Sep 7,
2019
Frank
Lee
Image source: FinancialSense.com
“Aftermath” is the latest addition to three previous
publications by Rickards, Currency Wars (2011), The Death of Money (2014), The
Road to Ruin (2016). Together, with the present offering (Aftermath, 2019), the
author uses the analogy of the Four Horsemen of the Apocalypse to illustrate
the themes of his four books. The latest book is thematic in its approach to
the events which have taken place in the world in general and the United States
in particular during this period.
HIGH SOCIETY
Rickards had previously worked for the CIA (possibly
still does – who knows?) but now seems to be a free-wheeling business
executive, writer and strategic analyst. He tends to circulate outside of the
usual middle-ranking semi-elite circles preferring to consort with the less
observable, higher-ranking coteries of the inner-party. Moreover, he has
nothing but disdain for the run-of-the-mill talking heads to be found (in
abundance) in the media and academia – the outer-party.
His observations of this social stratum are
unapologetic and caustic:
History is the first casualty of media micro-second
attention span. An army of pseudo-savants saturate the airways to explain that
tariffs are bad, trade wars hurt growth and mercantilism … are a throwback to
the 17th century. These sentiments come from mainstream liberals and
conservatives and tag-along journalists trained in the orthodoxy of so-called
free-trade and the false if comforting belief that trade deficits are the
flipside of capital surpluses. So, what is the problem? … The problem is that
perpetual trade deficits have put the United States on a path to a crisis of
the US$.”[1]
As is apparent, his contempt is palpable.
It should be said that much of his writing and
theorising is at times occasioned by a high level of sophistication, alas sadly
lacking in most of his contemporaries. But for all his refinement and eloquence
that doesn’t stop him being, from Off Guardian’s perspective (and mine), on the
other side – the side of the Anglo-Zionist empire.
THE GREAT BETRAYAL
Throughout this book and previous books there runs a
familiar leitmotif; a sense of betrayal by the present dominant section of the
US elite. This is not by any means an unusual political phenomenon and bears
comparison with the stab-in-the-back myth – a notion doing the rounds in
Germany circa 1918.
It held that the German Army did not lose World War I
on the battlefield but it was ‘traitors’ on the home front, especially the
traitorous republicans who overthrew the Hohenzollern monarchy in the German
Revolution of 1918–19.
This precedent loosely corresponds to Rickards’ belief
in the perfidy of the current leadership of the US and his vitriol is directed
against this globalist faction who are firmly ensconced in both Democrat and
Republican parties and whom, he argues, have sold the pass in terms of
America’s strategic interests. He writes:
Obama, both Bushes, and Bill Clinton were globalists,
defined as those willing to trade-off or compromise US interests for the sake
of a stronger global community … even conservative hawks like Reagan and JFK
were firmly in the globalist camp, as they relied on NATO, the UN and the IMF …
to pursue their cold war goals.
However, all was not lost. As a result of…
…the Presidential election of 2016 when Donald Trump
was sworn in on 17 January 2017 as the strongest nationalist since Theodore
Roosevelt. For the first time in 100 years a committed nationalist was sitting
in the Oval Office.” [2]
The event was obviously political grist to Rickards’
mill.
However, precisely how this liberation of the US from
the domestic globalists’ stranglehold was to be brought about wasn’t made
clear, and in fact is barely touched upon by Rickards.
Trump, for all his bombast and promises to Make
America Great Again (MAGA), and pursue a radical foreign policy of withdrawal
from globalist wars of choice and military adventurism, has been conspicuous by
its absence.
Moreover, from the outset he has been beset by the
ancien regime of neo-conservatives and neo-liberals – Bolton, Pompeo and Pence
– entrenched in key US institutions, as well as various think-tanks and media
who are still doggedly set upon the realization of neo-con foreign policy
goals.
It seems odd that Rickards doesn’t see fit to comment
on this important development given that Trumps’ campaign promises have
disappeared almost without trace since he entered the Oval Office.
IT’S THE ECONOMY STUPID
Rickards is on firmer ground, however, when dissecting
the 8th wonder of the world – US economic policy. The US sovereign debt (i.e.,
the debt of the Federal Government) to GDP is now at a record, this is unprecedented
for a peacetime administration.
