Farewell, My King
The Economics of Wreckage, Part Four
Part Two of this series showed how real hourly wages accruing to the U.S. labor force had been virtually stagnant over the past half-century and how, when inflations hit the economy, nominal wage gains had persistently and repeatedly lagged the run-up in the overall price level.
Part Three of the series explained neo-Keynesian macroeconomic policy in terms of a necessary reliance upon important factors of production being unable to quickly impound excess growth of the money supply that causes overall inflation: to the extent that, say, labor cannot immediately capture inflation driving up the prices of goods and services, workers must become more productive, both in terms of hours worked and in terms of efficiency in production, since they must pay higher prices for what they buy but are not earning higher wages per hour. The economist John Maynard Keynes described this as the "sticky wages" effect; it gives public policymakers a powerful incentive to use inflation cycles as a tool of economic growth, an idea given empirical weight by economist A.W.H. Phillips, who published a paper in 1958 showing a striking, inverse relationship between wage inflation and unemployment, a phenomenon that came to be known as the Phillips curve, which was the graphical representation of this inverse relationship between unemployment and inflation. The principal problem that has beset policymakers pressing this short-run phenomenon into effect has been that, eventually, wages and compensation to other factors of production do impound the inflation being created by increasing the money supply at a rate faster than the growth of the real, productive base of the economy can use the money. More importantly, once inflation expectations become embedded in compensation demands, the policymakers face a perilous choice: either they must accelerate the growth rate of the money supply to keep ahead of those expected inflation premiums, or they must reduce the rate of growth of the money supply below the real growth rate of the economy in order to allow economic activity to slowly absorb the currency overhang; in the first instance, accelerating the growth rate of the money supply will serve only to accelerate the inflation, but, in the second instance, clamping down on the money supply will cause interest rates already embedding an expected inflation premium to rise, thereby diminishing real economic activity to the point that recession could occur, as happened in the wake of the contractionary monetary policy regime instituted by former Fed Chairman Paul Volker in 1979.
In this last installment, a macroeconomic model will be introduced and then used to present a wealth of economic data from the past several decades. The model, a relatively simple means of breaking down the gross domestic product of a nation into large, mutually exclusive components, will allow trends and substantive changes in economic activity to become evident. Analyzing that economic activity within each large sector provides opportunities for highlighting interrelationships among the nation's foreign trade, government spending, and the various facets of the domestic private sector.
A national economy can be viewed as a complex machine comprising an incomprehensible number of individual parts: every household, every business enterprise, and every part of local, state, and federal government contributes some greater or lesser activity in terms of spending and output. Most households, for example, contribute labor to the national economy and, in exchange, receive compensation that is then spent on current purchases and possibly savings. Businesses employ labor and other so-called "factors of production," combining them in such a way as to create goods or services that are then sold. All the various levels of government, from local to federal, buy goods and services, employ factors of production, and produce goods and services. A broad but useful means of breaking down an economy into mutually exclusive parts is to separate domestic spending into private consumption, private investment, and government (this last one sometimes being called "public investment" both to relate it to and distinguish it from the investment in productive activities that occurs in the private sector). In a so-called "closed economy," one where no trade with other countries occurs, national spending could then be completely, if summarily, written as the sum of household consumption (C), private investment (I), and government (G).
Bringing international trade into the mix, an "open economy" would have two additional parts: exports, which earn the domestic economy more money to spend, and imports, which drain money from the domestic economy into the central banks of trading partner countries. Nations that engage in international trade both sell to and buy from other countries, so during any given accounting period, a certain amount of money is flowing into the economy from selling exports, and a certain amount of money is flowing out from the economy because of imports purchased. A country's "balance of trade" is the difference between its exports (X) and imports (M). In a given period, if more exports are sold than imports purchased, exports minus imports is positive, and the country is said to have run a "trade surplus" for the period; on the other hand, if the country buys more imports than it sells abroad as exports, the country is said to have run a "trade deficit" for the period. Hence, exports minus imports, which is called "net exports," accounts for the net amount of money a country either takes in for spending (when net exports is a positive number) or loses the opportunity to spend (when net exports is a negative number) as it engages in international trade. As a hint of the model to be presented below, economists break an economy down into two large components: the sum of household consumption, private domestic investment, and government spending is called the "internal" economy, and the exports minus imports is the "external" economy.
At the level of total, aggregate output where an economy is operating, which is traditionally measured by gross domestic product ("GDP"), what all of the parts of an economy have to spend in aggregate for a given period will be the same as what it has produced in goods and services during that period. Economists call this "equilibrium," the place where the total amount a country's economy has earned in productive output is the same as the total amount it has to spend. Hence, in general, national spending is the sum of household consumption, private investment, government spending, and net exports; but in equilibrium, national spending is the same as the total output of an economy, so the model presented below describes C+I+G+(X-M) as being the GDP instead of the more general national spending.
This might seem like a distinction without an important difference, and that is the case unless the equilibrium at which an economy is operating is undesirable. If the total output of an economy is too low, a condition that is associated with an unemployment rate that is unacceptably high, the more desirable, higher GDP would require some way for national spending to increase to close the "recessionary gap"; on the other hand, if the total output of an economy is so high that factors of production are being utilized too aggressively, the more desirable, lower GDP would require some means by which national spending might be cooled down to close the "inflationary gap." The economist John Maynard Keynes showed that the necessary government actions to either stimulate or suppress national spending were considerably less than the actual spread between the equilibrium GDP and a target.
To the matter at hand for this article, though, it is necessary to know only that the total output of an economy, GDP, is the same as national spending in equilibrium, so the equations presented below always use GDP to represent national spending, which is fully depicted as comprising the sum of the components of internal, domestic economic activity and the external, international activity.
|(1)||GDP = Consumption + Investment + Government + (Exports-Imports)|
Using letters to compress the equation, we have this result, which is both an algebraic equation and an accounting identity:
|(2)||GDP = C + I + G + (X - M)|
That equation above is called the Spending Allocation Model, and it is used to categorize and account for actual economic values in the national income accounting that is done by the U.S. government, which reports the numbers on a monthly, quarterly, and annual basis, along with excruciatingly detailed breakdowns within each broad category. As in all accounting, the numbers have to add up correctly: gross domestic product really does have to equal the sum of the numbers derived for C, I, G, and (X-M).
