RBI Overheating India’s Economy: On Materialist Greed Fueling Ceaseless Consumerism

A phenomenon as massive as the global coronavirus pandemic, which ran from 2020 to 2022, is bound to have major economic ripple, or wave, effects in its wake. India’s record high 9.2% growth of GNP in the 2023-2024 fiscal year illustrates the robust thrust of pent-up demand met with increased supply. To the extent that consumption over savings is the norm in any economy, a couple years off can subtly recalibrate economic mentalities to a more prudent economic mindset wherein saving money is not so dwarfed by spending it. Moreover, putting the brakes on a consumerist routine and societal norm can theoretically lead to putting the underlying materialism in a relative rather than an absolute position and thus in perspective. Yet such a “resetting” must overcome the knee-jerk instinct of any habit to restart as if there had been no change. Coming back to college, for example, after a summer away, students tend to pick up their respective routines right away as if the recent summer were a distant memory. India’s astonishing rate of economic growth just after the pandemic demonstrates that the penchant for consumerism and economic growth as a maximizing rather than satisficing variable returned as if the steeds in Socrates’ Symposium—only those horses represent garden-variety eros sublimated to love of eternal moral verities, to which Augustine substituted “God.”

The full essay is at "RBI Overheating India's Economy."

GDP Per Capita in the E.U. and U.S.: Changing Perceptions

Historically speaking, the E.U. and U.S. are relatively large in territorial expanse and population, so it is only to be expected that significant economic (and cultural) differences exist from state to state in the respective unions of states. In Europe, some medieval kingdoms have relegated to being but regions in E.U. states. Holland, for instance, is a region in The Netherlands, which in turn is a E.U. state. The same can be said of Bavaria (and England, were the United Kingdom still a E.U. state). To compare the economic inequality in such a region with the inequality in the E.U. (or U.S.) over all would be deeply misleading. For example, rural/urban economic patterns that pertain to an economy containing one major city do not translate into the multiple rural/urban patterns that exist in a modern (empire-scale) union of states. In short, scale matters, especially in how we make use of mathematical averages.  Comparing GDP per capita is a case in point; states should be compared with states.

Although recent studies had suggested that upward mobility was higher in the E.U. than in the U.S., the GDP per capita in the latter was significantly more in the latter than the former. To be sure, the gap is less “when adjusted for purchasing power parity (PPP)—which accounts for cost-of-living differences.”[1] Also, comparing the E.U. and the U.S. misses out on the significant differences between states in each of the empire-scale unions; such differences in turn can be used to compare individual states in one union with individual states in the other.

It is difficult to believe that in “the third quarter of 2024, Mississippi’s GDP per capita was €49,780, just €1,524 less than Germany’s at €51,304.”[2] That the industrial base in the latter state greatly exceeded Mississippi’s industry makes the respective numbers all the more perplexing. Because the E.U. average GDP per capita was €40,060 as compared to the U.S. average of €80,023, a person might begin to wonder whether a false economic-equivalence has pervaded both the American and European general perspectives. Certainly geographically, Americans may be surprised how much smaller Europe is than North America (and, accordingly, the E.U. in relation to the U.S.).  The GDP per capita comparisons may thus be like superimposing geographic maps at the expense of previously-held perspectives and assumptions of equivalence.

This is not to say that every E.U. state was poorer than every U.S. state; Luxembourg’s €125,043 is more than New York’s €107,485.[3] Nevertheless, it is significant that the figures for Germany, France, Italy, and Spain are less than those of West Virginia, Arkansas, Alabama, and South Carolina—each of these being below the U.S. average. It would not be at all surprising to read that these figures are incorrect, but, then again, the generally-held false geographical equivalence that Americans and Europeans naturally hold concerning the E.U. relative to the U.S. may, as a phenomenon of a false assumption of equivalence, exist economically too.

Were I to attempt an explanation—not being an economist—I would want to look at whether the relatively higher tax rates in the E.U. discourage economic activity. I would also want to investigate the extent to which the shorter work-week in Europe may also be a factor in the relatively lower GDP per capita. Furthermore, the relatively generous social policies in many E.U. states may also discourage the long-term unemployed from filling job openings, thus reducing factory efficiency and output and lowering per capita averages. Lastly, I would want to know just how much the different PPPs decrease the gaps of GDP per capita. I suspect, however, that all of these possible factors operate only on the margins, rather than explaining the entirety of the differences, given the magnitudes of the differences. It may simply be that hoch Kultur and the higher population (urban) density in the E.U. carries with it the false assumption that the E.U. must be as economically productive per person as in the U.S.

---

1. Servet Yanatma, “How Do America’s Poorest States Compare to Europe’s Largest Economies,” Euronews.com, January 6, 2025.
2. Ibid.
3. Ibid.

Adding Anti-Trust to Monetary Policy: The Case of Groceries

Monetary inflation is a complex phenomenon. Not only can its causes be several; it can make it more difficult to distinguish immediate and medium-term economic conditions from more long term, or structural changes impacting our species economically.  Of the former, the relationship between inflation and whether the markets are competitive or oligarchic (or even monopolies) can be better understood, and this in term can put us in a better position to assess the impact of longer-term changes, such as those stemming from the huge increase in the population of human beings since before the industrial age. The price of food (i.e., groceries) is a case in point. Specifically, the impact from presumably temporary shocks during the Covid pandemic should be distinguished from the impact of oligopolistic markets in keeping prices high, and of the increase in human mouths more generally (and longer term) representing increased demand for foodstuff in on a relatively fixed planet.