In addition, it is also worth noting the magnitude of
US private debt and unfunded future liabilities, pensions, Medicaid, social
security and so forth.
This would include household debt, student debt,
financial debt, corporate debt, and municipal debt. Add this to sovereign debt
and you get a figure roughly 5 times US sovereign debt, and even this is
regarded as being a conservative figure according to many – see David Stockman,
John Mauldin et al).
According to Rickards, the present situation has been
largely the result of excess spending by both Democratic and Republican
administrations. The spending has either been on ‘Defence’ – a Republican
favourite – or social like L.B. Johnson’s ‘Great Society’ programme – a
Democratic favourite.
LBJ’s administration contrived to conduct the Vietnam
War as well as an expensive social programme, simultaneously. A guns plus
butter economy. (The original version of the Guns versus butter argument was
given in a speech on January 17, 1936, in Nazi Germany. The then Minister of
Propaganda Joseph Goebbels stated: “We can do without butter, but,
despite all our love of peace, not without arms.”)
LBJ’s guns-and-butter policies were enacted in the
late sixties at the height of the Vietnam war and the Tet Offensive. The
utopian attempt to have the best of both worlds brought LBJ’s administration to
an end; more importantly, perhaps it was also the beginning of the process
which brought down the curtain on the post WW2 economic world order established
at the Bretton Woods conference in 1944.
Because the costs of the Vietnam war were superimposed
on the economy not far effectively from full employment, the US domestic sector
was severely destabilised.
Instead of taxing the nation to pay for the war, the
government engaged in the more acceptable practice of deficit financing…
Vietnam showed that neither the United States nor any
other democratic nation can ever again afford the foreign exchange costs of
conventional warfare, although the periphery was still kept in line by American
military initiatives most recently in Yugoslavia and Afghanistan.
The lesson in the long term is that peace will be
maintained only by governments refusing to finance the military and other
excesses of the increasingly indebted imperial power.” [3]
The figure for the US sovereign debt – began to rise
relentlessly from the 1980s onwards approaching wartime levels by the time of
the 2008 blowout.
It has been estimated by some economic theorists that
any sovereign Debt-to-GDP figure greater than 60% represents a tripwire whereby
governments should act to rein in government expenditures.
The EU Maastricht criteria, for example, stipulated
that EU Debt-to-GDP should not go over 60% except in certain circumstances and
an annual budgetary deficit should not be more than 3%.
That is a pretty tight monetary and fiscal policy EU
style, but not to be outdone the spendthrift US was to go on a wild binge in
both fiscal and monetary terms the result of which is a now an unpayable
mountain of debt. This gives an indication of how far US economic policymaking
has drifted away from any viable economic strategy.
Rickards fulminates:
To see how America came to this pretty pass we, one
needs to review almost 40 years of fiscal policy under Presidents Reagan, Bush
1, Clinton, Bush 2, Obama and Trump from the period 1981-2019.” [4]
Under Reagan in 1981 US Debt-to-GDP ratio was 32.5%.
The President was gung-ho for tax cuts and big spending increases, particularly
‘defence’ spending. This trend was continued under the tutelage of the Bushes
and Clinton, and Debt-to-GDP ratio rose to 56.4% when Bush Jr, took office and
had risen to 82% by the time he left.
The Obama years saw the Debt-to-GDP rise to 100%. The
diagram below 2009 debt-to-GDP was 82.3% This figure has risen inexorably to
over 100% in 2018. Yep, here we have the dreaded law of Diminishing returns.
Every new dollar of input gives you 90 cents of output.
The above diagram illustrates the growth of debt
vis-à-vis National Income (GDP) since the 2008 blowout. Debt has been growing
progressively faster than National Income.
The US economy, like the US shale oil industry, has
become a Ponzi scheme in all but name. The Fed’s issuance of new debt to pay
off existing debt signals the key moment of the Minsky crisis.[5]
There doesn’t appear to be any viable way out this
predicament short of a straight default. But Rickards argues that ‘the United
States will never default on its debt because the Fed can simply print the
money and to pay it off.’ This will involve an engineered inflation to wipe out
the debt. But in fact, inflation is the default, a default by the back door.