One important point to note for this article is that the government reports the numbers both in "current" dollars and in "constant" dollars adjusted for the effects of inflation. For the constant dollar versions, some base year is chosen (right now, the year 2000 is the government's choice), and the values of the components are then corrected so that any effects of inflation for years other than 2000 are taken out. Later in this article, when actual numbers for the U.S. economy are presented and analyzed, they will be in year 2000 dollars using the year-by-year adjustment factors called "GDP deflators" to remove the effects of inflation so that only "real" (that is, inflation-adjusted) year-to-year changes are being shown and analyzed. (As a note on methodology, all numbers in any given year presented here in the Spending Allocation Model have the same GDP deflator applied, whereas the government's numbers seem to have had a slightly different deflator applied to each component of a given year's GDP. The differences thus created between the numbers here and on the Website of the Department of Commerce are immaterial.)
As mentioned earlier regarding the distinction between domestic economic activity and international trade activity, Equation (2), by the way, is sometimes useful to write the following way:
|(3)||GDP = Internal Economy + (External Economy)|
Returning to Equation (2), levels of economic activity, although important, do not always tell the whole story. For example, if the price of an item that costs a dollar changes by 50 cents, that is quite a bit different from the situation where an item costing ten dollars changes by the same 50 cents: in the first case, the price has changed by 50 percent, but in the second case, the price has changed by only five percent. It is because of how absolute changes depend upon what numbers are being talked about that financial analysts and economists often prefer to look at percentages. To turn Equation (2) into an equation with everything depicted as percentages of GDP, we shall divide everything on both sides of the equation by the GDP, itself:
|+||(X - M)|
Simplifying the notation of Equation (4) a little bit, with the obvious result for the left side that GDP divided by GDP simply tells us that the sum of the percentages of the economy have to add up to 100%, we get this handy result:
|(5)||100% = %(C in GDP)+%(I in GDP)+%(G in GDP)+%(Net Exports in GDP)|
Finally, further simplifying the equation to make it look pretty and compact, we have the final form of the Spending Allocation Model that we shall use for demonstrations and the actual data:
|(6)||100% = %C + %I + %G + %(X - M)|
Demonstration 1: Suppose that total consumption in an economy is $400, private investment is $200, government spending, is $100, exports are $400, and imports are $100. Using Equation (1), we would get:
|(7)||GDP = $400 + $200 + $100 + ($400 - $100)|
So, our GDP is $1000, and we can write Equation (2) with all the numbers filled in:
|(8)||$1000 = $400 + $200 + $100 + ($400 - $100)|
As a side note, from Equation (3) we can see that the internal economy is generating $700 of the total GDP, and the external economy is generating an additional $300 of the total GDP. Notice that net exports are positive $300, meaning that this economy has a trade surplus for the period under consideration; if (X-M) had come out negative, which we will show in the following example, the economy would have been running a trade deficit.
Now, we shall divide everything on both sides of the equation by the GDP, $1000, of this economy as in Equation (4):
And, finally, we can write these as percentages:
|(10)||100% = 40% + 20% + 10% + (+30%)|
Putting this in words, the total Gross Domestic Product of this economy is 40 percent consumption, 20 percent private investment, 10 percent government expenditures, and 30 percent net exports. A little more broadly, we can see from Equation (10) that 70 percent of the economy is powered by internal, domestic activity, and the remaining 30 percent of the economy is powered by external, international trade activity.
So far, so good. All the Spending Allocation Model does is provide us a nice little framework to decompose an economy into important, separate parts, both internally and externally. It is not some deep, obscure mathematical theory at all; it is nothing more than a way we can see how the big parts of an economy each contribute to the whole of it.
The next example is just like the first, except that we shall set up a similar economy with only one difference: this time, we'll see what happens when the country runs a trade deficit instead of a trade surplus. One result of this seemingly minor alteration is a little amazing; but, first, let us get some numbers with which to work.
Demonstration 2: Suppose that total consumption, just like in Demonstration 1, is $400, private investment is $200, government spending (sometimes called "public investment" is $100, exports are $400, and imports are $600. Here, unlike in Demonstration 1, where imports were $100, we are making the level of imports larger than the level of exports, which means the economy is running a trade deficit. Using Equation (1), we would get:
|(11)||GDP = $400 + $200 + $100 + ($400 - $600)|
So, our GDP is $500, and we can write Equation (2) with all the numbers filled in:
|(12)||$500 = $400 + $200 + $100 + ($400 - $600)|
Again, as an aside, from Equation (3) we can see that the internal economy is still generating $700 of the total GDP, but this time the external economy (the (X-M) part) is generating negative $200 of the total GDP; in other words, a trade deficit actually saps GDP downward.
Now, we shall divide everything on both sides of the equation by the GDP, $500, of this economy as in Equation (4):
And, finally, we can write these as percentages:
|(14)||100% = 80% + 40% + 20% + (-40%)|
Putting this in words, the total gross domestic product of this economy is 80 percent consumption, 40 percent private investment, 20 percent government expenditures, and -40 percent net exports. A little more broadly, we can see from Equation (14) that 140 percent of the economy is powered by internal, domestic activity, and then the excess 40 percent of the economy is bled out by external, international trade activity.
Now, that is an interesting result: running a trade deficit allows the internal component of an economy (the C+I+G part) to burn at more than 100 percent of total GDP! Even though the trade deficit had actually lowered the gross domestic product, at the very same time it was forcing domestic consumption, private investment, and government expenditures upward because the sum of everything internal plus external must add up to 100 percent. That means, if the international component of a country's total economic activity is negative, the internal component has to be larger than 100 percent so the sum of the internal and external parts will still add up correctly.
Keep in mind, here, that this is not some "theory"; it is simply a mathematical necessity, just like two plus two has to equal four.
That still leaves the problem of how, exactly, this "equilibrium" circumstance is achieved in the real world; in other words, the question is this: How is it that a trade deficit makes the sum of consumption, private investment, and government spending go above 100 percent?
In non-mathematical terms, the equilibrium dynamic has been explained in several previous articles here at The Dark Wraith Forums, including "Exchange Rate Regimes."