In addition to a spike in the prices of raw materials, or, moreover, factors of production, and a growth in the money supply above the growth in GNP, the gradual consolidation of an industry from market competition to oligopoly and even a monopoly can increase inflation. The consolidation of the U.S. meat-producer market, for example, could be expected to result in higher meat prices at grocery stores. Similarly, barriers to entry facing discount grocery stores could result in food prices staying high even after a temporary increase in factor costs. In short, government action to keep markets competitive or return them to the discipline of competition should go side by side with monetary policy, lest it be assumed that inflation is primarily a result of the growth in the monetary supply. Otherwise, keeping interest rates higher than would otherwise be the case could unnecessarily put a damper on job growth.

In June, 2024, the U.S. official unemployment rate increased to 4.1 percent; the next month, that figure was even high, standing at 4.3 percent. This triggered the “Sahm rule,” according to which “a recession is imminent or underway if the three-month moving average of the unemployment rate rises by 0.5 percentage points or more relative to its prior 12 month low.”[1] The U.S. economy added 114,000, rather than the expected 175,000 jobs in July, and some people were nervous that a recession might be on the way.[2]

Accordingly, U.S. Sen. Elizabeth Warren wrote, “Fed Chair Powell made a serious mistake not cutting interest rates. . . . He’s been warned over and over again that waiting too long risks driving the economy into a ditch. The jobs data is flashing red.”[3] The Fed kept the interest rate in place in order to fight inflation even though 4.3 percent is above the acceptable range for unemployment according to the Fed. In fact, Austan Goolsbee, President of the Chicago Federal Reserve, said at the time that 4.3 percent was something the Fed “has to respond to” by cutting interest rates.[4] Besides, he added, the “trends show inflation coming down across the board, multiple months in a row” as the labor market was cooling.[5]

Anyone shopping in a grocery store, however, would beg to differ, however, as the rise in food prices during the Coronavirus pandemic had not come down after the shocks, which included shipping as well as hoarding, had ended following the pandemic. Meat prices in particular had stayed very high even though such levels would be expected to attract new suppliers (or more supply) in a competitive market. But the meat-producer industry had been consolidating so a few large companies could essentially dictate prices to grocery stores, a related industry that had itself become oligopolistic. That the discount chain, Aldi, was not in the San Francisco region of California, for example, even in 2024 while Safeway and Whole Foods kept prices high suggests that the competitive mechanism, which protects consumers from the excessive greed of producers unrestrained by market discipline, was not working, for the basic logic of market competition holds that higher prices (and profits) attracts new producers such that supply increases and prices fall rather than stay high unless the cost of a factor of production has increased and stayed high.

To be sure, limits to the supply of food (and the cost of fuel for shipping) could be expected to become more salient as the human population level continues to increase dramatically. Whereas the 20^th century had begun with about 2 billion human beings on the planet, the 21^st century mark stood at 6 billion; by just 2023, that number had increased to 8 billion. At some point, the Earth’s agricultural potential being relatively fixed, could be expected to run up against increased demand for food. The common experience of having to pay more for groceries during and even after the pandemic due to temporary shocks and the lack of competition that would otherwise increase supply and thus reduce prices could be just a taste of what humans could expect in the 22^nd century.

That a species’ population can increase beyond its ability to feed itself was posited by Thomas Malthus (1766-1834) in An Essay on the Principle of Population, published in 1798. The theological significance alone was startling, as the possibility threw off the notion that God had designed Creation and so the existence of God could be inferred from the excellence of the design found in nature itself. Malthus also claimed that famine, war, or disease is nature’s means of naturally correcting a schizogenic (i.e., maximizing) population, and subjecting the creatures who are in God’s image to such hardship hardly seems like part of the design of an omnibenevolent deity.

Therefore, the mechanism of a competitive market assumes not only lower barriers to entry, but also the capacity for increased supply when prices are relatively high, and this second assumption may be increasingly untenable as our species continues to grow while the natural resources of Earth remain relatively fixed, allowing of course for efficiency gains from technological advances. At the very least, from this macro perspective, governments should not shy away from enacting and enforcing anti-trust mechanisms so prices reflect not only demand, but also whatever supply is possible, given the Earth’s natural resources, especially in terms of energy and food (and also housing). Moreover, concurrent and sustained increases in several industries oriented to human sustenance ought to be especially concerning regarding toll from both uncompetitive markets and our species’ growth.

---

1. Alicia Wallace et al, “Markets End the Day Sharply Lower . . . “ CNN.com, August 2, 2024.
2. David Goldman, “Elizabeth Warren: The Fed Made ‘a Serious Mistake,” CNN.com, August 2, 2024.
3. Ibid.
4. Ibid.
5. Ibid.

Anticipating a Recession: Economic and Political Indicators in the E.U.

Anticipation in August, 2019, at least among bond purchasers on Wall Street, of an impending recession in 2020 had at least in part to do with the E.U. In particular, a large state, Germany, had a disappointing second quarter in terms of contracting economic output, and the increasing prospect of Britain seceding from the Union was thought to result in the E.U. economy turning recessionary. I contend that both of these baleful indicators were over-emphasized. Additionally, adding the increasing political polarization in the E.U. as another contributor to an upcoming recession would be too much.