Getting paid in worthless currency is in essence no different than not getting
paid at all.
NO EXIT
As for solutions to a crisis which has seemingly
reached the point of no return, all that Rickards can offer is a Japanese
scenario of low or zero growth punctuated by recession for the United States
and by implication for the rest of the world. The United States had its first
long decade from 2007 to 2017 and is now into its second decade.
This growth pattern will persist absent of
inflationary breakout which the Fed seems powerless to ignite in the short run;
a war; or severe depression perhaps caused by a new financial crisis.[6]
Not much of a prospect for the average family then.
But Rickards does give some useful advice to his more opulent readers on how
they should diversify their assets.
There are apparently “luxury bombproof bunkers
built in former missile silos and expansive estates in New Zealand loaded with
rations and good wines.”
Really? At this point one wonders if Mr Rickards is
being serious or just smug.
SOCIAL IMMOBILITY AND THE RISE OF OLIGARCHY
The social and economic impact on levels of inequality
in both the US and globally have been extremely deleterious and seem set to
continue. Inequality in income and wealth – a phenomenon identified and
outlined by Thomas Piketty – is resulting in societies which more and more
resemble feudal economic and social structures rather than textbook capitalism.
Social class is hardening into social caste and rates of social mobility are
decelerating at an alarming rate.
The liberal notion that the individual is the author
of his/her own destiny has become a very dubious proposition when the
drawbridges of advantage, birth and preferment are drawn up. Moreover, high
levels of income/wealth are not conducive to growth since the new aristocracy
owns most of the wealth/income which is hoarded rather than spent on investment
and/or consumption. Stagnation, idled capital and rent extraction becomes the
economic norm.
Inequality … is common in college admissions where the
wealthy and connected continue to send their sons and daughters to elite
schools while the middle-class are restrained by sky-high tuitions and the
burden of student loans.
It’s true in the housing market where the rich picked
up mansions on the cheap in foreclosure sales whilst the middle-class were frozen
in mortgage negative equity.
It’s true in health care, where the rich could afford
all the insurance they needed while the middle class were handicapped by
unemployment and the loss of job-related benefits. These disparities also
affected the adult children of the middle-class. There are no gold-plated
benefits packages in the gig society …
Research shows that fewer than 50% of all children
aged 30 today earn more than their parents did at the same age. This 50% figure
compares with 60% who earned more in 1971, and 80% who earned more in 1950.
The American dream of each generation earning more
than the prior generation is collapsing before our eyes … The middle class is
getting poorer on a relative basis and lagging further behind the rich whose
incomes absorb an increasing share of total GDP … The manner in which the rich
become rich is variable.
It could be due to a number of unrelated factors …
Problems arise in the way that the rich stay rich become richer and pass on
wealth to their children and grandchildren.” [7]
It is a matter of common knowledge that the
traditional techniques of preserving and creating wealth have been long
established in law, customs, education and socialization; these traditional
methods being practised over decades, if not centuries, have produced a system
of elite self-recruitment, one moreover which endures through time.
Many of the richest US citizens – e.g., Buffet, Bezos,
Zuckerberg – pay minimal tax demands. Much of the wealth of the richest
Americans is never taxed because they hold onto real estate and stocks and pass
them onto their beneficiaries tax-free. This is one of a perfectly legal method
of avoiding tax; there are many more too numerous to cite which include various
other examples of tax avoidance/evasion.
Levels of income and wealth inequality within states
are usually measured by what is called the Gini Co-efficient. This measure is a
commonly used measure of income inequality that condenses the entire income
distribution for a country into a single number between 0 and 1 or 0% to 100%:
the higher the number, the greater the degree of inequality. A rough estimate
of inequality is a figure above 40%.
The United States and China are in the low forties,
surrounded by underdeveloped and developing states such as The Democratic
Republic of the Congo, Uganda, Burundi and El Salvador. At the other end of the
spectrum are Sweden, Norway and Iceland.
In this connection the by now well-known study carried
out by two American academics at Princeton University Prof Martin Gilens and
North western University Prof Benjamin Page argue that the US is dominated by a
rich and powerful elite.
