The leading editorial of the 20th December 2008 issue of The Economist paints a bleak picture of the present global economic situation, which is characterized by a contracting of credit, a precipitous plunge in asset prices, and rapidly dissipating demand across the globe. Two trends are seen as particularly alarming: the rich countries are trapped in a severe recession that has scared America’s policymakers to the extent where they have cut the target for the federal funds rate to between zero and 0.25%. Emerging economies are faced with similarly deleterious conditions, not least as a result of plunging exports and a suffocating lack of foreign finance.
Further bad news is that open markets are under threat as never before in the modern era of globalization. The two engines of global integration, trade and capital flows, are ‘simultaneously shifting into reverse’.
Wrenching adjustments will be forced by that twin shift. The export countries responsible for the blow-out of the US current account deficit by which their growth was driven, from China to Germany, will slump unless they can boost domestic demand quickly. In economies with current-account deficits, financing will dry up as the result of a flight of private capital, and so also will export earnings.
The Economist warns that integration will lose its appeal when pain rather than prosperity flows across borders, and that governments will resort to the false comfort of protectionism. Governments will seek to divert demand from abroad with export subsidies, tariffs, and cheaper currencies in the hope of propping up domestic jobs and incomes.
But clear lessons are to be learned from history in that respect: economic isolationism will cruelly intensify the effects of recession or depression, as it did in the 1930s, when America’s Smoot-Hawley tariff was voted into effect. Although the World Trade Organization (WTO) and its multilateral trading rules are a bulwark against protection on that scale, “today’s globalized economy, with far-flung supply chains and just-in-time delivery, could be disrupted by policies much less dramatic than the Smoot-Hawley act.”
Under the section heading Fair Weather Free Traders, The Economist warns that the year is ending with no Doha round breakthrough in sight.
Scepticism with respect to open markets is a growing problem. Barack Obama and the new Congress, with its bigger Democratic majorities, do not inspire confidence in a future characterized by strongly pro-trade policies for America. The faltering exports of emerging economies may likewise result in a reduction in trade. “The WTO’s rules allow them plenty of scope: after two decades of unilateral tariff-cutting most of their tariffs are well below their ‘bound’ rates – they could triple their import levies without breaking the rules.”
Under the section heading ‘Handouts to the ready’, the threat to free trade is spelled out in graphic terms:
‘Politicians from Washington to Beijing are being pressed to help troubled industries, regardless of the consequences for trade. A bail-out of Detroit’s carmakers, whatever its final extent, will be a discriminatory subsidy. As China’s exporters go bust by the thousand, industries from textiles to steel have been promised handouts and rebates. Subsidies will beget more subsidies: Nicolas Sarkozy, France’s president, says that Europe will turn into an ‘industrial wasteland’ if it too does not prop up its manufactures. Subsidies will also invite retaliation. With China’s bilateral trade surplus at a record high even as America’s economy slumps, Congress will not take kindly to Beijing’s bolstering of its exporters.’
Nor do discriminatory subsidies comprise the entire infraction against the spirit of free trade. Exchange-rate movements could also prompt protectionist responses. The vexed issue of an undervalued yuan surfaces yet again. “A Sino-American trade spat is all too plausible”.
‘Add all this together and it is hard for a free-trader not to worry. So what is to be done? The first requirement is political leadership, especially from America and China. At a minimum, both must avoid beggar-thy-neighbour policies. Second, a conclusion of the Doha round would help. A deal would reduce the risk of broader backsliding by cutting many countries’ bound tariffs – and it would establish Mr. Obama’s multilateral credentials. Third, Doha deal or not, is greater transparency. A good recent idea is that the WTO publicise any new barriers, whether or not they are allowed by its rules.
‘The best insurance against protectionism, however, is macroeconomic stimulus. Boosting demand at home will reduce the temptation to divert it from abroad. By historical standards policymakers are acting aggressively, as the Federal Reserve did this week. But the effort is unevenly, and poorly, distributed. Emerging economies from which capital is fleeing have little room to boost spending. Some creditor countries (notably Germany) are holding back on fiscal stimulus, while the world’s biggest borrower (America) is acting the most boldly. A bigger push to boost demand in creditor countries coupled with more help, through the IMF, to cushion cash-strapped emerging economies would ease the world economy’s adjustment and brighten the prospects for free trade. In the 1930s protectionism flourished largely because of macroeconomic failures. That must not happen this time.’
The unfortunate state of affairs characterizing the current global economic situation came about through the dollar standard’s lack of an adjustment mechanism to prevent persistent trade imbalances, which in turn resulted in credit-induced economic overheating on a global scale. It is widely believed that the foundations for sustainable economic growth will not be restored until that flaw is corrected and the US trade deficit ceases to flood the world with US dollar liquidity. Therefore the dollar standard must be superseded by a new international monetary system that does not generate, or even tolerate, rampant credit creation.
Moreover, there is concern over the possibility that the cost of annual fiscal deficits will accumulate beyond control when lower, post-bubble tax revenues combine with higher expenditure on stimulus programs and social safety nets.
