Malaise in Globalization
Updated comment: March/09/2009
Go to : How the economy was lost by Paul Craig Roberts, Assistant Secretary of the Treasury during President Reagan's first term.
Updated comment: January/16/2009
The President Obama’s stimulus package accounts for $825 billion and includes $550 billion in spending and $275 billion in tax cuts. It is said that the plan would create 4 million jobs (First it was 2 million, then 3 million and now 4 million. By February, it will go to 8 million!). Clearly, Obama wants to get the support of the Republicans (tax cuts), the Democrats (social spending) and the ecologist (green energies). In fact, this politician patchwork is going nowhere: most of investments will have a very low capital output ratio. Moreover, tax cuts and social spending will not increase the consumption because the people are eager to pay debts or to save. This plan cannot avoid a new great depression.
Instead of a recession, we shall endure a new great depression and maybe something that we have never imagined. It is not cyclical crisis. The long run causes show that it is a structural crisis. In short, let us compare our globalized economy with a car. In theory, the car was very good. Unfortunately, the driver modified the motor and ran too fast on a bad road. Then, the car crashed into a tree. This dreadful accident corresponds to the new great depression.
We are facing a situation that prevents any recovery . On the side of the global demand, we may expect a deflation of the consumers’ prices. On the side of inputs, we shall see a constant increase of the costs because of scarcity. Whatever the fall of the demand, the producers will not sell below their marginal cost and will reduce their production (OPEP notably). As a result, there will be no margin for a recovery. It could be an endless depression with unpredictable social and political consequences.
Therefore, we suggest three solutions:
1-We recommend the launching of a scientific “ Manhattan project” in order to ban scarcity on major inputs.
2- We advocate for a limited and intensified globalization through a common market including north America, the European Union and eastern Europe.. On the other hand, a tariff wall will protect this great market against relocations, immigration and unsafe goods. This reform will raise the global demand.
3- As the Islamic countries use terrorism, we suggest to confiscate their oil and gas fields. An international consortium will exploit the resource and sell it at low prices. This policy will give us enough time to develop technologies in accordance with the fist proposal.
We displayed the root causes of the financial crisis in a previous survey (go to financial crisis ): instead of dealing with macroeconomic imbalances, the US business has used immigration to pressure the wages of the native labor force. Since such a policy could restrict the consumption and the growth, the government has favored a massive indebtedness to compensate the stagnation of wages. Once the market turned down, the entire building collapsed and led to a financial crisis.
This financial crisis is only a symptom. We posit that the coming great depression is also the result of geopolitical challenges. It means that we must enlarge the search of the long-term causes outside the economic domain.
Another point about the methodology: today, many people establish some parallels with 1930. Sure, the 1929 crash marked an end to a credit boom. In 1930, as now, banks failed under the bad debts. As a result, the GDP plummeted (Index 100 in 1929 and 56 in 1933), unemployment attained 25% of the labor force and the economy only recovered with the war. However, comparison is not reason. In 1930, world population was only 2 billions against 6.7 billions today. In 1930, modern economy was limited to the US and Europe. The larger part of the third world was colonized and the Soviet Union ruled another part. Today, we live in a globalized world with 208 sovereign states. In 1930, the role of the state was very low. The welfare society did not exist. The dominant ideology was to let market forces correct the crisis. Today, governments have launched a massive effort to save the banking system. It means that it is fruitless to compare the 1930 and the new great depression.
11-A change in the ruling class
We may posit that one of the long-term causes comes from a change in the ruling class . Before WW2, it was composed with capitalists, educated in a climate of decency and Puritanism and managing their own money. The ruling class was quite authoritarian and sent at bay all the crooks. At the end of WW2, a managerial revolution occurred and high paid executives replaced the old barons. This management correctly functioned until the beginning of the globalization.
The first alarming fact occurred in the early 80 with the bankruptcy of the Savings and Loans. The cost of the collapse accounted for 500 billion. Investigations showed that the bank managers were connected with the mafia and that 80% of the bankrupt were due to criminal activities. In the same period, the Japanese banks gave many loans to the yazuka mafia (about 600 billion) and 40% were impossible to recover.
Later, a second alarming fact occurred in the former Soviet Union. With the fall of the soviet system, there were some opportunities to extend a decent capitalism in Russia, Ukraine and so on. Instead of that, we saw a swarm of international crooks destroying all the economy and ruining most of the Russians. Thanks to a drunker (Eltsine), the crooks operated in a total impunity and finally destroyed the ideal of free entrepreneurship in the spirit of the Russians. Once the country ruined, the crooks found a safe harbor in the US or Israel. As a result, the soviet transition to free market was a complete failure and favored a massive public intervention in the Russian economy.
The third alarming fact was the bankrupt of Enron with its fake accounts and the complicity of some well-known notation agencies. So, do not be astonished by the Mardoff fraud (50 billion): it is just the final step of a too long serial. This swindle is as old as the world and would not have succeed without the active complicity of many bankers and traders in the US and Europe. Moreover, what do you think about the six hundred trillion of notional value on the derivatives? It seems that the bankers have organized a private world casino with shadow money. By the end, they got profits but they endangered all the savings of honest people on a worldwide scale.