Multivariate analysis indicates that economic elites
and organised groups representing business interests have substantial
independent impacts on US government policy, while average citizens and
mass-based interest groups have little or no independent influence.”
In plain English: the wealthy few move policy, while
the average American has little power.
The two professors came to this conclusion after
reviewing answers to 1,779 survey questions asked between 1981 and 2002 on
public policy issues. They broke the responses down by income level, and then
determined how often certain income levels and organised interest groups saw
their policy preferences enacted.
Americans do enjoy many features central to democratic
governance, such as regular elections, freedom of speech and association and a
widespread (if still contested) franchise. But we believe that if policymaking
is dominated by powerful business organisations and a small number of affluent
Americans, then America’s claims to be a democratic society are seriously
threatened.”
In summation, both gentlemen concluded that in essence
the US was an oligarchy not a properly functioning democracy. All very true but
somewhat self-evident.
Rickards regards the present situation as being
irreversible. He does not present any alternative to this trend other than some
vague hopes that the ‘nationalist’ President in the Oval Office will turn
things around – MAGA in fact.
The golden age of post WW2 capitalism ended when Nixon
took the dollar off the gold standard in August 1971, which was in effect a
default by the US. Holders of surplus dollars in Europe who were no longer able
to swap these dollars for gold but were merely presented with other US$s with
which they had to purchase US Treasurys (Bonds) debts which were never going to
be repaid. In the age of fiat currencies Europe and various other holders of US
Treasuries were in fact subsidizing the United States.
POOR LITTLE AMERICA
At this point the book becomes one long whinge about
how hard done-by America has been and how the rest of the world has taken
advantage of this benign gentle giant. This rather bizarre belief calls for
further analysis. The US pays some of the bill for NATO whilst European nations
pay insufficient amounts for the ‘defence’ of their countries.
It should be pointed out, however, that in terms of
military hardware the NATO alliance is standardized to American specifications.
This means large-scale purchasing of US war materiel which is a gift bonus to
the US armaments industry.
Then Germany has the nerve to buy Russian gas
transported to Europe via Nordstream 2 which is cheaper and more reliable than
US Liquified Natural Gas (LNG), when in fact they should be buying more
expensive and less reliable US LNG. Apparently, Germany ought really to be
subsidising the US shale oil Ponzi racket. Bad, ungrateful Germany.
Then comes the incessant carping regarding trade
policy and trade deals. The US in its speed to become a cool, post-modern,
financialized economy apparently forgot about the importance of production. In
the automobile industry the once dominant US triad of General Motors, Ford and
Chrysler are no longer in the vanguard and Japan, with South Korea catching up,
is now the leading country in the export of auto vehicles, a position which the
US once held. It was the Japanese auto industry which pioneered production
methods including just-in-time deliveries and lean production (Toyota). Was
anyone stopping the Americans from innovating?
In rank order. Figures quoted in Global Shift – Peter
Dicken.
- Volkswagen, Germany: Annual Output
8,576,94
- Toyota, Japan: Annual Output 8,381.968
- Hyundai,
South Korea: Annual Output 6,761,074
- General Motor, USA: Annual Output 6,608,567
- Honda, Japan: Annual Output 4,078,376
- Nissan, Japan: Annual Output 3,830,954
- Ford, USA: Annual Output 3,123,340
- PSA, France: Annual Output 2,554,059
- Suzuki, Japan: Annual Output 2,483,721
- Renault, France: Annual Output 2,302,769
Globally, the leading manufacturer of auto-vehicles is
Volkswagen followed by Toyota. GM are 4th and Ford are 8th of ten. Hardly
market leaders anymore, but Rickards apportions the blame to ‘unfair practices’
by foreign manufacturers and argues instead for tariffs. The same goes for
other trade partners. Fact that the United States has to a large extent been
deindustrialised was a political choice of its own making.
If the US has lost ground in the competition for trade
on world markets that is because of its own insular provincialism and hubris,
not foreign competitive malpractice. Moreover, much of its productive industry
which remains has been outsourced to low cost venues such as China. The US more
than anyone should know that its competitors are simply using the same policies
that it itself used during the 19th century to break British trade hegemony.
