What’s up with the Global Economy, and Where Do we Go from Here?

October 27, 2015

NOTE: Images in this archived article have been removed.

It now appears that the grand yearly addition to total human wealth, the global GNP, is no longer growing. If so, this means the world is headed toward a global deflationary spiral, a contraction in the global economy similar in nature to the trade slump that spread globally during the era of the Great Depression.

There really is no other explanation but a global trade slump that can account for the steep decline in the prices of basic essential commodities like oil and copper, and also the decreased demand for shipping capacity reflected in the Baltic Dry Index.

The troubled Chinese economy, its reduced demand for commodities, the devaluation of its currency to try to capture more trade, and the Chinese support for a new trade alliance in competition with the new U.S./Japanese TPP alliance — all these are symptoms that indicate that aggregate global buying power has stalled out. That means that investment capital is unable to find new profitable investments in the global marketplace, which is very bad news for finance capitalism as a global system.

At this point let me refer readers to Gail Tverberg and her blog, Our Finite World, which focuses on the key interactions between energy and economics. In fact we now see just the sort of troubled global economy that we might anticipate from a world that peaked in production of historically cheap conventional oil almost a decade ago in 2006. Tverberg is able to explain the global economic situation so clearly, so convincingly, and so persistently that she has attracted a huge popular economic following. One of her recent posts drew over a thousand reader responses; “Low Oil Prices – Why Worry?.”

Investment booms are always great for bankers, but with the economic boom phase of the capitalist business cycle comes, at some point, a classic overshoot of marketplace demand, followed by a subsequent bust. During the bust phase comes the “creative destruction” and restructuring that are supposed to clear the decks of investment relics like typewriter factories, and set the stage for a subsequent capitalist recovery.

A deflationary spiral, such as is now becoming evident globally, acts as a natural poison to be feared by those investment bankers who manage the U.S. economy through the private Federal Reserve. The bankers need outside governmental help, like Keynes prescribed, to restore the economic growth of the economy.

The banking sector is now and forever a profit-motivated sector of the economy. By its nature, finance capital is unable to cope with economic contraction, because that shrinks profitable investment opportunities (although some new investment opportunities arise even in a depression).

Accordingly, the private sector bankers call on the socialistic, publicly-funded sector of their economy, the government, to help their private sector to recover. Traditional Keynesian economic policy calls for the active help of federal government to inject money into the system broadly to supply new demand when a bust comes.

When there are no good new investment opportunities because most all of the injected stimulus goes to the banks instead of toward the broad numbers of the public struggling at the bottom, it does not generate much new demand except for palatial mansions and such. This is not at all what Keynes had in mind; it won’t work, and it is not working now.

If the core problem is really slow growth of the global economy due to an end to the cheap fossil fuel energy that powers the whole system, then there is no way to paper over this core problem, because a lack of cheap energy inherently reduces profit and that blocks any broad economic recovery. Now the credit markets are ceasing to function normally in response to quantitive easing.

This editorial tells us that those running the USA at the highest level are in a sort of panic that stems from addictive but unsustainable dependence on continued access to free money. Quantitative easing by the Fed has become less and less effective over time, since 2008 when the zero interest policy was first implemented.

Another way to put this is to say that what was once a rational policy of emergency economic stimulus has now metastasized into a need for successive handouts of liquidity to bankers, termed quantitative easing or QE, needed to keep the system solvent despite a vast mountain of accumulated debt, a burden which has now grown totally out of balance with any public ability to pay back the fiat currency debt in terms of its anticipated purchasing power.

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Chart from Zero Hedge.

Under Obama, the annual federal debt increase has been roughly a trillion dollars a year and Congress is about to raise it again. How much is that per person? Every billion dollars of new debt, divided by the U.S. population of 320 million, adds about $3 of debt per person. If we add a trillion a year in citizen obligations, that means about $3,000 per person of federal debt is being added by a Treasury/Fed alliance, to be spent now with a promise made for it to be paid back when convenient. Somehow and by somebody, someday, when the economy finally recovers.

As we see, the cost of keeping the U.S. economy functioning “normally” is going up exponentially. This is why the Fed, operating on behalf of its regional investment banks, is afraid to even slightly raise the cost of the new money that the Fed agrees to lend into existence. If Wall Street were compared to a junkie, this would be like a chart over time of its increasing morphine demand.

As they say, you can’t print your way to prosperity. The final outcome is fairly predictable when you try to do that anyhow. Denial of the underlying reality of a new era of permanently slower and less profitable growth due to natural resource limits has led initially to enrichment of our entitled banking sector, which was first in line for the bailouts.

If this pattern of crony capitalism is sustained for too long, it eventually leads to collapse. If we try to deny unsustainable trends and to sustain them for too long, what else could we expect but a sudden collapse, when the burden of denial becomes too great, when finally the unsustainable trends interact, converge, and undermine Wall Street’s expectation of economic recovery.

If all the dollars in the cyber-vaults of all the investment banks were to come off the sidelines and we started trying to buy real stuff with them, we would soon have galloping hyperinflation. What prevents this from happening now is that the velocity of circulation of money, the willingness of investment capital to invest rather than stagnate, is very low. What we would expect when there are so few good investments to be found. This is keeping the investment potential bottled up like a latent buying power.