Yet media emphasis has obdurately remained on strategies by which the present crisis can be minimized, not on any urgent prevention of the same or similar crises in the future. In a brief article in the 20th December 2008 issue of The Economist (page 114), former chairman of the Federal Reserve, Alan Greenspan, reduces the nature of the crisis to the demise of global financial intermediation, “that intricate and interdependent system directing the world’s savings into productive capital investment”. Mr. Greenspan’s view of the crisis is summarized in these sentences: “The disclosure that highly leveraged financial institutions were holding toxic securitized American subprime mortgages shocked market participants.” As a result, bank lending, issuance of corporate bonds and a wide variety of other financial products, stopped. Credit-financed economic activity came to a standstill. “The world faced a major financial crisis.”
But Mr. Greenspan declines to supply any background on the true causes of the crisis, namely the preponderance of US imports over exports and the preponderance of Asian exports over imports – and the lack of a mechanism by which the dollar standard might have balanced such distortions. Mr. Greenspan’s solutions for the present crisis, namely to partially restore the $30 trillion of global stock market value wiped out this year, and to stabilize the price of American homes – which will in turn lead to the eventual partial recovery of global equities, “as fear inevitably dissipates” – apparently carry sufficient authority, and engender sufficient hope in the prospect that the crisis will go away, to render the need for addressing its fundamental cause a mere side-show in the minds of all concerned.
The cautionary tale of the Smoot-Hawley tariff’s deleterious effect, namely a dramatic reduction in trade, is permitted to overshadow the need to address not only the economic lacks and excesses bedevilling human life at present, but also all other elements of the unhappy relationship between developed and developing countries, as characterized by the building tensions between Christianity and Islam, Democracy and Communism, and the market economy and the cartels.
It is not known to which degree the stimulation of aggregate demand is encouraged, nor even whether the implementation of a minimum wage in the manufacturing sectors of export countries, by which it may be accomplished, is anywhere discussed as a real option. The threat of potential radical deflation that will result from continued erosion of aggregate demand, and the potential to end monetarism, which comprises the chief element of that threat, appear to be deemed a bridge that will be crossed if and when it is reached.
Also, the need for the authorities to learn how to manage the global money supply, and the possible use of Special Drawing Rights in that respect, receives no attention at all form the global mass media. Richard Duncan, the author of Dollar Crisis, wrote in 2003:
‘The global money supply has run amok, and must be brought back under control. Measures must be enacted to prevent persistent, multi-year trade imbalances. Lord Keynes, in the plan that he drew up for the Bretton Woods conference, recommended that fines be imposed on countries with current account deficits as well as those with surpluses, effectively to discourage both. This was part of his plan for a Clearing Union.
‘The Keynes Plan was rejected. Yet that same plan could now be employed to put an end to the enormous trade imbalances that presently destabilize the global economy. Deficit and surplus countries could be fined to incentivize restoration of balance to their payments. Keynes suggested that the fine should be 1% of the deficit or surplus. Should that not prove effective, the percentage could be progressively increased until balance is restored.
‘Policymakers need to put in place a system that ensures that equilibrium on the current account be maintained. Establishing a mechanism to fine countries with deficits or surpluses could be an effective means of achieving that objective. Alternative methods could be devised; the one chosen should be implemented without delay.
‘Of course, turning off the taps of the global money supply after so many years of rapid monetary expansion would deliver a terrible shock to the global economy. Steps will have to be taken to soften the blow. The goal is not to stop the increase in the global money supply, but to gain control of its growth rate, slowing it down to a pace which supports economic expansion while preventing its destabilization. A new method of regulating liquidity expansion is required. Special Drawing Rights (SDRs) could fill that role admirably. That international reserve asset is valued on the basis of a basket of key national currencies, and serves as the unit of account in transactions between the International Monetary Fund and its members.
‘Therefore a system is already in place that allows the IMF to create international reserve assets in the form of SDRs. It is hard to believe that such an ambitious, complicated, and exhaustively designed scheme was never agreed upon by the international community. Nonetheless, it is very fortunate that it now exists. SDRs should be made into an important economic policy tool.
‘The IMF could allocate SDRs with the specific intent of supporting economic expansion around the world. A supplement to global liquidity would certainly be necessary once new arrangements were in place to end trade imbalances. After years of very rapid expansion of MG, the global monetary currency, the world is prone to experience the monetary equivalent of the withdrawal symptoms suffered by substance abusers – global monetary expansion will cease all at once and as the US current-account deficit disappears, SDRs could be allocated in sufficient amounts to effectively wean the world off its dependence on the US deficits and the reserve assets generated by these. If you will, SDRs could serve as a kind of monetary ‘fix’ to assist the world in liberating itself from its dollar addiction.
‘It will not go unnoticed that this proposal must be categorized as monetarism applied on a global scale.’
It appears, however, that a plot has been hatched by which the establishment of a new global economic architecture may be circumvented. The most powerful covert element among those that drove the ‘hope and change’ brigade to a triumphant election victory by means of a tidal wave of media hype may have persuaded US policymakers to abjure their responsibilities, and instead to exploit the opportunity offered by concealed, malign manipulators of the media to obfuscate the fundamentals of a plan by which leaders of special interests, dealers in armaments feeding internecine wars around the globe, and criminal elements of the global strategic mineral resources sector may be brought to the ascendancy in a bid for world domination.
