Part 1 - Economics and Reality
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Help, is anyone out there listening?
There is now a serious risk of Britain being brought into a nightmare
scenario, as a result of the currently unfolding global financial
crisis.
The elements of that crisis are:
- Withdrawal of capital, particularly dollar capital, from SE Asia.
- Low demand in the Japanese economy, with knock-on effects for SE Asia
again, but also for the US.
- Collapse of the Russian rouble, with consequent debt default
- Reduced expectation of net gain from emerging economies as a whole.
The consequences of this are:
- Unemployment and loss of income in the developing and emerging
economies.
- Unemployment and contraction in Japan
- Reduced demand from SE Asia, Japan and Russia to each other and to
Western nations
- A cycle of loss of confidence in stock markets
Bad
This may all correct itself - the IMF may get the resources to bail out
those countries such as Brazil, that are on the brink of contributing
further to reduced global demand and debt default. The Japanese people
and businesses may recover confidence in the future and start to spend
the extra cash they are receiving as a result of fiscal loosening,
rather than saving it to insure against an uncertain future, as they are
at present. This in turn can be expected to start a global upturn in
exports and confidence, which will continue until the next downturn. But
even so, it is important not to forget the waste of material and human
resources that has resulted. Lives blighted by loss of careers or
savings in countries with little welfare provision. Children dying
unnecessarily, or missing out on schooling because their parents are out
of work. It is probable that even as the upturn develops investment will
be a little slower to materialise and go a little less far in taking the
risks required to re-establish opportunities in the emerging economies.
And those countries that have been bailed out will have that much more
debt to act as a drain on their future resources. The nightmare scenario
of global economic and/or social collapse is surely only postponed, to
be even more severe when it finally does happen.
Worse
On the other hand that nightmare scenario may come about now. Brazil’s
economy may collapse, taking with it most of Latin America. The loss of
demand and damage to America’s banks may trigger full-scale loss of
confidence in business investment and lending in the US. Then we are all
in serious trouble. Unemployment in the US means poverty and loss of
individual healthcare provision, with all that means for the next
generation of Americans in a country already deeply troubled by
violence, drugs and guns. In Britain, people will not starve immediately
or forego access to healthcare, but the pressure of mass unemployment on
the tax base, will re-open the polarised debate between the ‘welfare
state’ and the ‘minimal state’. The former struggling with higher
taxation and worsening public debt, the latter resulting in ghettos of
poverty and crime opposed to those of affluence and security guards.
A Real World Balance
Are we left with no other choices than these. Is this just the way of
the world, the result of unchallengeable economic laws? I do not believe
so. Let’s try to trace out the roots of all this trouble. Essentially
economics is about a balance. A balance between optimising ‘production’
of goods or services in terms of quantity and quality, and between
distribution of that production, between people as individuals and as
groups. Exactly where that balance is to be struck, how stable that
balance is to be and whether it is arrived at through coercion of one
group over another or through democratic compromise is the realm of
politics. But economics can show us the relationship between different
rates of production in the long and short terms, and between different
modes of distribution. There should only be two absolute givens of
economics; firstly, the level of basic material resources available
given current knowledge of physics and chemistry, and secondly the range
of human needs and behaviours as established by current medical and
psychological knowledge. Note that money and markets should not be
regarded as givens, despite the fact that so much research and
discussion is expended upon those topics by economists and others. Both
production and distribution can occur quite smoothly without either.
That is not to say that they are necessarily bad or harmful, but it is
to say that they must not be assumed to exist. The characteristics, role
and effects of both money and markets must be examined and valued on
their merits if the effects of any particular economic arrangements are
to be adequately evaluated.
Understanding Money
When money without intrinsic value - paper money - was first used, its
value was directly tied to its validity as a claim for a certain weight
of gold from the issuing bank. That bank had to issue to the ‘bearer on
demand’ that pre-determined weight of gold. But bankers found this
restrictive, limiting the ability of banks to profit from loans and
merchants and manufacturers to borrow for profit. Nowadays money is
undifferentiated ‘purchasing power’, a claim on the stream of goods and
services the economy produces. Its value must be tied to the ‘value’ of
those goods and services, but this is a circular valuation if those
goods and services are simply valued in money terms. Clearly however, if
the economy suddenly ceased to produce anything, money would rapidly
lose value, as the real wealth for which it could be exchanged was
depleted.
Too much money, but in the wrong place
At the root of the current crisis is the paradox that while the growth
of money in nominal terms has been greater than economic growth in
nominal terms, the distribution of that money has failed to reach those
areas where it is most needed. (In the UK this is true directly, in
other countries such as the US, this is clearly true when the flow of
dollars abroad and their relative value to other currencies is taken
into account.) A glut of money in the corporate and financial sectors of
developed nations has raised the prices of property, of shares and of
the services of bankers, lawyers, management consultants and
accountants, up to the point that even those who benefit are beginning
to realise that these prices bear no relation to reality and are
stopping buying, paying, borrowing and lending. On the other hand, the
shortage of money to the poor of those countries and to the developing
world has created ever-greater inequality within countries and between
them, by lowering the commodity prices upon which they rely and forcing
reliance on debt to finance needed imports. The problem is that the
creation of money is not linked to real wealth creation, even by the
deeply flawed GDP measure currently used. It is decided by individual
commercial banks, who can create credit on the basis of 10% reserves, on
their judgement of the return on that capital. It is important to
realise that, as is the case with the debt of the Highly Indebted Poor
Countries (HIPCs) such as Tanzania and Angola, profit may have been made
many times over on loans for which there is no realistic prospect of
repayment. Indeed when it does become clear that these loans cannot be
repaid, they are simply replaced by bigger ones, accompanied by measures
which by reducing public health, education and welfare provision in
those countries, ensure that interest can continue to be paid while
impoverishing still further the people of those countries.
Unequal Prices
This problem is exacerbated by the constant attrition of the values of
developing world currencies, which ensures that the value of their debts
in terms of goods they can produce are forever rising, while the cost of
imports rises too. In Britain there is a marked dislocation between the
rises in prices of basic essentials such as food, clothing and household
goods, which are included in the Retail Price Index, and those prices on
which the affluent earn their fast-rising incomes, of property, shares,
and corporate services. Those businesses squeezed between interest
payments and shareholders’ dividends on one side, and the cheapness of
imported primary and manufactured goods along with their financiers fear
of price inflation on the other (thereby lowering the real value of
their domestic loans) can only survive by the use of monopolistic
tactics, persuasive advertising and ever lower labour costs. A prime
example of this at present is the effect of the big supermarkets’
increasing dominance of food retailing on the prices available to
farmers. And this despite the pre-existing policy of subsidy to keep
food prices down through the European Common Agricultural Policy. The
end result of this is bankruptcy of the UK farming industry,
ever-increasing poverty of developing world producers and the continuing
drain on the taxpayer of the CAP - the worst of all possible worlds.
Other essential prices on say clothing and household goods are kept low
by relying largely on imports produced by cheap overseas labour and on
artificially low commodity prices.
See Part 2 for 'A Way of Escape'
Diarmid J G Weir
djgw@febl.abel.co.uk
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