The concept is really quite simple to understand. When an American buys a foreign product, there is an exchange of U.S. dollars for the foreign merchandise: the domestic consumer gets an import, and, in exchange, the foreign manufacturer gets the greenbacks. This kind of trading, where currencies are swapped for goods and services, is called the "current account" because it happens in the here and now, with immediate exchange of money for goods. These are transactions involving relatively short-term assets (money and the things money can buy). Money and goods flow both ways, of course. American manufacturers export, foreign manufacturers export; American consumers buy imports, and foreign consumers buy imports. Between any two countries there will be a balance of exports versus imports; usually, one side will have exported more than it bought from the other side. This balance is the (Exports - Imports), which are called net exports in the equations above. Obviously, between any two countries, if net exports for one of the countries end up being positive for a given period, then the other country in the trading relationship will have net exports end up being negative by the same amount for the period. Overall, any country's international trade with the rest of the world can be represented as a ledger column of total exports to the rest of the world and another ledger column of total imports from the rest of the world. The sum at the bottom of the exports column is the "X" in (X-M), and the sum at the bottom of the imports column is the "M" in (X-M). If exports minus imports yields a positive number (mathematically, if (X-M)>0), then the country was a "net exporter" for the period in which the ledger was kept; on the other hand, if exports minus imports is a negative number (mathematically, if (X-M)<0), then the country was a "net importer" for the period in which the ledger was kept. A country that is a net exporter will have a net inflow of currencies from its trading partners; a country that is a net importer will have a net outflow of its currency to its trading partners.
Where a country is a net importer, then, there is a net outflow of its currency to its foreign trading partners. In the case of the United States, because we run trade deficits (in other words, (X-M) is negative), there is a net outflow of U.S. dollars to foreign countries, where they accumulate in those countries' central banks as what are called "foreign reserves." Those foreign reserves of dollars must be spent in the nation of their origin; in this case, that would be the United States.
The foreign central banks repatriate those dollars through investments in American assets, both real and financial. These investments pump those dollars back into the economy through purchases of long-term assets, the primary class of which is debt instruments.
When a borrower be it a household, a corporation, or a government agency borrows money, it is actually selling a debt instrument, and the lender is purchasing it. The particulars of the debt instrument how it is repaid, the interest rate, early payment provisions, etc. can vary widely: everything from a credit card purchase to a corporate bond to a mortgage loan to a U.S. government Treasury security is a debt instrument, each with its own "covenants." Lenders buy these, and the price they pay is, more or less, the loan amount, although a borrower might not get the whole price, depending upon terms, conditions, fees, and other agreed-upon mark-downs.
In the case of foreign lending, the central banks of countries with foreign reserves of American dollars buy U.S. debt instruments of all kinds. When corporations want to raise money through borrowing, they "issue" bonds that are purchased by investors who are nothing other than lenders. When banks want to move mortgage loans off their books, they bundle a group of them and sell the package to a corporation like Ginnie Mae, which then carves up the cash flows or otherwise separates, rearranges, then blends the individual loans into very large "secondary mortgage market" instruments that are sold to big investors who are, again, nothing other than lenders since the money they pay for those secondary mortgage market bonds flows back through the banking system to become more money available to banks to lend.
Among borrowers, though, the United States government, itself, is a veritable 800-pound gorilla, these days, as it has been at other times in American history. Any time the federal government raises insufficient revenues through taxes to pay for its current obligations, it runs a "budget deficit" for the period under consideration, and that shortfall of revenues to meet expenditures must be borrowed. The federal government gets its loans by selling Treasury securities, which are debt instruments of the United States government. It sells all kinds: very short-term, promissory paper called Treasury bills ("T-bills"); intermediate-term paper called Treasury notes; and long-term paper called Treasury bonds. Treasury auctions are held periodically by the United States Treasury Department, and at these auctions, the government sells as much paper of different kinds as it must to raise the money it needs to meet its shortfall. Treasury auctions occur at regular intervals, and lenders from around the world come to these auctions (not physically, of course, since everything is done electronically, these days) to buy the paper the Treasury is offering. When the government is borrowing money, this is one of the ways foreign central banks repatriate to the United States the dollars they have acquired through trade with us. (More on this particular topic can be found in the article "Foreign Trade and Debt" here at The Dark Wraith Forums.)
Bringing this back to the Spending Allocation Model, in times when the United States is running trade surpluses, the American central bank, the Federal Reserve, as an agency of the U.S. government is a net investor to the rest of the world; when the United States is running trade deficits, the central banks of foreign countries are, on balance, net investors to the American economy.
The Spending Allocation Model can be represented as a teeter-totter on one side of which is the internal component of the overall GDP, which is the sum of our consumption, private investment, and government spending; on the other side is the external component of overall GDP, the difference between how much we sell abroad and how much we buy from abroad. The entire sum of the percentages of consumption, private investment, government spending, and net exports constitutes 100 percent of GDP, as illustrated in the graphic immediately below.
If the U.S. were to run a trade surplus of, say, five percent of GDP, the teeter-totter would produce the overall 100 percent of GDP by allocating five percent to our external trade activities, with the remaining 95 percent allocated among the internal components of the economy, as shown in the graphic below.
On the other hand and this is the one that seems almost perverse if the U.S. were to run a trade deficit of five percent of overall GDP, as illustrated below, that would mean the internal components of the economy would have to be 105 percent of GDP to keep the final sum of all the percentages equal to 100 percent.
In recent years, the United States has run trade deficits, in part because the U.S. dollar has been very valuable ("strong," in the vernacular of international trade) against other currencies. Much of that was the natural result of the strength of the American economy: it is massive; it is diverse in its productive output; the labor force is generally educated, well-fed, and enculturated to a work-for-compensation ethic; and the banking system is sound. The United States is the banker to the world; as such, it gets banker's preference in interest rates, terms, and conditions of its borrowings, which means it can serve as a global financial intermediary. Furthermore, the federal government is good for what it owes: it has a huge tax base of wage-earning citizens, and it has a legacy of more than 200 years of continuity in governance, having even at one time proved its internal federal supremacy by crushing a multi-state rebellion against rule by the central government. Its institutions, both private and public, are the subject of the rule of law, and its laws and their enforcement, while strong and comprehensive, are subject to review by an independent judiciary. Its banking system is the subject of strong, consistent, and pervasive oversight; and its currency, even though backed by nothing other than the "full faith and credit" of the central government, is every bit as good as gold in any transaction anywhere in the country.