The USA is not in a position to appreciate the ultimate goal of the power manipulating the agencies governing its historical development in the direction suggested here. But a brief note on each of the categories listed above may shed some light on the matter.
Firstly, special interests. The article Barack Obama’s BlackBerry – Subject: Iran (page 76), demonstrates that a president elected on a peace ticket enjoys no advantage when pressed to protect American interests against rogue states whose leaders seek limitless control over feudal fiefdoms unaccountable to the requirements of democracy and market economies.
Secondly, dealers in armaments. The article on Viktor Bout, on page 51, is a stark reminder of just how unsavoury, not to say extremely odious, special interests can be when they serve maniacs who abuse the concept of business for criminal purposes. Bout supplied weapons to the Taliban while The Economist wondered why the mighty NATO appeared so pitifully inept against a rag-tag army of turbaned fanatics protecting the heroin trade against its global victim base. Bout abetted despots and revolutionaries in Africa and south America while those who paid for it reviled the targeted regions in the pages of The Economist. Bout aided Hizbullah in Lebanon and Islamists in Somalia while manipulators of American mass media extolled the virtues of Islam, and attacked Israel as ‘an apartheid state’. Bout even supplied American forces in Iraq – in order to render his victims complicit in his crimes at a petty level, so that the egg on their faces would prevent them from prosecuting him for crimes of gigantic magnitude elsewhere. Born in Tajikistan, Bout’s objective was said to be “not nationalistic, but to get rich quickly”. Apparently no objection can be found to crime when it brings in handsome profits for the criminals involved, even if the victims are left absroved, dehumanized, or even slaughtered, as the case has been with Africa throughout the past century.
Thirdly, criminal elements of the global strategic mineral resources sector. Concealed, malignant manipulators of the global mass media are directly responsible for the success of the alliance between global terrorism and the heroin trade, which protects a cascading array of other contraband, distributed from Afghanistan to Colombia and from Africa to Luxembourg – such as rocket launchers, surface-to-air missiles, and specially adapted helicopters, to be directly swapped for African blood diamonds in Sierra Leone. Is it any wonder that those manipulators provide so much mirth and gratification to the world’s bandits, revolutionaries, and mullahs when they mess with world leaders who seek to protect human nobility from the corrupting power of anarchy and abuse? Americans are prone to every possible form of diabolical insurrection from any number of its many national enemies, who are free to deploy unconventional strategies of war against them by means of the USA’s most popular mass media formats.
Yet, as a direct result of machinations by concealed, malign manipulators of the media who happen to control also the global strategic mineral resources sector, the World Court at the Hague will prosecute the poor deceived Africans who were given to believe that their people could be saved from the Hell and death that had engulfed them, by means of desperate military remedies made accessible by apparently sympathetic businessmen like Viktor Bout. With regard to African matters, the World Court should remain at all times mindful of a contemporary adage which asks: “Why should a poor, innocent man go to prison?” – and which replies: “To keep a rich, bad one out.” Viktor Bout was said to be worth $6 billion. The same cannot be said for his African victims.
In South Africa, the stupid racism inculcated in the white community, by means of totalitarian social engineering by concealed enforcers of an uncritical belief in all foul-mouthing of Africans in the global mass media, has finally resulted in the scourge of communism in that country. Moreover, communism will perhaps never be overcome, since the same manipulators have duplicated their communist deception in the USA under the same banner of liberal democracy. Now America, which had proudly deterred rogue states from harming weaker ones, languishes in sack and ash as a penitent fugitive before the league of nations.
In the pages of The Economist, morally upright German citizens are clapped into the same category as the rubble of city slums, who move about in the streets as gangs that assault police officers – as the direct result of a term invented and bandied about by the media wherever anarchy generated as insurrection against democracy confuses people, and turns them against their better instincts: ‘xenophobia’ – the concept by which community defence against invaders has been outlawed, and the world has been populated with teeming millions of homeless refugees. As may be expected, the success of that vile strategy of war has nowhere reached more spectacular proportions than in Africa.
In the homes of sober, morally intelligent people who advance the cause of law and order, cultural excrement is insinuated into their homes in the form of DVDs, through the violent peer pressure to which their children are exposed, and parents who know better than to permit such filth under their roofs are muzzled into submission – by a tyrannous political correctness, and by diabolical applications of medical science perpetrated upon them through techniques of social engineering that serve a bid for world domination by the worst criminals in the world.
All such things are made possible by the refusal to distinguish between crime and legitimate business. A terrible need for right conduct exists with regard to a thousand matters, of which the establishment of a fair and efficient global economic architecture is by no means the least. Trade does not deserve to flourish anywhere on Earth if criminals will dominate all its dynamics, and morally upright people will languish in a slough of misery as a result. The media have a duty to conduct public debate in a mode that clearly distinguishes between trade and crime, and that unequivocally favours trade over crime in every context. Unless that will soon become the rule rather than the exception, nothing that could advance the human cause will prevail, in economics or in any other field.