Germany’s economy contracted just 0.1% from the 0.4% growth rate of the first quarter.[1] Placing such emphasis on a change from 0.4 to 0.3 might strike some people as being petty. Yet Carsten Brzeski, chief economist in Germany of the Dutch bank ING said at the time, “Today’s GDP report definitely marks the end of a golden decade for the German economy.”[2] A 0.1% change ends a golden decade. How fragile golden decades must be!

To be sure, “industrial output for June dropped over 5% compared to the previous year. And the ZEW indicator of economic sentiment for August plunged sharply, hitting its lowest level since December 2011.”[3] Brzeski pointed to increased uncertainty from a large state seceding from the E.U. and the U.S.-China trade negotiations as the main culprit. Whereas the British economy would likely be negatively affected in the scenario of secession without coordination, the argument that the E.U. economy would contract as a result is more tenuous. Even if the British economy of a fully sovereign U.K. were to falter, the E.U. economy, being, like that of the U.S., made up of state economies, would hopefully be able to absorb interruptions in trade with Britain. Moreover, the empire-scale of the E.U. (and U.S.) is, as a cluster, much larger than the state-scale of political entities within the empire-scale union.[4]  Baleful economic predictions in 2019 for the E.U. post-secession may have been exaggerated in part due to conflating the two political scales. References to Britain’s “divorce” from the E.U. serve as perfect examples of the category-mistake. No, Virginia, the U.K. is not another E.U.; rather, pre-secession Britain was/is a political sub-unit in the E.U., whose laws and court (ECJ) trump(ed) British law and courts.

The pre-secession trend of business moving from the state of the U.K. to other states may suggest that the E.U. economy would actually benefit from a “no deal” secession. Furthermore, the E.U. trades with other countries, so disruption in trade with a former state could be viewed relatively and thus seen as less baleful for the Union than some economic forecasters were predicting in 2019.

More crucial to the E.U., and less to its economy, were “insurgent movements from the anticapitalist far-left to the nativist far-right,” which have “made inroads” amid “eroding public confidence in mainstream conservative and social-democratic parties that for decades” had dominated at the state level.[5] Although it is tempting to label all this as political instability, the political institutions have funneled even parties like the 5 Star party, which came out of anti-corruption protests, into the nitty-gritty of coalition talks.

Even the political tensions in 2018 between the state government of Italy and the federal E.U. level, which “upset investors in Italian bonds and banks, hurting the flow of credit,” and the collapse of the governing coalition in 2019, which drive some investors into bonds, were not economic crises for the E.U. economy as a whole. Politically, however, Matteo Salvini of the League Party in Italy, could already be viewed as potentially damaging the E.U. federal system. He “challenged” the E.U. law on fiscal discipline for state governments, accusing the states of Germany and France of hypocritically getting away with exceeding the limits on state debt and deficits while the E.U. imposed austerity on the Italian government. His complaint was valid enough. On August 20, 2019, he repeated he would defy federal authorities on the tax-increase (rather than a decrease!) part of the austerity fiscal-discipline federal mandate.

In the early 1830’s, U.S. President Andrew Jackson was forced to deal with South Carolina’s Nullification Acts, which stipulated that the state government could defy federal law regarding laws that the state deems are detrimental to South Carolina. Jackson was aware that a federal system in which governmental sovereignty is split, as in the U.S. and E.U., cannot long survive when even just one state government can decide to defy federal law. So the political uncertainty regarding the growing power of the political extremes in the E.U. has primarily political implications. To put the economics before the political in such a case represents yet another over-statement of the economic. Politics does not reduce to economics. Although the former can obviously affect the latter, one of the domains should not be put foremost in the domain of the other. My thinking on political uncertainty is that its economic effects tend to be overstated. Even in political terms, political institutions have shown a remarkable ability to funnel, or normalize, what was once raw political conflict.

Related: Skip Worden, Essays on the E.U. Political Economy: Federalism and the Debt Crisis. Available at Amazon.

---

[1] Julia Horowitz, “German Economy Shrinks as ‘Golden Decade’ Comes to an End,” CNN.com, August 14, 2019.

[2] Ibid.

[3] Ibid.

[4] Skip Worden, British Colonies Forge an American Empire: A Basis for Trans-Atlantic Comparisons. Available at Amazon.

[5] Marcus Walker, “Italy’s Government Collapse Sets Up a Power Struggle,” The Wall Street Journal, August 21, 2019.

