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The Big End of the American Economy?
By Richard Lawson
Every schoolboy
knows that the American economy is the engine of the
world economy. There is an ominous knocking sound coming
from under the bonnet, and to those who can hear it, it
sounds like a Big End.
The facts are that
the economy of the US in the position of one of its
cartoon characters who has run off the edge of a cliff
but does not yet realise that there is nothing between
its feet and the ground except a thousand feet of thin
air. Like an aircraft, the economy can keep airborne so
long as it keeps moving, but if it stalls, it falls. The
bad debts of America's sub-prime mortgages are beginning
the stall process, and the turbulent flow will spread
like a disease to other countries.
The first signs of
institutional problems are showing in Bear Sterns in the
USA, and RAMS Home Loan Group in Australia. Baseless
rumours hit the prestigious Barclays Bank in the UK,
soon after the near collapse and government-led Bank of
England bail out (to the tune of £23 billion) of the
Northern Rock mortgage lender. This is likely to be the
first in a series of financial wobbles, as the financial
sky darkens with the wings of sub-prime chickens coming
home to roost.
For "sub-prime"
loans read "ill-judged". Lenders have been overly keen
to lend money, because they know that most loans are
nice little earners. All the lender has to do is to
judge whether the loan applicant is a good risk, and
write some numbers on a sheet of paper. Controversy
still rages in my mind as to whether the lender has to
drwa in money from somewhere else, or whether he creates
it out of thin air, limited only by the amount of gold
his company has stashed away at Gringott's. I suspect
that the latter is the case.
Anyway, it falls to
the debtors to stump off to their humdrum work each day
for the next few decades to earn the money to pay off,
first the interest, and eventually the equity on their
loan. So keen were the lenders, that they forgot to take
a reality check on the capability of the borrowers to
pay back. Now we have a black hole at the heart of the
home loan market in the US. House prices are falling in
the US, and will probably start to fall soon in the UK,
leaving borrowers in the unpleasant position of negative
equity - repaying unfeasibly high loans that will never
be realised in house value. Heartbreaking and
demoralising. Enough to make you want to give up. The
problem is that lenders believed that loans created
value. Greed blinded them to the fact that it was a
negative value.
To make matters
worse, the world's macro economy is no better. The great
nations of the world look like people with a McJob who
have taken out a mortgage on a £750k house with a
swimming pool. The External Debt of the USA is $10
trillion (that's 10 million million, or 10 to the power
13). As usual, the UK is flying along in America's
slipstream in second place with a stonking $8 trillion
debt. The US debt is equivalent to only a single year's
GDP. The UK external debt is equivalent to 4 years' GDP.
Things do not look healthy for the Anglo economies in
particular, nor for the world in general. Of the 198
countries in the world, only 5 have no external debt.
One of these is Brunei. The others include such big
hitters as Palau, East Timor and Leichtenstein. Well
done those countries!
The current world
economy recalls the old story of a ring of people who
were blackmailing each other. One got so fed up he went
to the police. The others rounded on him "Why did you do
that? We were all doing fine".
Maybe the world
economy will continue to do fine. Maybe Northern Rock is
a minor wobble, and the famous Power of the Market will
reassert itself. Maybe also, the Market will meet the
challenges of continually rising energy prices as demand
for oil begins to exceed supply, survive the buffeting
of increasingly energetic storms as Gaia strives to win
the argument with ExxonMobil/Esso about atmospheric
physics, and will survive such other unexpected quirks
as fate comes up with, such as an outbreak of pandemic
flu. Maybe the world economy will ride all these ups and
downs. Maybe.
Or maybe not.
Monetary value is built on confidence, and confidence
can easily give way to anxiety, which can give rise to
defensive money movements, which can give rise to global
slump. After all, the Great Depression of 1928 was
caused at least in part by widespread debt in the world
economy.
Military planners
always look at the worst outcome, so that anything else
looks relatively pleasant. Our Governments should have a
contingency plan ready in case the financial knitting
begins to unravel.
What would a great
depression look like? It is a total failure of the
economic system, characterised by a succession of
negative feedback loops. Incomes fall, trade falls,
prices fall, profits fall, tax take falls, mining,
logging and heavy industry falls, and banks fail. About
the only thing not falling in the Great Depression was
unemployment which reached one in four of the
population. The only silver lining to the cloud is the
fact that world CO2 output will fall, which will give us
a chance to get to grips with global warming.
This reminds us of
the need always to consider the economy in its
ecological setting. The picture in 2007 is that the
world is just waking up to the reality of global climate
change as a result of man-made greenhouse gases,
primarily CO2 from the burning of fossil fuels. A second
reality is just beginning to dawn: we are entering the
age of Peak Oil, when slurping noises are coming from
the bottom of the world's oil barrel. There is a finite
amount of oil under the ground, and we are somewhere
near half-way through. Despite brave protestations from
parts of the oil industry that there is more oil to be
found, the amounts of new discoveries are failing, at a
time when demand is rising. Any schoolboy know that
rising demand and falling supplies means Trouble, in the
form of rising prices. These are critical times.
