The law of unintended consequences is known to create monsters from time to time.
Part of the delay in writing this post has been simply that I’ve been overextended with other writing–spelling out in painstaking detail the differences between the Permanent Court of Arbitration and the International Court of Justice is a treasured pastime of mine, after all. Yet this is not the complete story–I’ve also been aghast at just how quickly events are churning out new tidbits of our impending doom and future penury. I’ll deal with the Korea issue in the next post, but for now I’m going to limit this to the possibility of the dreaded ‘double-dip recession‘ and what the potential fallout means.
The reason why I closely follow the words of the very hedge fund managers and assorted muppets like Larry Summers who put me in the unemployment line two years ago is a piece of simple logic–you are more likely to catch fish wherever the sharks are feeding. In this way, I feel as if I’m reliving the horrors of 2008 all over again, because the waters are full of chum and a feeding frenzy is imminent. There is a major difference, however, between what transpired two years ago and what is occurring now–the blood in the water is no longer that of underwater homeowners and coked-up companies like AIG and Lehman Bros., but of entire nations like Greece, its fellow PIIGS, the majority of the Eurozone + Britain, and the US (just to pick a few) that find themselves under crushing debt burdens. The answer to why we find ourselves in this place is fairly straightforward–the crisis that began in late 2007 left many nations that were already in debt in the position of having to alleviate growing unemployment lines with deficit spending and stimulus packages to undergird the basic structural integrity of the entire global economy. Although the Club for Growth-cheering, Ayn Rand-worshipping, punish-the-poor-for-being-poor crowd continues to find themselves aghast at the notion of a nation-state trying to be responsive to the needs of its citizens, it’s not as if there was a real choice as to what to do. After all, there is a broad consensus that bread riots are never a desirable end of public policy.
How can you sack a man who’s on the dole? Good question–we may find out the answer soon. P.S. Watch Boys from the Black Stuff if you haven’t already.
The problem, of course, is that the assorted stimuli (whatever you think of them) left countries with gaping holes in their respective national budgets. When nations such as Greece who were in dire fiscal straits even before the crisis unfolded found themselves unable to service their debt, the vultures began to circle. Greece, of course, is somewhat exceptional in how deeply and how quickly it found itself in a de-facto state of default. Nevertheless, there are far larger economies with far larger deficits and equally troublesome structural problems out there–namely, the United States. A year ago, James Kenneth Galbraith of the University of Texas noted that there was very likely little way out of a protracted recession because of what’s known as a ‘liquidity trap.’ Simply put, there’s no way to increase the amount of credit that’s out there already–interest rates remain at 0%–and without this, economic growth in sectors that actually involve producing something tangible and usable (as opposed to making paper and numbers appear and disappear magically) is difficult at best because such sectors require credit to buy materials and hire workers. This in turn leads to protracted periods of high unemployment, which then leads to a decrease in GDP and government revenues–and we’re back to step one of the vicious cycle.
This is not the first time this has happened–it took twenty years and a world war for banking and lending to recover from the Great Depression. The major difference aside from technology and the fiat money system is that the proliferation of derivatives has allowed financial institutions to make massive bets against not only failing companies but entire countries; and this creates an additional pressure on governments to fill budget gaps instead of combating unemployment that was not extant even twenty years ago. The simple answer to this, of course, is to ban the shit out of shorting sovereign debt–after all, governments have guns and popular appeal (sometimes) and plenty of capital of their own (even now), and Goldman Sachs (perhaps surprisingly) does not to date constitute a Weberian nation-state.
Artist’s depiction of the battle between derivatives traders shorting sovereign debt and central banks.
This, however, discounts both the reluctance of governments to combat such activities because of the signal of weakness this would convey to the markets (after all, nothing barks louder than a scared dog); and the conflict of interests many policy makers in both the US and Europe have regarding their ties to the financial sector. While many politicians are beholden to such corporations because of their large donations to campaign coffers, the more pressing problem is that many of the people making economic policy don’t want to preclude their ability to land a six or seven-figure job in the private sector once they’re out of government. So while the melt-up of liquidity and the structural integrity of the global economy proceeds apace, policy makers are going ‘softly-softly’–to the detriment of both their own ability to implement policy and the overall welfare of their citizens. There’s another aspect to this–namely, the neo-liberal faith that the markets will eventually correct themselves–that also feeds into this dynamic, but to expound upon that would take several entries here, so I’ll save it.
To sum it all up, I leave you with this video: a guy who single-handedly bankrupted Russia and walked away from the inferno he sparked with both tenure and fat pockets gets savaged by a egomaniacal hedge manager who is calling for nations to purge sovereign debts by sparking an even deeper but shorter recession now–a position he of course stands to make billions from because he’s short-selling these very same nations’ debts.
We could all use a beautiful distraction these days, couldn’t we? The World Cup starts soon, you say? BRING IT ON ENGLAND