Pruning Back an Ideological "Re-Definition" of Socialism

Should language lose its integrity for ideological purposes? On Fox News in the wake of the passage of Obamacare, Brit Hume and Newt Gingrich, a former Speaker of the U.S. House of Representatives, both (re)defined socialism as “government control of private property.” Their rendering falls short, however. According to the Random House Dictionary (via Dictionary.com), socialism is “a theory or system of social organization that advocates the vesting of the ownership and control of the means of production and distribution, of capital, land, etc., in the community as a whole” (italics added). Whereas government regulation of privately-owned means of production and distribution involves some of the control being in the hands of the community as a whole through its government, socialism includes the vesting of both ownership and control with the government. 
Hume and Gingrich doubtless believed that words can be redefined to suit ideological objectives. Public discourse is difficult enough in a democracy. The dialogue "across the aisle" becomes more difficult when one or both sides decide that language can (and even should!) be subordinated to ideology to the extent that dictionary definitions (and common usages) are presumed to be changeable simply by applying a new meaning to the words on the public airwaves or speeches. Ideologically akin people will doubtlessly follow along, and soon the word has a meaning that contradicts the dictionary definition.  
Going further, to intentionally scare people by redefining a word in such a way that the word appears worse than it actually is nothing short of misleading manipulation. Even in such a case, not even the opposing partisans alert the people through the media or speeches that X means Y rather than Z according to dictionary definitions. No one stands up for language, so ideology can have its way and prey on words.
If government control via regulation is not convenient to the business sector and its advocates, what about government ownership without control! As per the definition of socialism, government ownership without formal control does not constitute socialist enterprise. Ownership and control can indeed be separated. Bearle and Means, in their classic treatise, The Modern Corporation and Private Property, point to the separation in modern large corporations, wherein stockholders as a group are the owners and control is maintained by managers. Theoretically, a government could own a company that is controlled by its management. Perhaps public policy would be served by the ownership alone, or the managers could have taken de facto control away from the government officials.
Therefore, the definition of socialism is more delimited than typically thought. To be sure, the meaning of words can change naturally, but such shifts are gradual as per changing times and thus uses, rather than sudden, as from being artificially interlarded for short-term political use. In the case of socialism, the term has historically applied to an entire economic system, such as those of the U.S.S. R. and China before capitalism made such inroads. A person would not say that healthcare is socialism, or even that taxes are socialistic. In Arizona, the dominant ideology has viewed taxes as theft.
With the fall of the command-and-control economic systems of the U.S.S.R. and China, socialism has come to be increasingly applied to governments owning and controlling particular enterprises rather than every means of production and distribution. Hence a capitalist economic system can contain socialist enterprises. For example, the Green Bay Packers’ football team in Wisconsin has been socialist because the citizens of the Green Bay together have owned the team. The community need not transfer ownership formally to a government for an enterprise to be socialistic. So too has the China National Tobacco Corp. 
In short, socialism can be distinguished from government regulation of privately-owned economic enterprise. Conflating the two by effectively redefining the word, socialism, muddies the public discourse and sows confusion, neither of which is helpful to viable republic. Furthermore, socialism can be applied to particular enterprises as well as to an entire economy whose means of production and distribution are owned and controlled by the community as a whole (often through its government). The application to particular enterprises does not reduce socialism to control alone. 

Exaggeration on the U.S. Economy “Going Over the Cliff” after the Financial Crisis of 2008

As the U.S. Government faced down its own deadline in 2012 before the Bush tax cuts would expire and across-the-board budget cuts would commence, the Federal Reserve, which had been struggling to prop up the economy by buying bonds and keeping interest rates low, would, according to the Chairman, Ben Bernanke, be largely powerless to do more in the face of a recessionary policy on taxes and spending. "We cannot offset the full impact of the fiscal cliff," he said of the Fed. "It's just too big." That he had written a doctoral dissertation on the Great Depression and had specialized on it as a professor at Princeton lends a lot of weight to his judgment on the matter. However, he had also managed to be re-appointed to the Fed and thus knew how to play the game. In the case of the automatic budget cuts, major power-brokers, specifically in the military industrial complex, had a lot riding on Congress and the White House making a deal that would obviate the cuts in defense spending. The chairman of the Fed could have been carrying their water.

Ben Bernanke, Chairman of the Federal Reserve, in front of the lights.   Reuters

In September 2012, Bernanke had announced an open-ended mortgage-backed-security purchasing program that would put $40 billion a month into the economy. At the time, he said, “If we do not see substantial improvement in the outlook for the labor market, we will continue the MBS purchase program, undertake additional asset purchases, and employ our policy tools as appropriate until we do. We will be looking for the sort of broad-based growth in jobs and economic activity that generally signal sustained improvement in labor market conditions and declining unemployment.” Presumably the Fed would continue the mortgage-bond purchases were the automatic budget cuts and end of the Bush tax breaks to forestall a “broad-based growth in jobs and economic activity.”

In terms of economic impact, a stimulus of $40 billion a month, or $480 billion annually, would just about match the anticipated $500 billion hit from the “cliff.” How is it then, that the latter is “just too big”? Were the $480 billion insufficient, the Fed would be free to increase its purchases.  Time magazine describes the stimulus mechanism as follows: “Open-ended purchases of mortgages will have the effect of lowering interest rates, helping more people qualify for mortgages or refinance. But more importantly it will — in theory — have the effect of creating an expectation of generally higher asset prices in the future, which will motivate people to get off their duffs and spend money now. If companies and individuals are indeed convinced that prices will rise in the future, that would encourage them to spend, hire, and jump-start the economy out of its chronic underperformance.” Whereas monetary policy was contracted in response to the Great Depression, the scholar of that mistake could presumably do the opposite should we—in his words, “go over the cliff.” His $480 billion mountain of money could turn his $500 billion cliff into a mere bump.

To be sure, purchasing mortgage-bonds can only do so much. As David Dayen of Firedoglake argues, there’s only so much the lifting of asset prices can do without appropriate fiscal policy to accompany it: “(Y)ou have to question the role of monetary actions by themselves to generate an economic boost, especially at this time. Lower mortgage rates may or may not prove helpful . . . without fiscal stimulus and a reversal of the current trajectory of deficit reduction, we will never get to the desired trend for growth.” However, the Fed could presumably buy up more than mortgage-bonds, freeing banks up to lend more in the process.

Most telling is Bernanke’s claim that the Fed could not increase its stimulus enough to counter the anticipated $500 billion hit from sequestration and the end of the Bush tax breaks—and yet the Fed was already on record that it would spend $480 billion in 2013 unless the economy improved in the meantime. His inflexibility seems arbitrary, or dogmatic, in other words, given what the Fed can do, and this leads me to the alternative explanation that the chairman was actually doing someone else’s bidding rather than proffering a judgment steeped in decades of study. The real task would be one of locating the real power-brokers whose financial interests were so threatened.