It has been the same story with agriculture. Trade
liberalization (this must rank as the greatest misnomer of trade theory) and
trade treaties have been an example of the blatant unfairness of such
agreements. During the Uruguay round of ‘talks’ (1982-2000):
…the United States pushed other countries to open up
their markets to areas of ‘our’ (i.e. the US’s) strength, but resisted,
successfully so, to efforts to make us reciprocate.
Construction and maritime services, the areas of
advantage of many developing countries were not included in the new agreement.
Worse still, financial services liberalization was arguably even harmful to
some developing countries: as large international (read American) banks
squelched local competitors denying them the funds they garnered would be
channelled to the international firms with which they felt comfortable, not the
small and medium-sized local firms …
As foreign banks took over the banking systems of like
Argentina and Mexico worries about small and medium sized firms within these
countries being starved of funds have been repeatedly voiced.
Whether these concerns are valid or not, whether they
are exaggerated or not, is not the issue: the issue is that countries should
have the right to make these decisions themselves, as the United States did in
its own country during its formative years; but under the new international
rules that America had pushed, countries were being deprived of that right.
Suffice it to say that agriculture has always been a
flagrant example of the double standards inherent in the US trade
liberalization agenda. Although we insisted that other countries reduce their
barriers to our products and eliminate the subsidies for which those products
competed against ours, the United States kept barriers for the goods produced
by the developing countries, and the US continued massive subsidies to its own
produce. [8]
EXORBITANT PRIVILEGE
Oh, I almost forgot: the imperial tribute that the
world pays to the hegemon; aka the reserve status of the dollar. The role of
the US dollar in the world’s political economy gives it advantages which the
rest of the dollar surplus-states are dragooned into accepting. In the late
sixties early seventies, the US was on the verge of technical bankruptcy due to
its spending profligacy at home and military adventurism in Indochina. It had
three choices of how to deal with this acute problem.
[The] 3 courses open to the US government on the
collapse of the Gold Pool in London in 1968 were: immediately pull out of the
war in South-East Asia and cut back overseas and domestic military expenditure
to allow the dollar to firm again on world markets; to continue the war paying
for its foreign exchange costs with further outflows of Fort Knox gold; or to
induce the Europeans and other payments surplus areas to continue to accumulate
surplus dollars and dollar equivalents (US Treasuries) not convertible into
gold.” [9]
Of course, it was option three that appealed and Nixon
in his television broadcast was to announce a ‘temporary’ suspension of gold
sales by the US to its overseas ‘partners’.
The date in question, 15 August 1971, marked the end
of one epoch and the beginning of another. The temporary suspension soon
morphed into a permanent one and a global fiat currency regime based on the
dollar came into being. This represented a culmination of a situation in which
the US manipulation of the dollar was termed the ‘Exorbitant Privilege’ by the
senior French politician Valery Giscard d’Estaing. And privilege it was.
The central political fact is that the dollar standard
places the direction of the world monetary policy in the hands of a single
country which thereby acquires great influence over the economic destiny of
others. It is one thing to sacrifice sovereignty in the interests of
interdependence; it is quite another when the relationship is one-way.
The difference is that between the EEC(EU) and a
colonial empire. The brute fact is that the acceptance of a dollar standard
necessarily implies a degree of asymmetry in power which, although it actually
existed in the early post-war years, had vanished by the time that the world
sliding into a reluctant dollar standard.” [10]
There were a number of advantages which accrued to the
dollar contingent on the ending of gold convertibility which Eichengreen listed
these in his book. But the principle one was making the surplus nations of the
world pay for America’s wars with an unconvertible currency. Instead of being
paid for in gold, or at least a gold-backed currency the world produced goods
and services for a piece of green paper backed by nothing.
Quite a clever little racket when you think about it.
Better still is the way that the two biggest surplus
nations, Japan and China, have been the US’s main creditors, bankrolling the US
by buying its Treasuries. This had another intended, or perhaps unintended
effect: long term interest rates on US bonds came down (since bond prices and
bond interest rates move in opposite directions) and enabled the property
bubble to expand until the inevitable blow-out in 2008.