To the extent that the United States is able to maintain the validity of and belief in the representations above, its currency maintains its strength against foreign equivalents; and just like any good bank, the United States then serves as a magnet for investment from around the world, and those of other nationalities will strive to acquire American dollars that can then be invested back into our historically powerful engine of solid, relatively safe returns on investment. In practical terms, this means the currencies of other countries will have a persistent tendency to be "weak" against the dollar, if for no other reason than that such weakness will cause foreign imports to the U.S. to be relatively cheaper than American exports to the rest of the world. In essence, foreigners will be willing to sell their goods and services here via the current account at attractive prices so they can receive valuable American greenbacks in exchange because those dollars can then come back here via the capital account to earn solid returns.
Unfortunately, the downside of this is two-fold: first, this means our economy will persistently be the target of foreign investment, which means claims on future cash flows generated by American assets are owned by those of other nations; second, a foreign central bank, especially one with weakness in its own, internal economy, will have an incentive to cheat by making its currency weaker than it already is, or by keeping that currency inappropriately weak long after it has gained considerable strength relative to the American dollar. The reason for such an incentive to cheat is that, by keeping a currency weak against the dollar, the productive base of that foreign economy ensures a continuing export market for its goods and services, which boosts that country's own GDP; but the harm done is of several types, not the least of which is that, by maintaining a continuing inflow of greenbacks in foreign reserves, the country's central bank must expend those assets in the United States, not in its own country, thereby sapping its own productive base of needed capital to continue growing.
Far worse, however, is the damage done by the mechanics of how a cheating country "pegs" the exchange rate of its currency to the dollar, which is by printing its own currency in massive quantities and then entering global currency markets to buy dollars with that money. The result is inevitable: sooner or later, all of that currency printed in excess of what the country's own economy needed for internal transactions will come back to its own shores; and whenever the growth rate of a money supply exceeds the real (that is, physically productive) growth of the economy backing it, the "overhang" will become inflation. Countries that have played the game of pegging their currencies against the U.S. dollar have almost all, eventually, come to the same disastrous place: hyperinflation, which made their currencies become so worthless that they could not buy anything in international markets, which forced them to use their gold reserves, which they then wiped out. After that, these hapless governments no longer had any way to keep their economies from collapsing under the weight of inflation, sky-rocketing interest rates, and resulting social instability. In the end, rebellions and revolutions happened; or, much worse, the International Monetary Fund sent in the economists to take control of the central banks while Right-wing, authoritarian governments got installed to set about shooting the fussy peasants.
With respect to the United States and the dollar's natural tendency to be strong against the currencies of other nations, the resulting trade deficits have both an upside and a downside. To the benefit of the United States, those current account trade deficits mean that the internal part of the economy again, the sum of household consumption, private business investment, and government spending will run at greater than 100 percent of the total GDP of the economy. To the detriment of the United States, as shown in Demonstration 2, above, that total GDP of the country is lower because of the productive capacity we are allowing overseas manufacturers to carry by virtue of their production of the goods and services we buy. In the language of those opposed to extensive trade with other countries, the United States loses millions of jobs because we buy things from overseas instead of buying them from domestic producers. There is, however, no evil intent in Americans buying foreign imports: people are rational, and they will tend toward purchases that save them money. Grand exhortations to "buy American" simply will not win the day when real money and real, personal decisions must be made about the use of limited income in a world of many needs and even more wants.
The Spending Allocation Model comes to life in the real numbers from the U.S. economy, and this is a model that gives quite interesting insights, especially in the context of the forces that have brought the economy to its current situation. The table below shows the year-by-year breakdown, from 1990 to 2007, according to the Spending Allocation Model. Each cluster of rows presents one year, first with the model, itself, then with the actual, inflation-adjusted number for each component, then with the percentage each component constitutes in total GDP. The final row for each year shows the total internal percentage of GDP (that arising from the sum of consumption, investment, and government), and the part arising from external, international trade. Readers will be able to see exactly how, in each year, the trade deficit exactly matched, as a negative number, the extent to which the internal part of the economy exceeded 100 percent of GDP.
China and the "Free Market" Myth
As a foreword, I trust that many readers recall the numerous occasions upon which I have described the apparachiks of the Chinese government as nothing other than "communist mercantilist thugs." On several occasions, I have added the adjective "murderous" to that description. I have also written previously, extensively, and in detail about foreign trade with China: my May 2005 article, "Seven Principles of Macroeconomics," is a good primer for those who are relatively more recent readers.
For years, we as a nation allowed the monstrosity that is the People's Republic of China (what we used to call "Red China") to hold the dollar-yuan exchange rate at the ridiculously non-market ratio of 1:8.28, thereby causing Chinese imports to the United States to cost perhaps a third or so of what they otherwise would have under purchasing power parity. The effect was to induce a massive, year-over-year flow of U.S. dollars into the central bank of China as we bought those cheap imports. This is the so-called "current account": we trade American dollars for the cheap imports.
The backflow of the current account, matching in size the trade deficits we run from year to year, is the so-called "capital account": that is where those American greenbacks return to the United States as investment by the Chinese in American assets. In this capital account, which is the long-term mirror image of the current account, we are getting Chinese investment in exchange for claims on our future expected cash flows. The Chinese buy U.S. government debt securities, secondary mortgage market paper, commercial real estate interests, corporate debt instruments, municipal bonds, and other lending and ownership claims; we get the investment, and they get claim to future money that is earned by those assets we are selling to them.
No free market exists when one component of the overall market is cheating; and that is exactly what the Chinese have been doing for years and years, all while our politicians, economists, big-business apparachiks, and other assorted fools stood around all misty-eyed about the lies the communist mercantilists were telling about "market reforms."
In summary, there has been no "free market" in the rush to "globalization," especially in the Sino-American quarter. Not only have the Chinese all along been rigging the game while we looked the other way, but it finally became so ridiculously, pervasively obvious that, years into the affair, the Bush Administration felt it had to buttress the myth in writing, declaring with a straight face that the Chinese were not manipulating the dollar-yuan exchange rate. The President's apologists in the U.S. Treasury Department made this ludicrous assertion for no reason other than that the Bush Administration, itself, with the aid of its Republican-controlled Congresses, has been generating staggering, year-over-year federal budget deficits, thereby desperately needing the Chinese (and other foreign central banks) to keep lending dollars to the United States Treasury. Those dollars being lent by the foreigners are, of course, the very same dollars Americans had previously traded in the current account for cheap foreign goods and services.