Whereas the expiration of the Bush tax cuts and cutting entitlement programs had been perennially on the block for years, the sacred-cow of defense spending was all of a sudden susceptible as well. Hence, I believe, all the dire doomsday warnings coming out of Washington to the contrary, the pressure on a political deal was oriented to protecting the status quo of the military-industrial complex rather than obviating certain economic collapse. That is, even more fundamental than the interest of politicians and the media to over-dramatize “going over the cliff” in order to gain attention, the subterranean financial interest of the American military-industrial complex may have been pulling many strings—many puppets—to veer the debate toward a deal. Even as the major players on stage were posturing, a two-step could have been going on behind the scenes—dancing around the sacred cows. Perhaps the real news behind the Bernanke’s warning is that even the “non-politicized” central bank was “doing the dance.”

Sources:

John Cushman, “To Bernanke, ‘Cliff’ Says It All” The New York Times, December 12, 2012.

Christopher Matthews, “Ben Bernanke’s Heavy Artillery: Will Open-Ended Bond Buying Drive Down Unemployment?” Time, September 14, 2012.

On the Danger to the United States of Living off Government Debt: The Case of the Dollar as World Reserve in 2010

Given the $13 trillion of U.S. Government debt in 2010, the dollar was losing out at the time in percentage terms to other currencies as the global reserve currency. To be sure, in absolute terms, there were still more dollars being held abroad than twenty or thirty years earlier, but as a report from Emma Lawson of Morgan Stanley showed, other currencies were taking on more of a relative presence. The lesson concerning excessive public debt was not grasped at least through the 2010's, as the debt continued to increase trillions of dollars more.

The Euro had been making the greatest strides in percentage terms, particularly in 2002. The slight downturn in 2009 might have reflected the impact of the financial crisis of 2008 in Europe, though the Greek debt issue had not yet reached a boil (it would be interesting to see the figures from 2010).  In any case, the dramatic drop in the dollar’s percentage terms also came in 2002, before the Iraq war and the bank bailout spending (i.e., the $13 tillion dollar debt). The drop could have been in reaction to September 11, 2001, though it would seem an exaggeration even then to say that the US financial system would be undone by the attack.  Even so, as we know from 2008, irrational exuberance can take hold in even a global market. We ought nevertheless not lose sight of the fact that the number of dollars held in reserves around the world increased. The pie got bigger, and even though the dollar piece became larger, it was a smaller proportion of the pie in 2010.  Even so, the $13 tillion in US Treasury debt, the decision of the Chinese to allow their currency to appreciate to a limited extent, Russia’s call for a mix of global reserve currencies, and the EU’s bailout of the Greek bonds all pointed to trouble for the US dollar as “the” reserve currency. Also troubling was the UN report at the end of June, 2010, which urged that the US dollar is no longer stable enough to be the world’s reserve currency. Ouch! The dollar slid %5 in June. Fortune reports that central banks had been preferring gold to the greenback.

Lawson believed that  ”over time we anticipate that reserve managers may reduce their holdings further.” She is looking at the significance of small percent changes over a short time—and this I see as perhaps susceptable to overblowing small trends. For example, she found that central banks had dropped their allocation to U.S. dollars by nearly a full percentage point to 57.3% from 58.1%, and calls this “unexpected given the global environment.” But was such a change, relative to those shown in the chart, really significant? She argued that other dollars - the kind that come from Australia and Canada - had been benefiting from skiddishness on the dollar. The allocation to those currencies, which fall under “other” in the data, rose by a full percentage point to 8.5%, accounting almost exactly for the drop in the U.S. dollar allocation. She was undoubtedly assuming that the trend would continue, but a look at the chart can demonstrate that even the dramatic changes in 2002 had not continued at such a rate (e.g., for the euro and the US dollar). 

Even so, Treasury’s huge debt could not but undermine the US dollar over the long term. This point ought not to be minimized or ignored under the fiscal pressure to push the US economy out of recession. Even if the US did not admit that the debtload was too high to be paid down one day (the debt then approaching the annual GNP of the US), the market rendered its verdict. Relative the huge debt facing the US dollar (and remember there are huge state debts, such as in California, Illinois and Florida!), the “crisis” facing the euro in 2010 paled in comparison.  As of mid 2010, the euro was still over $1.20. Years earlier, it had been at parity. The media frenzy on Greece's debt in 2010 ought therefore to be put into some kind of perspective, and the impact of the dollar’s public debt not be lost. 

It’s not clear to me that the human mind can conceptualize a trillion, not to mention thirteen of them. Yet we glide over the public debts in the US as though they were sustainable. If the US falls, it will be from within--from consolidation at the empire-level.  Such a fall will likely come as a surprise to most Americans, who in being oriented to external threats tend to miss the gravity of the black hole amassing under our very noses.  To be sure, the additional debt enables us to live beyond our means as a society, and such a condition can be very addictive.  Perhaps the parallel question for us to reflect on is whether Rome fell from within or simply from the Goths.

