April 1, 2009

Why the Economic Plan Will Not Work

At the time of writing, the economic situation is in a kind of purgatory, not quite Hell, and certainly not the Heaven the politicians claim they want to attain. Yet, their glib reassurances are punctuated by the crashing sounds of still more institutions collapsing or on the verge. However, don’t worry, they assure us; they have a plan. Yes, they have ‘A’ plan-- a very shaky plan-- and if it fails, there is, apparently, no plan ‘B’ to fall back on. If throwing billions of borrowed, and then printed, dollars at the problem does not induce the desired ‘kick-start’ of the stalled economy, then.... what? They are like the survivors in the movie, Flight of the Phoenix, who have cobbled together a flyable-looking aircraft from the wreckage of their downed cargo plane. They have only seven explosive ‘starter cartridges’ to use to get the single motor spinning again... and the first six have produced nothing more than coughs and belches of black smoke. It seems like an entirely fitting depiction of the present situation as acted by Obama, Geithner, and the other boffins of banking in the Western world.

In the movie, of course, the last cartridge somehow succeeds in igniting the motor into roaring life, and the pathetic heroes even manage to fly to safety. Things are not so co-operative in real life. Pumping billions of ‘dollars’ (however on Earth they do that) into the so-suddenly broken machinery of the Western economy, will just not bring it back into the satisfying purr that we’ve grown so accustomed to. Why do I say that?

First, ask the question ‘Why/how did the economy come to such a juddering halt in such a short time, anyway?’ After all, things seemed to be all gung-ho as usual back in late summer of 2008 (Beijing Olympics, and all that hype). The cracks start appearing in early Autumn, but the peerless leaders were telling us it’s nothing serious. Then, as the next few weeks unfolded, the news quickly tumbled from bad to worse, and we were seeing huge investment banks declare virtual insolvency, the incredible Madoff scam, and other failures up to and including the potential bankruptcy of General Motors! In the face of these unprecedented crises, the only solution advanced by the people in charge-- mostly the same people who were in charge when the machinery broke down-- was to pour money into the gears in the hope that enough lubrication would get things spinning again. Why were the brains behind the ‘rescue plan’ the same crew of incompetents who caused it in the first place? Because the new US administration (and the Brown gov’t in Britain) simply appointed them to the role, never mind such details as conflict of interest and annoyances like that.

Second, comes the question ‘Where is the bail-out money going?’ Well, by now, we all know that it’s going to pay the bonuses (they call them ‘performance bonuses, don’t they?) of the executives who created the mess. But that accounts for relatively little of the princely sums being disbursed. The big cheques seem to be going to banks in the hope that they will lend liberally once more, and restore the old spending habits. But the banks, having been burned, are holding on to their wind-falls, and possibly covering their fractional exposures. Other big amounts given to various corporations seem to be used to cover salaries to prevent closing their doors and re-locating off-shore. Clearly, virtually nothing is going to the people who need it most-- the people who pay taxes and put their meager earnings in banks for ‘safe-keeping.’

Third, what is the underlying pretext for spending billions of public funds-- funds that have to be either borrowed or printed-- to prop up banks and corporations that have failed the basic test of the capitalist ‘free market?’ Most pundits have expressed wonder at how the bastion of rampant capitalism can so expediently revert to state support or ownership when the big guys start to reap the consequences of their market mistakes. Well, the logic they promote is that by going into ‘temporary’ deep debt, governments can put money into circulation once more, getting citizens to use their credit cards to purchase ‘goods’ from companies that will resume production of those goods, and the whole reciprocating engine will cough back into a roar, and life will go on as always in the capitalist paradise (except that there will be some long-term bills to pay). Yes, the old formula that worked before is expected-- or hoped-- to work its magic once again.

Fourth; the critical question, then, is this: will the old Keynesian magic really work again? My response is no way! Why not? Look to the Bernie Madoff scheme as illustrative-- it’s been called a classic Ponzi scheme. That is a scam wherein new ‘investors’ are constantly recruited because their money is used to pay ‘installments’ to the earlier investors. It’s a pyramid that’s a house of cards; eventually, there’s not enough new suckers to sustain the illusion, and the whole thing crashes. That’s essentially what the capitalist model really is-- a global Ponzi scheme. Its proponents have been telling us for decades that growth is eternal, and no-growth is intolerable. Growth, in their lexicon, means buying and consuming products at a never-ending, forever increasing rate. This is clearly absurd, and only appeared plausible as long as only the ‘Western’ nations were growing, while the rest stagnated and supplied cheap materials for the production lines. Once the world population reached a certain level, and the citizens of the poorer countries began to want the ‘good life’ of the Western world, the Ponzi scheme started to unravel.

The vast herd of ‘consumers’ in the Developed nations have had a severe reality check with the latest financial turbulence. As a result, they-- especially the squeezed middle class-- are very skittish about the supposed solution. They don’t want to exacerbate their already precarious financial status, and they are fully mindful that their fortunes have not improved in the last 15 years; if anything, they’ve gotten worse. And they now know for certain what they’ve darkly suspected-- that they can’t trust either the banks or the governments to tell the truth or to operate in their (middle class’s) best interests. And in sociological terms, a large portion of the Western middle class is comprised by the Baby-boom generation, who are just moving into their retirement stage of life (the earliest ‘boomers’ having just turned 63). People entering retirement are not into risk-taking, at least not with their accumulated wealth on the line; so don’t expect them to go into a buying frenzy at the earnest urging of their political leaders. Remember that the whole ‘tone’ of Western society over the last 50 years has been essentially set by the advance of the post-WW2 boom generation, and that phenomenon will not peter out until the final ranks of this group has melted back into the soil.

As for the younger members of the middle class, who are fully raised in the crassest consumer milieu, they are the ones competing for jobs in the shrinking employment pool. And that pool is shifting more and more from manufacturing to lower-paying service sector jobs-- which are often on a part-time, transient basis. Combining the various social factors, then, it becomes apparent that the tired formula of throwing money at the top-- to banks and corporations-- simply puts more dough in the hands of those who already have more than enough, while, what’s worse, it will fail miserably to achieve the desired result of re-igniting a sputtering economy.

But, another question now: is reviving the economy really ‘the desired result?’ Of course, that’s what all the politicians, economists, bankers, and assorted experts are publicly stating... but is that the truth? If it is, then we have to face another ineluctable question: why can’t all those highly intelligent, highly rewarded leaders perceive that their plan can’t succeed? To which I would pose yet another query: suppose that the plan was never intended to succeed? The real answer, basically, is that they are presiding over the last grand transfer of wealth from the once-great middle classes to the coffers of the elite. Once this ersatz bail-out has drained the piggy-banks, Americans (in particular) will be in enormous debt, both individually and as their slice of the public debt, and whatever money they may possess will be greatly devalued by the ravages of inevitable inflation caused by the flood of paper bills that the ‘Fed’ is having to print in order to sustain the illusion of liquidity. It will result in a middle class barely distinguishable from the poor; and, oh yes, an even smaller, wealthy elite who will own everything, and thus control the world.

The end of a Ponzi scheme is always ugly, with much wringing of hands, pointing of fingers, and gnashing of teeth. The fall of American-style, de-regulated capitalism is likely to be horrendous, given that its influence has infected the entire world. You would do well, dear reader, to prepare yourself now, mentally, for the prospect.

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