Again, the "free market" claim in global trading relationships was, is, and always will be a disingenuous, corrosive delusion because it is attended by a destructive lack of firm, resolute, punitive actions by the country being harmed by a cheater, which is what China was, is, and always will be.
The paradigm of some nearly mystical, natural tendency toward free markets is a myth cuddled to the breast bone of childish, simplistic idiots, most of them conservatives, Right-wingers, and Libertarians. Asymmetric information, imperfect allocation of physical resources, and concentration of capital, influence, and power all ensure that no market is free; and, as such, no policy that assumes the benefit of a free market will lead to other than defeat when the opponents know very well that the paradigm is a myth. The Right-wing/conservative fantasy of China moving toward free markets has been every bit as delusional as the old Leftist/liberal myths about the wonders of socialism in countries like Cuba under the fist of a repressive tyrant like Castro. (But, of course, Cuba has universal healthcare, so that makes everything all better, doesn't it?)
China is ascendant, which means its brutal, repressive version of authoritarianism is, as well. As the aforementioned article in Rolling Stone illustrates, this is all to the benefit of the corporate engines of war-making, law enforcement, and punishment: they sell the instruments of repression to those who must rule by oppression. No longer is authoritarianism about politics; it's business, and the business is booming.
On the global stage, the Chinese have beaten us; in fact, they have trounced us at our own game, and they have done so by having a clarity of purpose that has perpetually eluded us in the game of world control. How they did it certainly wasn't "fair and square"; but, then again, no one other than misty-eyed American politicians and their fellow idiots in business and academia thought fairness was part of the game.
And, no, the American capability for violent military force does not make up for intelligence in the game of global domination; but even there, if our wondrously astute thinkers in government and the military had the common sense to correct for the undervaluation of the Chinese currency, the revelation about the level and growth of military expenditures in China would scare the Hell out of anyone.
Oh, yes, one more thing: the Chinese accumulation of foreign reserves of America dollars was not a good thing during the 1990s, but the capital account backflow was going only to credit-hungry consumers and hyper-growth-obsessed corporate debt jockeys. The "credit crisis" we now face happened after the U.S. government, which had finally gotten into budget surpluses during the Clinton Administration, went hog wild under spend-spend-spend Republican rule led by "conservative" President George W. Bush. Starting in 2002, the U.S. Treasury was stepping up to the hog trough of foreign lenders, thereby shoving aside ("crowding out," to use an old economics term) both business and consumer credit opportunities. Few people know this, but before consumers recently started seeing the credit crunch, private investment had already been dropping as a percentage of GDP for several years. (In a few days, I shall publish an article wherein I show the numbers.)
The bottom line is obvious. The world is full of bad people; most can do little harm beyond their immediate families, their communities, and their circles of close acquaintances. It is only through the machinations of those who are like-minded in their evil or weak in their resolve that the bad people of the world can do extensive damage. If we want to see why the Chinese thugs will become a globally dominant force, vicious in its internal controls and appalling in its hegemony in the years to come, we need look no further than to the mirror on the wall, wherein lies the image of a foolish nation ruled by free-market advocates who cannot seem to comprehend that globalism is the clarion call of those ready, willing, and able to do anything whatsoever to ensure that they come out the winners, even if that 'anything whatsoever' wrecks the world, the sovereign nations of it, and the right to freedom of its inhabitants.
Welcome to the 21st Century; it's sort of like the 20th Century, except that it's going to suck even more.
Just be sure to vote for one of those unprepared morons running for President: you'll all get just what you deserve.
Unfortunately, so will the rest of us.
The Dark Wraith has spoken.
Biden Blasts Bush for Anti-Obama Belch
In his speech before the Israeli parliament marking the 60th anniversary of the birth of the Jewish State, Bush invoked memories of the military expansion of the Third Reich across Europe, describing those who would sit down with "terrorists" as laboring under "foolish delusion" similar to those who sought negotiations with Adolf Hitler. The remarks were met with substantial applause from the audience of lawmakers of our most subsidized ally, which has threatened to attack Iran if the United States does not do so.
Although the White House is publicly denying that the comments were aimed at Democratic presidential candidate Barack Obama, who has called for negotiations with Iran, aides to the President privately acknowledge that Bush was taking direct aim at the man who is appears likely to be the Dem nominee.
At the end of the article CNN.com published about Sen. Biden's response to President Bush's remarks, readers were invited to comment on the story. As I have done with previous articles at CNN.com, I did so, although none have ever been subsequently presented anywhere at the CNN.com Website. To diminish the importance of CNN's disinterest in publishing my response, below is the comment I submitted.
Yes, what Mr. Bush said is, indeed, bovine by-product.
It is, however, also the sign of a desperate man, one who uses incendiary, false assertions to buttress the flagging ramparts of a unitary executive for whom defiance of the rule of law offered no protection from the lessons of history. To the same extent that he has crafted from the whole cloth of delusion the claim that the economic crises now looming are somehow the fault of the Democrats, he now erects his ludicrous monument of self-exoneration for the utter collapse of our foreign policy into miserable, useless, lost wars that have debilitated our military to the point where genuine threats to our security, threats that will loom larger and larger in the coming decades, face no clear, present, and viable long-term deterrence from what was once a credible war machine in the United States. Instead, Mr. Bush has squandered our future security on a Global War on Terror that is nothing more than a staggeringly expensive exercise in chasing a handful of bearded religious maniacs around the world while imposing greater and greater degradations of personal privacy at home.
Mr. Bush will soon be at the end of the time in which his incompetence can blight the American experience. Although he will likely be replaced by one fool or another from one party or another, at the very least we shall be relieved of the tiring nonsense of a unitary executive without a clue.
The other bright note, of course, is that the likes of mainstream news media outlets like CNN, along with The New York Times, the Washington Post, and far too many others, will be able to claim to an ever-gullible public that they were not really every bit a part of the madness of these first eight years of the 21st Century in America.
The great news is thus: the more the mainstream media cry their lack of culpability, the more they will sound just like the President who disclaims his own failure.
History will be most unkind both to Mr. Bush and to his propagandists. That's what makes history so much more fun to those who read about it than to those who must live through it.