Sources:

 http://www.businessinsider.com/morgan-stanley-dollar-euro-reserve-holdings-2010-7#ixzz0tBDYFjMd

 http://wallstreet.blogs.fortune.cnn.com/2010/07/09/central-banks-start-to-abandon-the-u-s-dollar/

The Saudi Crackdown: A Cause for Market Confidence

The Saudi government sought to confiscate cash and other assets worth as much as $800 billion in ostensibly cracking down on corruption in late 2017. More than 60 princes, officials, and business practitioners were initially detained. Both the figure and the number of arrests reflect merely “the initial stages” of asset seizures and arrests, according to a Saudi spokesman.[1] It was not long before 500 had been detained.[2] I submit that both the swiftness and scope left international investors and foreign businesses in Saudi Arabia unnecessarily rattled. Doubtless uncertainty as to the real reason for the crackdown unnerved the business elite. Corruption was endemic in the Saudi political economy, so the sudden need to crack down on it understandably left people to wonder as to the real reason, which, as it turns out, was nothing for business to fear.

The first point to make regards the spuriousness of the prime facie anti-corruption motive. At the time, Saudi laws “included little or no regulation of the sprawling royal family and its closest clients.”[3] For example, a major Saudi investment firm founded by one of King Salmon’s sons and then chaired by another owned “a significant stake in a conglomerate” that did “extensive government business.”[4] Indeed, princes “were known for borrowing money and simply never paying it back, which nearly led to the collapse of the National Commercial Bank.”[5] Prince Alwaleed bin Talal, curiously one of the detainees, told the American ambassador in 1996 that a handful of senior princes controlled billions of dollars in off-budget programs.”[6] Bringing about accountability in princely self-aggrandizement at the expense of the government can only be an oxymoron when said government belongs to the royal family. To apply democratic accountability would only be to demonstrate a foreigner’s base ignorance of the Saudi political economy.

The New York Times observed at the time that “if corruption is defined as private profit at the public expense, the practice is so pervasive that any measures short of revolutionary change may appear to be selective prosecution.”[7] Such change was clearly not in the cards. Doubtless the Crown Prince, who headed the anti-corruption force, shielded his allies and supporters and took advantage of the opportunity to take some detractors out of play, but his motive likely went beyond merely consolidating power, given the precariousness of the economy’s oil-dependency in the twenty-first century amid global calls for lower use of fossil fuels. Indeed, being dependent on any industry is not sound economic practice for any government or ruling family.

Crown Prince Mohammed bin Salman said that going after corruption at the highest level would be necessary to moving the Saudi economy off its dependence on oil, but the pervasiveness of “unlawful gain”—as if the law touched the royal family—undermines the claim. Were the Crown Prince determined to rid the political economy of corruption, an entirely new system would be needed; such a prospect would indeed legitimately raise caution-flags among investors and businesses, but they needn’t have worried as corruption itself was still safe in Saudi Arabia given the continuance of the royal family as the economic and political sovereign.

The riddle as to the actual motive is solved once it is realized that the assets seized would go to the state, and thus be available for investment to diversify the economy. The prolonged period of low oil prices had “forced the government to borrow money on the international bond market and to draw extensively from foreign reserves, which dropped from $730 billion at their peak in 2014 to $487.6 billion in August” 2017.[8] Eurasia Group, a political risk advisory firm, claimed that the crown prince needed “cash to fund the government’s investment plans.”[9] Like other countries in the Middle East, Saudi Arabia was facing time pressure to diversity economically while oil-money could still make it possible. The low oil prices simply meant that more than on-going oil revenue would be needed. So rather than being spooked by the uncertainty unleashed in the dramatic crackdown, investors and business practitioners having an interest in the Saudi economy should have felt more secure, for a diversified economy enhances stability for the long term.

---

[1]Margherita Stancati, “Saudis Target Up to $800 Billion in Assets,” The Wall Street Journal, November 8, 2017.

[2] Nicholas Kulish and David Kirkpatrick, “Arrests Reveal Blending of Kin and Kingdom,” The New York Times, November 8, 2017.

[3] Ibid.

[4] Ibid.

[5] Ibid.

[6] Ibid.

[7] Ibid.

[8]Margherita Stancati, “Saudis Target Up to $800 Billion in Assets,” The Wall Street Journal, November 8, 2017.

[9] Ibid.

The Keynesian Drug: America’s Achilles' Heel

Keynes posited that government deficit-spending could boost an economy’s output of goods and services when it is short of full-employment. In the context of an economy near full-steam, tax cuts and/or more government spending could trigger inflation while adding little to GDP. To maintain balance in the government accounts, government surpluses during the ensuing upswing are used to pay off the accumulated debt. This is the theory. Unfortunately, it seems to be at odds with representative democracy. Specifically, a systemic bias exists in favor of recurrent deficits, and thus accumulating debt.

As one example, the surpluses in the U.S. Government in the late 1990s were not devoted entirely to debt reduction; even if they had been, the debt would not have been wiped out, given the economic downturn in 2001. Clinton’s assumption of 15 years of surpluses turned out to be wildly idealistic, and his decision to spend portions of the surpluses in the late 1990s imprudent. Besides the natural human preference for immediate gratification over paying down debt and the associated enabling by elected representatives who are easily distracted by other goals, the tendency of an economy to stay well below full-employment means deficits will continue to be called for more often than surpluses. In other words, on economic terms alone, Keynesianism is inherently unbalanced, and political dynamics rooted in human nature extenuate the imbalance.

The propensity of government officials to supervene other agenda items such as “size of government” and “jobs” in the face of deficits over $1 trillion and an accumulated debt of over $14 trillion boggles the mind. To be sure, those other items are important; but if they are allowed to eclipse or block the achievement of fiscal balance, it can be asked whether a people (and elected representatives) are sufficiently mature for to manage public debt.

