Archive for November, 2013

Mild Depression: The Malaise of Bloated US$.

26 November 2013
The latter half of twentieth century in particular saw North America, Western Europe, Australia-New Zealand, and Japan, experience an unprecedented economic boom and prosperity. The standards of living of far more people shot to dizzying levels than ever seen in the history of human civilization. Rising from the death and destruction of world war–II on the back of copious flow of cheap and versatile fossil fuel –petroleum from the “new and carefully” constructed autocratic regimes in the Middle-East; the factory production of metals, chemicals, plastics, automobiles, white goods, building materials, processed foods, and industrial agriculture reached new heights to cope with galloping demand. Rising wages placed rising disposable incomes in the hands of working population in these few countries and fueled demand, demand sucked in investments to enlarge industrial capacities, which in turn brought in more people into the workforce at higher wages that led inevitably to the next spiral of growth. There were several hiccups on the way –such as the stagflation of Nixon presidency in USA- but the future had never looked for close to 20% of the humanity so bright and so reassuring. The two oil shocks of 70s did knock around the utopia, but it seemed do so only momentarily and not enough to derail the growth and development juggernaut permanently. The nightmare of great depression looked distant and permanently exorcised. Growth and ever increasing prosperity came to be seen in mainstream economic praxis as secular normal; and periods of recession as temporary aberrations caused by momentary lapses and delays in efficient allocation of resources by the Market forces. All this carefully construed liturgy by the high priests of the *science of economics* came undone when the leveraged financialization of US economy burst with the housing bubble in 2007. It is now 5 years since then, but the anemic economy is refusing to be nursed back to health despite generous and continuous doses of cheap money by Federal Reserve under its Quantitative Easing (QE) program.
This persistence of chronic *mild depression* had the former Treasury Secretary in Clinton administration and former Chairman of National Economic Council in Obama administration, Lawrence Henry Summers, prescribe at the annual IMF Research Conference thus:
Summers’ remarks drew wholesome approval from longtime loose and cheap money champion and Nobel laureate, Paul Krugman, in his NYT Column: A Permanent Slump? In fact, the rock star attention Summers’ remarks received made Krugman “confess to professional jealousy” on account of his own long history (since the start of Great Recession) of professing the very same ideas to “little effect”.
Krugman marshaled the behavior of the ratio of US household debt to GDP to posit why easy money is here to stay.
Barring over two decades between 1960 to 1985 when the ratio remained stable or even declined, it has shown inexorable secular rise ever since. This shows, he argues, shrinking of disposable incomes of majority of US households: “Yet even with households going ever deeper into debt, the economy’s performance over the period as a whole was mediocre at best, and demand showed no sign of running ahead of supply. Looking forward, we obviously can’t go back to the days of ever-rising debt. Yet that means weaker consumer demand — and without that demand, how are we supposed to return to full employment?” He adds two more factors to his analysis: The persistent trade deficits that US is experiencing since the 1980s and the population that is not rising fast enough. The second is obvious and is observed wherever relative prosperity alongside economic empowerment of women has occurred. The solution would be to have more babies, which he knows is unlikely to happen or to allow more immigrants, which would militate unacceptably against the “American Way of life”.  The persistent trade deficits are on the other hand unique to USA. What is obvious is that USA needs far more from the outside world than what the outside world needs from it. But this skewed tendency would have had automatic corrective doses applied by the inexorable and rapid devaluation of a currency of any country caught in such adverse trade imbalances scenario. That would have made imports into USA costlier curbing overall consumption and exports out of USA cheaper and competitive. That has not happened because the demand for US currency, US Dollars, is simply not abating despite excess supply of Trade-$ than demand for Trade-$. Why? Post Second World War US$ became the de facto world-currency. The world trade is predominantly denominated in US$ even if no company from USA is a party to the contract. Oil trade too is quoted and settled in US$. When the currency of transaction is US$, whatever may be the flow of goods and services, the money flow occurs within the physical bounds of USA between two or more banks situated in USA, which are acting as counter parties to the banks of exporter and importer. Add to this scenario, which already favours US$, the fact that even for parking money generated from trade surpluses the most favoured currency is again US$. These fat surpluses go into buying US treasury bills. This unparalleled advantage keeps the US currency either from depreciating or from going out of favour; and thus permitting USA to indulge in unchecked profligate consumption behaviour. However, this profligacy is not creating enough domestic demand in Krugmans’ words to run ahead of supply.
There is a sense of euphoria in the fossil energy industry in USA over defeating the “doomsday scenario of peak oil” through the “successful exploitation” of shell gas and oil. In fact, Confident energy experts proudly announce that in a decade or so USA can kick the “addition to imported oil”. Riding piggyback on this presumptuous future is the unstated assumption of return to “limitless growth and prosperity”. Is it possible to have infinite growth on a finite planet? The theory and practice of Economics (limitless growth) would have to deal additionally with the two vexing parameters of Environment and Energy. Even before we worry over the depleting and deteriorating resources base of the planet, where prospects of diminishing marginal returns stare unblinkingly in the face; the poisoning of the environment through the inevitable “production” of toxic wastes poses imminent and grave danger. Climate change and toxic wastes would get us even if depletion of resources wont. This is how Richard Heinberg of Post Carbon Institute puts it:
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