Crises offer us
threat and opportunity. The threat is on a recession,
leading into a global economic depression, characterised
by economic stagnation, widespread poverty, civil unrest
and the possibility of war, as in 1939, this time over
dwindling resources and shrinkage of life supporting
land.
The opportunity is
that a breakdown of the current economic order could
lead to a phoenix-like economic renewal, a rapidly
rising ecological economy based on Green Keynesianism
that would stimulate action to protect and heal the
planet's damaged biosphere. That is an immense job of
work. There is no room for unemployment in a Green
economy, but unemployment is the hallmark of a
depression. Therefore green work will heal the
depression and heal the environment at the same time.
John Maynard Keynes
advocated using the economic power of the State, through
deficit funding if necessary, to end depression by
stimulating demand in the economy. His theories were put
into practice first in Sweden, then by President
Roosevelt (the New Deal programmes), and finally and
tragically in the frenetic activity of the Second World
War, which created a huge demand for production of the
instruments of death.
In 2007, Global
Warming is the threat equivalent to that posed by Nazi
Germany in the 1930s. It threatens humanity with
drought, flood, hurricane, famine, mass starvation, and
mass migration. It can be met only through intense
economic activity, primarily in the fields of energy
conservation, renewable energy technology manufacture,
production of energy efficient motors, ecologically
sensitive re-afforestation, and carbon sink technology.
Victory in this enterprise is possible, but only if
levels of state spending worldwide are equivalent to,
and indeed in place of, current military spending.
How should this
money be spent? The key area of spending should be
direct, in stimulating employment in the green sector of
the economy, by producing a Green Wage Subsidy in the
following way.
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1. Tribunals are set up
who are able to judge whether the processes
and product of an enterprise is of net
benefit to society and environment.
2. businesses and public
enterprises who think they might qualify go
to the Tribunals seeking "Green"
Accreditation.
3. Businesses that get
Green Accreditation may take on new workers
(i.e. in addition to their present
establishment) from the unemployment
agencies, and the intake are allowed to keep
their unemployment benefit. Unemployment
benefit changes into a Green Wage Subsidy (GWS).
In this way the Unemployment Benefit (UB)
behaves exactly as Citizens Income (CI)
4. It will be illegal for
employers to replace previous establishment
with GWS workers, and if a worker thinks
s/he has been so replaced they can make a
complaint to the Tribunals, who would be
able to reinstate the worker or, if
necessary, revoke the offending company's
accreditation.
5. The GWS specifically
stimulates the Green Sector of the economy
during the Depression.
6. The GWS money is money
that would otherwise have been given to
unemployed people on condition that they do
nothing, which is the present status of
Unemployment Benefit (UB). GWS changes the
same amount ov money from being a dead dole
to a stimulus for greening the economy.
7. Although at first
there would be little difference to public
sector finances, apart from the stimulus to
the green sector, because the GWS is
permanent (as opposed to being time limited,
as analogous benefits are currently
structured) there would be a long term cost
analogous to that of CI.
8. These costs are
consonant with Keynesian doctrine of the
state stimulating work in times of economic
depression.
9. GWS is therefore a way
of introducing CI gradually in such a way as
to green the economy at the same time. |
In Keynesian terms,
the demand is in planet-saving industry and activity,
just as in 1940 the demand was for the instruments of
war. The Green sector of the economy is intrinsically
labour-intensive, several reports of Friends of the
Earth have shown. In 1996 I showed that the jobs
available to be filled in the green sector of the UK
economy were standing at between one and two million,
which as it happens was equivalent to the number of
unemployed in Britain at that time.
This is not the
only green economic response to a global economic
slowdown. Local Exchange Trading Schemes (LETS), or
TimeBanks, where people barter their services and
skills, are a complementary response. Depression also
raises the question of who is the right agency to create
the money supply, and indeed of what kind of money
should be created. The town of Worgl, in Austria,
produced its own local currency that required a stamp to
maintain its value. This meant that it was better to
spend the money than to save it, and the money
circulated 13 times faster than national money. In the
middle of depressed Europe of the 1930s, Worgl
prospered, creating many infrastructure works and
unemployment fell from 30% to low levels. The experiment
was eventually killed by an unholy alliance between
local socialists and national banks.
In conclusion, if
the world economy slips into a recession or depression,
it will present the Green movement with a unique
opportunity to green the economy, to address the causes
climate change, and reform the way money is created.
(c) Richard Lawson.
8/11/2007
Source:
Green Health
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posted 11
November 2007
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