For example, referring to the two-year extension of the Bush tax cuts in 2010 in the midst of a huge deficit (and accumulated debt), Alan Simpson (WY-R) bemoaned, "It's a great disappointment, a tremendous disappointment, because—what is it, $858 billion in two years added to the deficit? I mean, that just breaks your heart. What the hell do you think we've been talking about?" The former U.S. Senator was pointing to the immaturity involved in placing other priorities, even his own (i.e., smaller government), above reducing deficits running over $1 trillion and a debt of over $14 trillion. He was being an adult, bracketing other priorities dear to him while talking to irresponsible children who ought not be allowed to play with debt, especially when it is at a dangerous level.

Speaking on the possibility of the Chinese pulling out as a creditor of the U.S. Government Treasury bonds, Alan Simpson warns, "It will be precipitous. It won't be six months, might not even be six weeks. It might be six days when they suddenly start the flight. And I know how bankers are: once the flight starts, and the money and rumors, it'll be fast and difficult. . . . We don't know the tipping point. But the tipping point will come if you fail to address the long-term problem of debt, deficit, and interest." Given this danger, it is foolish, in other words, not to throw everything we have—including more revenue and lower spending—at the problem and then debate jobs and the size of government later.

In short, the American people ought to stay away from the Keynesian drug—finding a better way—or we must enact mechanisms by which we will enforce fiscal balance on ourselves. A balanced budget amendment would disallow Keynesianism rather than apply balance by limiting deficits to what a government stipulates itself to paying off in a few years’ time.

Even if modern Americans are in a convenient denial, the Anti-federalists saw the danger in sustained government borrowing (and the possibility of an associated increase in the U.S. Government’s power). Brutus (p. 151), for example, observes: “The power to borrow money is general and unlimited . . . By this means, they may create a national debt, so large, as to exceed the ability of the country ever to sink. I can scarcely contemplate a greater calamity that could befal this country, than to be loaded with a debt exceeding their ability ever to discharge. If this be a just remark, it is unwise and improvident to vest in the general government a power to borrow at discretion, without any limitation or restriction. (I)t would certainly have been a wise provision in this constitution, to have made it necessary that two thirds of the members should assent to borrowing money—when the necessity was indispensible, this assent would always be given, and in no other cause ought it to be.” War stemming from being invaded is likely what Brutus was thinking of—rather than stimulating the economy. Lest it be assumed that the latter would necessarily be excluded, two-thirds of the U.S. House members and U.S. Senators could vote for borrowing to stimulate the economy to create jobs that are necessary. To be sure, the likelihood of such a vote would be less than under the hurdle of a mere majority, but Keynesianism would not be theoretically excluded. The matter of enforcing balance in using the Keynesian drug is difficult in terms of design because of the gravity of the addiction and the associated enabling rationalization of slippage.

Sources:

Brutus, Letter 8, January 10, 1788, 2.9.95, in Herbert J. Storing, ed., The Anti-Federalist, (Chicago: University of Chicago Press, 1985).

Alan Simpson, Newsweek, December 27, 2010, p. 28.

The Spanish Recovery: On the Roles of Budget Constraints and Exports

In 2007, the E.U. state of Spain “was hopelessly addicted to a credit-fueled construction boom that produced a shattering bust, leaving banks collapsing in the face of bad loans.”[1] A decade later, the state’s economy was “expanding at around 3 percent” over the previous year, “producing goods for export, generating jobs,” and pointing to possible E.U.-wide economic recovery.[2] The Spanish economy had returned to its pre-crisis size, according to the state’s government, yet the economy had not yet solidified a firm foundation and unemployment was still stubbornly high.

Although the credit-based building boom was doubtlessly not sustainable and fraught with risk, the ensuing budget austerity mandated at the federal level inhibited the state’s government from spending more money “on infrastructure projects to generate jobs.”[3] Contracting government spending exacerbates rather than ameliorates an economic downturn, even if deficits go up. The federal law on state deficits being at or below 3.5% of a state’s GDP did not have enough flexibility for the Spanish government to be able to minimize the period of the downturn. 

Hence, The New York Times concluded at the time of the recovery, “Spain’s resurgence is less cause for celebration than a grim reminder of how long it took.”[4] That is to say, the steep unemployment level, which had reached 25 percent, need not have endured as long as it did. Even in 2017, the unemployment rate remained above 18 percent (near 39 percent for the state’s youth).[5] 

It is difficult, therefore, to see even a return to the size of the economy before the debt-crisis as a recovery. To be sure, exports had grown “to close to one-third from about one-fourth of the economy,” and such an economic engine is clearly more stable than an over-leveraged construction-led economy.[6] An economy fueled by consumption-buying from within would be more stable still, however, and the stubbornly high unemployment rate attests to why such a solid foundation had not yet materialized. Even though the large SEAT auto-factory put €3.3 billion (about $3.8 billion) of new machinery into the operations, relying on one company for the surge in exports is not as solid as a diversified export-base.

To be sure, the increasing tax revenue in the state, albeit very modestly, enabled more money to flow back into the economy. Work on the long-planned expansion of the Barcelona subway system, a €6.8 billion project, had resumed. Yet such an infusion was needed especially during the crisis and in the ensuing years of extremely high unemployment.  The inflexible federal strictures of budget discipline did not allow for such counter-cyclical measures even in a rather extreme cyclical downturn.