This situation leads to investment fads, termed “asset bubbles.” Zero interest money from the Fed since 2008 has by now totally distorted marketplace reality. If we look at the market for top art works we can clearly see the asset bubble syndrome at work.

We can also see this in the shale oil euphoria and current bust of an investment bubble that was supposed to keep us driving, despite cautionary warnings from top geologists. As another example, the current tech job boom has led venture capitalists to invest untold billions in social media and software solutions that make little sense in light of the real world marketplace.

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Money drain image via shutterstock. Reproduced on Resilience.org with permission.

Here is a graphic picture of what could very well happen as a consequence when the easy money ends, in the complicating context of the contracting global economy.

In the Austin area, the economy is booming primarily because of the tech job boom. This tech bubble is only one of the asset bubbles which predictably result from easy low interest credit, for those with the right Wall Street connections to gain access to the vast supply of new money the Fed is creating. This pattern is not hard to observe. President Ronald Reagan’s former budget director David Stockman recently authored The Great Deformation: The Corruption of Capitalism in America, a long, detailed, and scathing indictment of crony capitalism as it is currently being practiced.

The political fallout

An economy that doesn’t recover because it really can’t recover is certain to lead to political problems. We don’t have to go far to find the evidence of that. With a broad sector of the public now furious at Washington due to the top banking class and their corporate allies getting most of the gravy, the angriest presidential candidate has a rocket-boosted assist in trying to win the presidential election.

Why? If we elect an angry impatient leader, then at least he might shake things up enough to get us moving beyond the current Washington political gridlock and paralysis, right?

I will argue that an old fashioned Marxist class analysis helps us to make sense of what’s happening, one that ties together a coherent picture of our current reality, and explains the consequences of business-as-usual denial, including the predictable but unhappy consequences of this same denial, like our angry politics.

…Cruz attempted to explain why he, a sitting US senator, could appeal to those attracted to “outsiders” like Carson and Trump. Conservative voters feel “volcanic rage,” he said. “People are ticked off with politicians … that make great promises on the campaign trail but then they don’t actually follow through.” Asked if he had followed through on vows to shut down Obamacare and the multinational nuclear deal with Iran – which both remain standing – Cruz said: “What I promised is that I would fight with every breath in my body to stop the out-of-control spending and the debt that is bankrupting our country, to stop Obamacare, to protect our nation…

As things currently stand, the bourgeoisie, a powerful fraction of less than 1% of the population, with its undemocratic economic influence expressed through the Fed, has now rigged the game to facilitate exploitation of the other 99%. Already the other 99% of the population has noticed this, and many have gotten royally pissed off about it, but not all in the same way.

A privileged economic sector, classically termed the petite bourgeoisie, has now become politically reincarnated as the Tea Party’s Republican faction. This sub-group is demanding that the socialist sector of the economy, the government, should stop all its spending — except for its military adventures abroad which are assumed to benefit everyone at home.

This explains the current split within a Republican party trying to hold its two wings together, despite their appeal to different class interests. As the economic pie shrinks, the very rich who rule are not so inclined to share their wealth with their former managerial allies comprising the Tea Party faction, who are now struggling to hold onto their shrinking power and influence, and their precarious share of total national wealth.

Since most traditional factory jobs in the USA have by now been exported to production abroad, the traditional party of U.S. labor, the Democrats, no longer have a big natural base of voters in the industrial proletariat. The political influence of the Democrats is now largely through appeal to minorities who are so alienated that they don’t vote, with the goal of keeping funds flowing into stuff like welfare, food stamps, and what remains of the social safety net. But helping the increasingly unprofitable ranks of the poor fed while the whole economic pie is shrinking infuriates both Republican wings.

The Obama and Clinton wing of the Democrats want to maintain a sort of welfare state based on business as usual, as their political base of supporters gets poorer and angrier, much like the Tea Party faction of Republicans. That is now causing a lot of what is still left of an exploited but class-conscious proletariat to split away and support a politically moderate but angry socialist, Bernie Sanders.

Once the increasingly imperious control of the 1%, the bourgeosie, starts coming unraveled, history tells us that the process can be hard to stop. The current situation will probably continue to polarize along class lines, and eventually lead to angry mobs with pitchforks, or the modern equivalent, guns. This situation is leading by stages toward a timeless pattern of history, a new phase of class antagonism explained in modern terms here.

We now have a thoroughly angry public and we have a responsibility to try to seek social justice while we still have the opportunity to make a peaceful revolution. Majorities voting in elections can still bring about major changes, but in our era of increasing top-down control through money power, this window of opportunity is closing. In 1962, John F. Kennedy famously said, “Those who make peaceful revolution impossible will make violent revolution inevitable.”

What should we do locally about this troubled situation? After thinking globally, we have the opportunity to act locally. One site, Resilience.org, provides good analysis and practical advice every day on how to organize locally, batten the hatches, and prepare for hard times.

Tags: deflation, economic contraction, low commodity prices, peak oil, quantitative easing