The Dark Wraith still cannot imagine why CNN did not publish this erudite reply to one of its articles about President Bush.
The Gospel of Impending Doom
The above-mentioned articles at The Dark Wraith Forums incorporate by reference links to a number of other published articles I have written over the past nearly three-and-a-half years forewarning of the coming economic catastrophe. In my January 2005 article, "Prologue to the Book of Consequences," I wrote the following:
The calculus of where the economy is headed is quite simple. Mainstream news media outlets bend over backward to avoid appearing biased, so they avoid describing the future consequences of current political actions, even though the consequences are governed by rock-solid principles of economics and finance that are not open to disagreement among the learnéd. Unfortunately, the neo-conservatives have made a craft of disputing the indisputable, giving observers an impression of debate where none exists.
At that time, I still had hope that the Federal Reserve, which had begun to clamp down on the growth rate of the money supply, would stick to its guns, even though that course would have thrown the economy into a recession. Financial markets were sending the classic signals that this is, indeed, what was coming, as I pointed out in several articles, including "Toward Full Yield Curve Inversion," which I wrote and published in March of 2006.
By that time, however, the reckless mendacity of this Administration was returning to fashion at the Fed: as it turned out, the Fed had rather swiftly and quietly untethered the broad monetary aggregates M2 and M3, once again causing them to grow out of control, leaving only M1the kind of money ordinary people useunder an approximately zero growth rate regimen. The broader aggregates M2 and M3, feeding as they do the financial sectors and the wealthy, are now growing at rates that have absolutely no justification whatsoever other than to forestall economic catastrophe until the Bush Administration leaves office.
The growth rates of M2 and M3 are breath-taking. As mentioned above, the Fed no longer publishes M3. Including as it does M2, which in turn includes M1 (which, until recently, was not growing), this broadest measure of the money circulating in the economy is now in the growth rate range of 20 percent.
Two years ago, the yield curve inverted, which has historically signaled a good possibility of economic downturn that might become a recession. Shortly after full inversion, and notably in what was the Spring of a mid-term election year, the Fed panicked, backing down from tight monetary policy on the big-money aggregates, leaving only the people who use cash and checking account types of money to labor under a money supply being held at zero growth. As it turned out, the Fed was commencing the second phase of what would be a nearly unprecedented expansionary monetary policy that continues to this very day. Under this regime, not only is the Federal Reserve increasing the money supply at a rate in excess of the real growth rate of the economy, but the Fed is accelerating this growth rate! Although the chart below has been published here on several recent, prior occasions, it is worth publishing again, and it should be noted that John Williams of Shadow Government Statistics showed an almost identical chart in the video offered above.
The Federal Reserve is pouring hundreds of billions of excess dollars into the economy to hold off an economic crash. The longer it does this, the worse the resulting inflation will be; more importantly, however, the longer it pursues this radically irresponsible policy, the worse the recession will be when a new Federal Reserve Board must crush the money supply long enough to drain out the staggering greenback overhang. Interest rates, which will already be rising because of inflation expectations embedded in them, will skyrocket because interest rates are the price of money, and when the supply of anything contracts, its price goes up. Business investment, already laboring under tight credit conditions, will grind to a standstill, as will consumer spending on anything other than basics, which will absorb a greater and greater share of income in the spiral of accelerating inflation caused by the almost incomprehensible oversupply of money progressively eroding the purchasing power of each dollar circulating in the economy.
On the international front, as the dollar continues its inexorable plunge into Second World currency weakness, U.S. exports to other countries will rise as our goods become cheaper overseas, and foreign imports to the United States will become more expensive. That has two sour notes. First, as imports become more expensive on American shelves, the domestic substitutes right beside them on the shelves will rise in price by the so-called "substitution effect," fed as it will be by the excess money that will fuel the demand-pull inflation at the retail level. Second, as Americans buy fewer imports, foreign reserves of dollars, which are the means by which our government, our businesses, and our households have been able to borrow so much money for the past several decades, will begin to dry up; and with the U.S. government spending in stupendous excess of the tax revenues it draws, the U.S. Treasury in the years ahead will suck up what little there will be of foreign capital available for lending, leaving both households and private businesses with virtual bread crumbs of lendable funds, especially once the Fed begins the long, gruesome process of letting the economy slowly absorb in real output gains what will ultimately be the trillions of dollars in excess liquidity poured in by the Bush Administration's Federal Reserve.
All of the righteous, legitimate, and perhaps even understated condemnation of the Bush Administration and its Federal Reserve aside for a while, the pertinent questions on most people's minds revolve around what is to come; and by no means are the answers pleasant. Even under the most responsible, intelligent, and take-charge Presidentof which none appear to be on hand for the up-coming electionthe economy and its constituents will suffer, and the suffering will be severe.
No, the United States economy is not in a "recession," yet, despite the premature squealing of quite a few people. Although some parts of the country might already be experiencing negative economic growth, according to the latest figures released by the Bureau of Economic Analysis of the Commerce Department, the overall economy actually grew in the first quarter of 2008, albeit at an anemic rate of just 0.6 percent, matching the growth rate for the final quarter of 2007; and, although the Commerce Department is notorious for revising such GDP growth rate numbers several times, the signs simply are not there of a widespread recession underway for the U.S. as a whole. Americans have not seen a severe recession in more than a generation. The last bad one was caused by the contractionary monetary policy of the Federal Reserve under the leadership of Chairman Paul Volker, President Jimmy Carter's appointee; Volker's Fed aggressively clamped down on the money supply to drain out the excess money that had been building at a greater or lesser pace for more than a decade. Volker did not let go until not only the inflation had abated, but so too had the far more important expectation of future inflation. Recessions since then have been relatively short and mild by comparison, and the "recession" that heralded the beginning of the current Administration was not a recession by the technical measure of two consecutive quarters of negative real GDP growth, but it was certainly more than enough of a pretext for George W. Bush and his Republican allies in Congress to get their way with drastic tax cuts to "stimulate" the economy, a siren call the GOP has used in the past, most notably at the outset of the Reagan years and, before that, near the end of the Eisenhower Administration. Unlike Ronald Reagan and George W. Bush, who led their party's parade to the trough of wildly generous tax cuts for the rich, Eisenhower resisted the tax cut bleatings of his fellow Republicans and, in so doing, was able to deliver several years of balanced federal budgets, unlike either Ronald Reagan or George W. Bush. Of course, in all fairness at least to the current President of the United States, few are those even among the professional apologists for Mr. Bush who would accuse him of being the latter-day incarnation of President Eisenhower in fiscally responsible leadership, much less in statesmanship and general intelligence.