Related: See Essays on the E.U. Political Economy, available in print and as an ebook at Amazon.com.

---

[1] Peter S. Goodman, “Spain’s Long Economic Nightmare Is Finally Over,” The New York Times, July 28, 2017.

[2] Ibid.

[3] Ibid.

[4] Ibid.

[5] Ibid.

[6] Ibid.

Global Geopolitical Risks: Is Wall Street Hypersensitive and Reductionistic?

The Dow dropped 140 points in August 5, 2014 on a rumor that the Russian military is about to invade eastern Ukraine. Three days later, amid hints of de-escalation and the end of troop “exercises” on the Ukraine border, the Dow gained 186 points. Three days later, as Russia’s president approves a deal wherein the Russian OAO Rosneft and the American ExxonMobil can begin drilling a $700 million well in the Arctic Ocean, the Dow gains 16 points.[1] Are stock analysts and Wall Street investors really so hypersensitive to day-to-day changes in geopolitical risk? It may be simply that such news sells.

Just because to events are correlated in that they both occur at the same time does not necessarily mean that one caused the other.  According to the eighteenth-century philosopher David Hume, we think we have a better grasp on causation than we actually do. In the case of positive correlation between two events, a third one could be behind both—rather than one of the correlated events causing the other. In general terms, causation may be much more complex than the human brain is naturally inclined to accept.

In the case of the changes in the Dow cited above, many analysts held at the time that a “plunge in geopolitical risks related to the Ukraine-Russia crisis leads to a rally in U.S. stock prices.” Yet how “micro” can we take such a change to be? Do rumors and hints coming out of Moscow really have such power to reverberate throughout Wall Street? If so, stock analysts and investors may have a proclivity to minimize or simply not see the tremendous inertia that the geopolitical status quo enjoys. To be sure, significant events do happen. A century before, on August 4, 1914, Britain entered World War I, the war to end all wars only to prompt Adolf Hitler into political action.

Additionally, analysts may be inclined to develop an “either/or” perceptual framework that ignores the gray areas in sizing up the relative importance of multiple geopolitical hot spots around the world. Some analysts dismissed the negative impact of the escalating fighting in Iraq and Israel even as the American press was full-blown into yet another obsession on them. The Markets in New York and Illinois may indeed have been “shrugging off” the detrimental impacts of the American bombing in Iraq and Israel’s in Gaza because the Middle East as USA Today reported at the time. Yet even though Russia can have a clear economic impact on Europe, which in turn could hamper the American economy, neither the E.U. nor U.S. is indifferent to possible impediments to oil coming out of the Middle East. Russ Koesterich, the chief investment strategist at BlackRock, said as much in maintaining that the American markets would be higher if it weren’t for the increase in geopolitical risk in the Middle East.

Interestingly, however, Koesterich also stressed that “other issues are also weighing on stocks, including elevated valuations in the U.S. market, renewed economic weakness in Europe, concerns about an earlier-than-expected interest rate hike by the Federal Reserve and recent weakness in the high-yield bond market.” It is easier to reduce the cause to one, and point the finger squarely at the particular military conflagration having the most direct line, or seemingly so, to the economies in the West, than to go back to the hackneyed, even banal, myriad of domestic usual suspects. The human brain yearns for simplicity even when the actual causation process is more complicated, and the media dutifully comply.

---

[1] All quotes are from Adam Shell, “If Russia Sneezes, Wall St. Gets a Cold,” USA Today, August 12, 2014.

Weening Businesses off Debt: A Difficult Recovery?

We might view the recovery from the financial crisis of 2008 as a systemic correction in which managers were weened off their reliance (i.e., addition) on debt. Of course, the key lies in holding to the correction rather than falling off the wagon. Perhaps there should be an AA for debt-ridden businesses.

The near credit-freeze that came to a head in September of 2008 meant that even in the ensuing recovery, managers at American companies would be hesitant to spend their companies’ cash reserves. $838 billion for S & P’s 500 Index in March, 2010, was up 26% from March, 2009. Accordingly, managers have been hesitant to hire. From late 2007 to late 2009, payroll employment dropped by nearly 8.4 million by July, 2010; only 11% of the lost jobs were regained.[1] 

Robert Gordon, an economist at Northwestern University, points to the shift in executive compensation more in the direction of stock options. This arrangement gives managers more incentive to cut costs more in recessions and hold off in hiring in recoveries so that profits might surge first. However, one could point to the mandatory delay stipulated in some executive’s options to buy stock as giving them an incentive to look to the longer term.  Lynn Reaser, another economist, points to the lack of available external credit even more than a year after the financial crisis of 2008. She argues that managers conserved cash because they couldn’t rely on outside financing. 

However, firms like Apple, Yahoo, and Google are debtless and doing very well, so I would question the premise that outside credit is something to be desired.  Managers betting on leverage typically allow their irrational exuberance to distort their debt-to-assets and debt-to-profit benchmarks. If managers have become more averse to debt, maintaining higher cash reserves is not a bad thing, even when little interest is made on the cash. Once the new level is achieved, then only replenishments would be needed, so the diminishment of a firm’s investing in equipment or new hires would be temporary—to build the reserves and then to keep them stocked.  Drawing on their firm’s cash reserves rather than asking a bank for a loan or selling bonds proffers more freedom and self-reliance—qualities that are valuable even though they are difficult to quantify.  

1. Robert J. Samuelson, “The Big Hiring-Freeze,” Newsweek (August 2, 2010), p. 26.