In mafia terms the US dollar has been a ‘made’
currency enjoying a set of privileges and protection which it did not earn but
foisted upon others. This is a unique dispensation which is enjoyed by the US
to which the rest of the world is excluded.
However, it is in the nature of things that privileges
will ultimately get abused. In pushing its luck to the point of abuse the US
should be aware that initial signs are that the world is sloughing off the US
dollar. As it proceeds in that direction, the US currency will lose its
position as the global reserve asset. Holders of trillions of
dollar-denominated assets will become sellers eventuating in a collapse of the
currency.
The US economy lives like a parasite off its partners
in the global system, with virtually no savings of its own. The World produces
whilst North America consumes. The advantage of the US is that of a predator
whose advantage is covered, by what others agree, or are forced, to contribute.
Washington uses various means to make up for its
deficiencies: for example, repeated violations of the principles of liberalism,
arms exports, and the hunting-down of oil super-profits (which involves the
periodic felling of producers; one of the real motives behind the wars in Iraq
and Central Asia).
But the fact is that the bulk of the American deficit
is covered by capital inputs from Europe and Japan, China and the South, rich
oil-producing countries and comprador classes from all regions, including the
poorest, in the third world, to which should be added the debt-service levy
that is imposed on nearly every country in the periphery of the global system.
The US superpower depends from day to day on the flow of capital which sustains
its economy and society. The vulnerability of the United States represents a
serious danger to Washington’s project.” [11]
In light of the above we may conclude that – in spite
of the irritating name-dropping – Rickards’ books are interesting well written
and well-argued; per contra they are very light on facts which have been left
deliberately unexamined as well as counter-narratives which have also been
ignored.
This was to be expected quite simply because at bottom
Rickards is a sophist much in the tradition of Protagoras, Gorgias and
Thrasymachus “I say that justice is nothing other than the advantage of
the stronger” [12]
A view which Rickards would certainly endorse. Beneath
the Upper Manhattan, polished chic, there resides a ruthless Cold Warrior. The
further one digs into the book, the more this becomes apparent.
NOTES:-
[1] Rickards – Aftermath – page.21
[2] Ibid., – page.65
[3] Michael Hudson – Super Imperialism – pp.298/99,
32.
[4] Rickards – Ibid. – page.66
[5] Hyman Minsky’s theories about debt accumulation
received revived attention in the media during the subprime mortgage crisis of
the late 2000s. The New Yorker has labelled it “the Minsky Moment”. Minsky
argued that a key mechanism that pushes an economy towards a crisis is the
accumulation of debt by the non-government sector. He identified three types of
borrowers that contribute to the accumulation of insolvent debt: hedge
borrowers, speculative borrowers, and Ponzi borrowers.
The “hedge borrower” can make debt payments (covering
interest and principal) from current cash flows from investments. For the
“speculative borrower”, the cash flow from investments can service the debt,
i.e., cover the interest due, but the borrower must regularly roll over, or
re-borrow, the principal. The “Ponzi borrower” (named for Charles Ponzi, see
also Ponzi scheme) borrows based on the belief that the appreciation of the
value of the asset will be sufficient to refinance the debt but could not make
sufficient payments on interest or principal with the cash flow from
investments; only the appreciating asset value can keep the Ponzi borrower
afloat.
[6] Rickards – Ibid., page.85
[7] Rickards – Ibid., page.239
[8] Joseph Stiglitz – The Roaring 90s – pp.206/207
[9] Gold Pool 1968. The price of one troy ounce of
gold was pegged to US$35. … The larger the gap, known as the gold window,
between free market gold price and the foreign exchange rate, the more tempting
it was for nations to deal with internal economic crises by buying gold at the
Bretton Woods price and selling it in the gold markets. It
couldn’t last and it didn’t.
[10] Michael Hudson – Ibid. – p.309
[11] Barry Eichengreen – Exorbitant Privilege –
passim.
[12]
Plato – The Republic.
00
Frank Lee left school at age 15 without any
qualifications, but gained degrees from both New College Oxford and the London
School of Economics (it's a long story). He spent many years as a lecturer in
politics and economics, and in the Civil Service, before retirement. He lives
in Sutton with his wife and little dog.
No comments:
Post a Comment
Note: Only a member of this blog may post a comment.