As a touchstone for reference, the table below presents the record of recessions in the United States from the third decade of the 20th Century to the present.
1920 to Present
|Peak before Recession||Trough of Recession||Duration of Recession|
(months from peak to trough)
|Decrease in Real GDP|
(percent from peak to trough)
|Duration of Following Expansion|
(months from trough to peak)
|*As of end of First Quarter 2008|
With that data providing helpful historical guidance, and with some well-established macroeconomic principles being applied, what follows is a summary, if highly preliminary, assessment of what interested readers should expect of the economy in the coming months and years.
First, the economy will not go into recession for a while. The current scenario appears too much like the U.S. economy in 1979, except that the incumbent Federal Reserve is far more out of control than the pre-Volker Fed was. We will experience what in Carter's time was called "stagflation": paltry real growth of GDP coupled with accelerating inflation. Eventually, as that inflation becomes more and more embedded in interest rates, the Fed's efforts to hold interest rates down by pouring money at greater and greater rates into the economy will begin to fail, and the economy will teeter closer and closer to the brink of negative real growth in GDP.
As far as inflation is concerned, a quick, dirty way to generate a forecast is to take the year-over-year growth rate of the money supply and subtract from it the real growth rate of GDP: that's the "overhang" of dollars the economy's real (that is, production-based) spending growth cannot use, so that overhang must, sooner or later, become inflation. If the broadest money aggregate, M3, is growing at close to 20 percent, and the real GDP is growing at around half-a-percent, that means inflation will eventually hit 19.5 percent or so on an annualized basis. As a nice, round number, call it a forecast of 20 percent inflation. As mind-numbing as that number is, the worse part is that, the longer the Federal Reserve under the new President fails to crush the money supply, the closer expected inflation will get to that 20 percent figure, which means interest rates will climb to the point where economic activity in the United States will grind to a virtual halt; but that's not the worst part.
The expected inflation premium does not affect only interest rates; it becomes embedded in the forward expectations of compensation for all factors of production, perhaps most notable among them being labor, which has been on its back for years in terms of its ability to successfully project bargaining power into management-labor wage negotiations. That will change: under mounting pressure from rank-and-file workers who will begin to experience real deprivations as their nominal purchasing power withers in the accelerating inflation, people will forcefully demand far greater performance from their unions and, in the absence of union representation, from the employers themselves. Long dormant (in some cases, even intergenerational) frustrations with the inability to get ahead economically will translate, at best, into far more active, vociferous workers and, at worst, widespread agitation and activities that will bring down what has become a swift, efficient, often merciless fist of retributive law enforcement surveillance, actions, and violence, which will be wholly and prejudicially supported by courts packed by the Bush Administration with extemist conservative and Right-wing judges.
The next President, regardless of which nominee it is, will be faced with the choice of either forestalling the application of draconian remedies for the hyperinflation or forcing the Fed to quickly and resolutely clamp down on the money supply, this latter choice sending the economy into a hard recession near the depth and length of the Great Depression. Either way the new President decides to play it, by 2010 or 2011, unprecedented, severe, unavoidable demands on the federal budget will emerge, and they will get worse with each successive budget cycle. At the same time, the utter debilitation of the U.S. armed forces will have become apparent not merely to the U.S. brass, but to the heads of state of adventurous countries in the Shanghai Cooperation Organization, a nascent South American alliance, the European Union, and loner countries like Japan, all of whom will shed at least some pretense of disinterest in taking command of land, the seas, the sky, and space in the growing chasm between continued American military posturing and viable, multi-theater engagement capability.
And if all of that is not enough, the growing independence of the world economy and its sovereign participants from the U.S. dollar will mean that U.S. goods and services, although cheap and well received in other countries, will become not just more expensive here at home, but also subject to much more price volatility as the greenback no longer serves as the anchor in international contracts for everything from foodstuffs to hydrocarbon products.
Other catastrophes will attend and succeed those listed above, but that's a good start, although, as cautioned earlier, this is just a preliminary and quite summary impression of what is to come. Indeed, it could get much worse.
One way or the other, despite the greatest efforts of the stupefyingly irresponsible Bush Administration and its swirling cacophony of apologists in the Right-wing think tanks, the mainstream media, academia, the courts, the religious community, and the general population, reality will soon arrive on the unstoppable freight train of dire consequences to which each of the aforementioned groups will no doubt find its own means by which to dismiss personal responsibility for national calamity. That, no doubt, was why the gallows were so popular in a by-gone era: a good noose not only kills the mendacious, it shuts them up, too.
The Dark Wraith will offer further economic forecasts as events merit.
The Dark Wraith Lecture Series: Lecture 3
Lecture 3: "Constitutional Rights and Fiduciary Duty"
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A Conspiracy Theory Primer
Therein was my potentially grave error in assessing the story line of The Ring, and I have now decided that the only way I can dispense with what could otherwise be an unwanted curse upon my soul is to inviteindeed to encouragereaders to watch a 139-minute film by über-conspiracy theorist Alex Jones of Prison Planet. The movie is herewith embedded near the end of this article.
Long-time readers of my articles might recall that I have mentioned Mr. Jones in the past, specifically with respect to the fact that maverick Republican presidential candidate Ron Paul appeared in a film of his. In my tradition of diplomatic understatement, I wrote of Alex Jones that, "[He is] believed by at least some rational people to be a few cheese cubes short of a snack tray..."