Similarly, Arnaud de Borchgrave, editor at large of The Washington Times, recently said: “In the 1990s, Russia‘s new capitalist system quickly morphed into Russian organized crime, which went global. In the US, democratic capitalism gradually morphed into casino capitalism and, more recently, bandit capitalism, which scored some spectacular successes.”
In 2004, the Free World Academy alerted public opinion about the extension of crime and corruption into the ruling class . We underlined that the criminal activities were on the increase. We demonstrated that they accounted for about $2000 billion (World corruption, Drug trafficking, counterfeiting, prostitution, monkey business and so on). Go to our survey world corruption. We posited that the globalization was the cause of this bad evolution.
Indeed, the globalization has intensified the relations between our executives and the fake business class of the third world dictatorships. Many western executives took the habit to corrupt civil servants in the third world. By the end, they thought that they could benefit of the system. As a result, more and more business people were involved in corruption and illegal activities . Finally, the globalization introduced a negative change in our societies: Marx predicted the diminishing of the farmer’s class and the emergence of a high paid executive class. He did not predict the appearance of a new class only specialized in laundering of dirty money, facilitation, organization and management of corruption. A new society is emerging. It is not the free society, nor the classic authoritarian society but the mafia society. The next drawing illustrates this process: the corruption coming from the relations with the third world (black circle) is progressively growing in parallel with the enlargement of the capitalism to the rest of the world. Finally, the capitalism implodes.
In 2004, we wrote, “If we do not pay attention to this phenomenon, be sure that like an internal virus, it could destroy the entire globalization and our free society». (Go to malaise in the globalization). The Capitalism cannot work without a minimum of ethical values. Therefore, there is already a first axis for our therapy: removing the wrong ruling class .
12-A distorted globalization
The present globalization was launched in the 80 with the famous Washington consensus. It implied a panel of policies based on fiscal discipline, a redirection of public expenditure toward fields offering the potential to improve income distribution, tax reform, interest rate, liberalization, competitive exchange rate, trade liberalization, privatization, and so on. The free trade theory and the comparative advantage of Ricardo were the main pillars of the system . You will find a numerical example of the comparative advantage in future of china. Moreover, in order to get a complete survey of the trade theories based on the comparative advantage, go to internationalecon.com.
Today, the main assumptions of the free trade theory have been fully realized. The GDP has grown on a world scale and in each participating countries. Since 1980, the emerging countries have known a fast growth and some huge populations have improved their income in India and China.
However, our ruling class has hidden the consequences of the theory for the low wages: Let us suppose two countries such as the US and Mexico. The US is capital abundant while Mexico is labor abundant. The free trade theory clearly shows that capital owners in the US will experience an increase in their incomes while US workers will experience a decline of their wages. Similarly, workers will gain in Mexico but capital owners will lose. The theory also posits that the prices of the factors (capital and labor) will be equalized between countries. It means that free trade with Mexico would lead to a reduction in US wages coupled with an increase in Mexican wages.
Indeed, in accordance with the theory, the majority of the US labor force has not shared the gains from economic growth over the last decades . Just look at the following figures that compare the increase of the GNI with the median weekly earnings of wages (Source World Bank for GNI and US bureau of labor statistics for the median weekly earnings in current dollars)
Years ------------------- 2000-------------- 2005----------------- 2007
In real 2007 dollars, the buying power of $34,400 in 2000 attains 41,420 in 2007. Since the real 2007 income accounts for 46,040, the buying power of the GNI per capita has really increased over the period. On the contrary the buying power of the median weekly earnings of wage in 2007 ($695) has exactly the same buying power as $576 in 2000. It means that the median salary was remaining stagnant over the period. Regarding the low salaries, the situation is worse. Calculated in real 2007 dollars, the 1980 hourly minimum wage (at the beginning of the globalization) was $8. In 2007, it only attains 5.85! In 1980, it represented 70% of the poverty level against only 55% in 2004. Of course, only 1.7 million workers are paid at the minimum wage. However, its level influences the low salaries of the 76 millions of workers that are paid at hourly rates. Go to www.bls.gov
The free trade economists perfectly knew this problem and then proposed a compensation principle. Since in a country, the GDP rises, the total benefits of the free trade exceed the total losses and then it should be possible to redistribute income from the winners to the losers. In fact, practically all the gains in income have gone to the top 20% of households and the sustainability of the consumer power has been maintained through the distribution of easy credit in replacement of good wages. In Europe, the slowdown of wages was not compensated by loans but with handouts from the State. As a result, households have kept a good saving rate while the State is very indebted.
Clearly, the ruling class has forgotten the compensation principle . However, the Washington consensus clearly posited a redirection of public expenditure towards income distribution.
122-A distorted theory
All the trade theories (Ricardian, Heckscher-Ohlin models and so on) assume that the factors of production (labor and capital) cannot move from one country to another in search of higher wages or higher profit . Of course, the factors are freely mobile between firms within an industry and between industries within a country. It means that politicians, journalists or scholars lie when they claim that immigration and relocations are in accordance with the free trade theory. Today international factor mobility is viewed as an enlargement of the international trade in goods and services. In fact, this enlargement completely changes the theory and aggravates the fate of the losers in our countries.
