class to buy more and more expensive goods, houses and technology. They will thereby push them to ensure that they take credit that will become more and more costly, until debt becomes unbearable. The unpaid debt will lead banks to bankruptcy, which will then be nationalized by the state," he wrote, as if these words were seemingly written only yesterday. Of course, Marx did not offer ready-made solutions, noting numerous times in his writings that future generations would also not be more stupid than their forbearers.
Western economies’ orientation towards monetarism has affected the behavior of independent investors, who are interested in their money actually being put to work. As is known, nature abhors a vacuum – if funds leave some markets, they enter another. Already long ago, investors began to actively invest in Asia and in other regions with emerging industry. In the U.S. and Europe, the decline of industrial production volumes has led to higher unemployment, and, as a consequence in avoiding a social catastrophe, the growth of new artificial financial bubbles.
From production to monetarism
I recently met with a man who is considered to be one of the founders of the modern monetary system, or at least the "father of the euro". Robert Mandell is a Canadian economist and Nobel laureate, who developed the theory of "optimum currency areas", and who does not see the flaw in substituting the industrial component of the economy with a credit and finance component. Moreover, he is seriously considering the prospects for the emergence of a new common currency, which could take the yuan "under its wing", and perhaps even the ruble. "What the world primarily needs now is the stabilization of the dollar and the euro, so that the rest of the countries settled and regulated their currency’s relationship to them. And it should be able to launch a new global currency on the basis of the International Monetary Fund. In my opinion, this is the most suitable and necessary international policy," Mundell stated during an interview with WEJ.
But in many ways, the global crisis was generated by the uncontrolled growth of the money supply, which was not secured by real values. As much as the distinguished Professor Mundell would definitely have wanted to solve all the problems of creating a new artificial financial instrument, it is unfortunately impossible without national economies clearly being production-oriented. In this connection, I would like to quote French professor Francois Chesnais from an interview with a correspondent from our magazine:
"The entire currently existing financial system leads, and, in fact, even pushes ordinary people towards learning, that the money made from money. Financial fetishism has taken root in much of Western society. People mistakenly believe that their well-being depends on money, and on the productivity of money. The relative stability and profitability of the financial system makes us aware that this capital is a "sham". Another important facet of the public consciousness is that a house is no longer perceived as housing, it is now seen as an "investment" or "capital". People are taught the idea that the fictitious processes of capital formation and growth is what the market actually consists of. The consequence is the situation in the euro area, where presidents and prime ministers, in principle, consider it possible to encourage citizens to obey "market requirements" and to pay down the national debt in a timely manner, regardless of what kind of spending on the collective and individual level this will mean. Today, financial institutions, on an unprecedented scale, dictate Western countries’ public policy. At some point, the fetishistic idea that "money begets money" comes up against harsh reality, which is happening today. Those benefiting from financial gain, especially in Europe, have recently become increasingly aware of two important points. First, the payment of interest and dividends is dependent on the successful completion of the full cycle of accumulation (money-capital-output-capital-money). Second, under the conditions of oligopolistic competition prevailing in the world economy, it should be the state and producers, rather than financial institutions, that have greater control investment, affecting the creation of added value in itself, and its own products.”
There is actually a need for effective regulators. Recalling the words of Romano Prodi, cited earlier in this article, it can be concluded that current policy has categorically not kept pace with the world, which is living according to definitions that weren’t just laid down by the law yesterday. We would also like more from supranational organizations. When the World Economic Journal asked the Chairman of the UN General Assembly, Vuk Jeremic, whether the United Nations really does have the opportunity to fully regulate global economic policy, he only raised his eyebrows, "But we are already such a regulator!" If this is indeed the case, why does it not address the real problems, which cannot be solved at the national level, such as the redistribution of cash balances, which would solve the problem of hunger in the world’s poorest countries. Perhaps this function could be performed by the World Industrial Organization, which will be established in the future under the United Nations’ auspices.
Obviously, there can be no simple or quick solution to the crisis. If they want to avoid a social disaster, leading countries need to push to recover industrial production, to ensure that businesses and capital return home, to create new jobs, and to provide tax breaks for investors. After all, production now entails new technology and new energy, which is required for the development of large-scale and long investments. The task of servicing financial institutions is to provide investment, and to create opportunities for investors to obtain a real income. Whether the future of goods’ production will occur on the traditional assembly line or whether it will be printed via a 7D-printer is not so important. It is important for this product to regain its leading role in the modern economy; otherwise, Armageddon is imminent.
"Now I am afraid to make predictions, because, more likely than not, they will be wrong."
“We set up the G-7, which then became the G-8; now it’s the G-20, but the process of adopting joint consensus at the national level is still complex. Moreover, even the G-20 isn’t capable of considering the views of all countries defining the global agenda.”
"The UN can solve problems of any degree of complexity."
|Finn E. Kydland:
"European politicians are not capable of building a robust strategy for the next few years."
"There are no quick or easy fixes to this crisis."
"Financial fetishism has taken root in much of Western society."
"What the world primarily needs now is the stabilization of the dollar and the euro, so that the rest of the countries settled and regulated their currency’s relationship to them. And it should be able to launch a new global currency on the basis of the International Monetary Fund.”
Text: Robert Abdullin