That aside, for readers who want a remarkable, although incomplete, rundown of a principal branch of conspiracy theory, allow me to recommend Alex Jones's 2007 movie, Endgame. It is sweeping, and it is compelling. It is also deeply flawed, primarily by the way it, like most conspiracy theories, constructs conspiracy by virtue of mere associations, some of them familial, others chronological, still others even less well-defined. For example, Jones connects the evolution theory of Charles Darwin to a cousin's twisted ideas on eugenics, and then he goes on to associate the early eugenics whackosadmittedly including a number of Charles Darwin's subsequent family membersto the later eugenics whackos like Adolf Hitler and the better-race promoters in the U.S., including the predecessor to Planned Parenthood. In all fairness to Jones, however, he does not directly attack the theory of evolution, nor does he condemn the idea of the right of women to choose abortion; but he does seem to have an intense interest in offering a less-than-dim view of the foundations of many modern-day organizations, including everything from the World Wildlife Federation to the Federal Reserve system. Along the way, as well as going after the predecessor to Planned Parenthood, he jumps on the usual list of conspiracy theory hot buttons like the United Nations, the European Union, and NAFTA. I roll my eyes every last time the conspiracy theorists trot out these worn-out whipping boys, although the matter of that trans-America highway corridor is a little less of an eye-roller than meets the eye, particularly since officialdom in Washington acts to this very day like the thing doesn't even exist.
I must admit that, within the sweep of his attack, Jones goes after some of my favorite rich-boy charlatans. One of them is Al Gore, a gentleman who in my own, personal opinion is a PowerPoint-wielding, sky-is-falling elitist-opportunist. My published writing and comments about him are harsh and unyielding, and I am not in the least impressed by his Nobel Peace Prize, awarded as it was to a quite comfortable, upper-class gentleman at the same time in history that genuine heroes the world over are rotting in prisons, being tortured, and getting executed for demanding such trivial things as freedom in unfree lands. Yes, the Presidency of the United States was stolen from Mr. Gore; but, no, sometimes it is not better for the Republic that its wronged meekly stand down, for their surrender is not theirs alone, but is also the sacrifice of the millions who will then suffer under the reign of the venal thieves wretchedly proclaimed victor.
Enough with grinding the personal axes; this post is about Endgame, which is, as noted above, incomplete. While it fabulously explains the Bilderberg Groupa favorite sore spot of any self-respecting conspiracy theoristit completely avoids mentioning the Illuminati, Opus Dei, Freemasonry (although a stylized version of the All Seeing Eye is presented several times), the Jewish conspiracy, and anything whatsoever having to do with UFOs. (Those who know about these matters will, however, notice in the movie all kinds of visual hints of other conspiracy theory threads.) Strangely, avoiding a free-fall involvement of all these other branches of conspiracy theory keeps the movie from drifting into complete silliness.
Along the way, the movie gets a little slow in some places, but the tenor re-attains fever pitch at several places in the last half. Without giving away too many details, the mention that Hillary Rodham Clinton did a half-day appearance at the 2006 Bilderberg Group conference is worth noting. No, she's not a Bilderberger: a half-day visit would mean she was there to briefly present herself for the core group to consider. At that 2006 conference, by the way, Jones got photographs of none other than the disgraced Ahmed Chalabi of Iraq pre-invasion disinformation fame; Chalabi was slithering around at the hotel like some kind of creepy denizen from the depths, apparently a welcome participant in the confab of the rich and powerful.
Another fun part of the movie is the interview into which Jones suckered a young Rothschild heir, a fellow heavily into promoting save-the-planet concerts. Jones threw a rather ludicrous "fact" at the dear boy, who took the bait like an idiot and responded with one of the most self-defeatingly stupid answers I've ever heard from an ostensible heir to shadowy greatness. I actually had to get out of my chair and walk a few feet away during the Rothschild pup's blithering oral dance. Whether or not Jones knew his "fact" about other planets in the solar system exhibiting signs of warming was ridiculous, he certainly got a future Bilderberger to make an ass of himself.
I should also point out that Endgame touched a soft spot in my heart as it took on such historical icons as Bertrand Russell, a man whose bizarre statements about depopulation made him someone I have reviled both as a person and as an intellectual inspiration my whole adult life; Russell resides in the same level of my esteem with self-fawning sods like Ayn Rand and Henry David Thoreau. Another joy to my heart came in the mention that Vice President Dick Cheney, in making his triumphal return to the Council on Foreign Relations some years back, commented on the use of ethnic bio-weapons. (Gee, with stuff like that being talked about by White leaders of the Free World, it's no wonder people like Rev. Wright are considered total lunatics when they start their bizarre rants about AIDS being human-manufactured to kill Blacks.)
I tell you, if all that wasn't enough, I became downright giddy when Bill Gates and Warren Buffet were trotted out for a brief flogging.
Yes, for me, Endgame was a veritable orgy of evil, sinful, wrongful delight, the kind of stuff I know very well is just plain mind-rotting in the same way a rare, fatty, 20-ounce steak cooked on an open fire and a nose-piercing, mucous-clearing cigar are bad for me. God! but it was sweet.
For me, the list of pleasure points in Endgame was rather long; but just because Jones and I have a common manifest of disliked creeps and just because we share a deep concern for the emergence of an authoritarian state, I simply cannot allow that I agree with the scope of his conspiracy theory. I do not, and the reason is quite simple: even though the Bilderbergers really do imagine themselves controlling the fate of the world, and even though their idiocy has caused actual harm, they are pathetically incompetent in their silly plans, schemes, and dreams. Unless their master plan really was to crater the world economy with a blithering combination of neo-liberals, neo-conservatives, communists, Right-wing thugs, religious nutcases, and assorted other thunderously ignorant operatives, where we are headed would be the very last place putative global controllers would have wanted to go: down this path we are plunging lies what will in all likelihood be a horrendous, destructive clash of classes over everything from food to shelter to freedom. As enfeebled of mind as Americans have been for a long time, and as weak and reckless as political opposition has been to the insanity of the Bush Administration, its military adventures abroad, and its ever-expanding, ever-more-intrusive law enforcement machinery at home, the dynamic will change, and the change will be dramatic.
It will also be ugly.
Shadowy, filthy rich cretins who meet once a year to plan the fate of the world would be awfully stupid to risk a global economic collapse that could just as easily lead to anarchy as it could to some pretext for a one-world, authoritarian government solution.
Certainly, those shadowy, filthy rich cretins are not that stupid. Such an idea is every bit as crazy as saying that the richest, most powerful nation on Earth would allow itself to be ruled, and thereby economically destroyed, for eight long years by a vicious, moronic, inarticulate, power-mad, secretive, incompetent fool.
The very idea is laughable.
Anyway, grab some popcorn, pour a drink, close the curtains, and spend a little more than two hours watching Endgame. If nothing else, it's certainly worth a laugh.
The Dark Wraith gives it two thumbs way up.