Massive relocations have destroyed jobs in the advanced economies. Just consider the French case. The French stock overseas exceed by 215.1 billion the foreign stock invested in France. This negative result represents about 10% of the French GDP. Look at the next drawing:
Years -------------------------------2000------------ 2006
Stocks of foreign investments----- ---279.2 ------------585.8
Stocks of French investments
Result------------------------------------ 199.1 ---------------215.1
The amount of 215 billion represents hundreds thousands of job losses in France. We may add that these figures are carefully hidden. For example, media and politicians only consider the inflows of foreign investments and never the outflows from France. As a result, they claim that our social model is attractive for the foreign investors! It is not amazing to see our western countries progressively transformed in industrial deserts.
Moreover, this strategy of relocation in low costs countries hides another worrying fact. In the past, the investors established their manufactures among populations gifted with ancestral expertise. For example, Flanders became a textile area because the Flemish’s had a expertise inherited of the craftsmen of the Middle Ages. It means that a businessperson does not seek only for low wages. He goes to the population possessing specific gifts whatever the level of the wages. Today, a financial investor implements a plant in France. He carefully copies the expertise of the local population. Then, he fires the workers and relocates overseas! As a result, our nations are losing their ancestral expertise.
You may object that thanks to low wages, our consumers benefit of cheap goods. In fact, I am not sure that the consumers make a profit. For example, you buy for $300 English shoes that will last ten years. Of course, it is more expensive than rubbish that you get for $40 from China. However, since you cannot keep your rubbish more than one year, it is obvious that the purchaser of British shoes is the winner.
The ruling class has created 50 tax havens to avoid fiscal policy. For example, Mac builds machinery in China (Cost 80) and sells it for 100 to Mac-Offshore located in the Caimans. Then Mac-Offshore sells it for 300 to Mac France. All the benefit is realized by Mac-Offshore in the tax haven and does not benefit to China or France. According to Transparency International, there are more than 400 banks, two million of corporations and $10,000 billion of financial assets in the tax havens. Instead of free trade, we observe an unfair trade. We are very far from the recommendations of the Washington consensus about fiscal discipline and tax reform!
Immigration and replacement of native populations
The ruling class has promoted a massive immigration to lower the wages. It is really a new phenomenon with unpredictable consequences. The next drawing shows the trend of immigration in the US.
Period ------------------ 61/70----71/80---81/90----91/20---2000/2008
Million Migrants---------- 3.3 ------ 4.5------7.3------- 9----------20
Since 2000, legal and illegal immigrants to the United States have accounted for 2,500,000 per year. Globally, legal and illegal immigrants represent about 57,000,000.
Free trade activists and no border movements claim that the freedom of mobility of workers must be the same as for goods and services. Once again, the Ricardian model posits that labor does not move across countries. It means that the no border argument is a heresy. According to the free trade theory, the companies that are not anymore competitive should disappear. Therefore, the import of immigrants maintains companies that do not benefit of any comparative advantage while the taxpayers pay for the social costs of this immigration. It means that these companies benefit of public subsidies. Clearly, the ruling class invokes the comparative advantage and modifies its mechanism by moving populations from one continent to another.
Some business people complain that a slowdown in immigration could result in an increase of relocations. For example, the chairman of a big firm recently said that he did not need any more American labor. Nobody asked him if he could also bypass the American market. All these companies which produce in China would not survive if the US and European markets were closed. It means that a bit of protectionism should limit the relocations . On the contrary, we have dismantled our tariffs and maintained our welfare states. Finally, Immigration results in an increase of social and public spending. For example our exclusive study shows that the net cost of the third world migrants represents about 80% of the French public deficit in 2004 (Go to bilan economique de l’immigration ).
123-The theory works against the developed countries.
The free trade theory posits (Notably the Hecksher-Ohlin model) that a richer country which have more capital, should export capital intensive goods and import raw materials and labor intensive goods from a developing country. Each time the developing country modernizes and climbs one rank, the developed country has to move up with a more added value products. For example, Europe sells textiles in exchange of raw materials. Then, it sells machinery in exchange of textiles. Then, it sells technology in exchange of machinery and finally it sells planes and financial services in exchange of high technology.
The Ricardo Comparative advantage was invented when Europe was the most advanced civilization. Backward countries were expected to grow steps by steps. Implicitly, western economists thought that these countries would constantly stand behind Europe. It means that we have never expected a reversal move: Firstly, we import from China high technology and we export gross machinery (Such as Germany today). Later, we will export wines, antiques and tourism in exchange of basic apparels and so on. By the end, Europe could be an industrial desert.
Of course, the theory posits that the inflow of dividends and other revenues from investments abroad would compensate our negative trade balance. This success story supposes that we are all becoming capitalist and only earning dividends for a living. In 1900, some French people had for a living the product of their investments in the Ukrainian railroads or the tramways of Shangai . Unfortunately, this first happy globalization ended in the butchery of WW1. Moreover, the present property owners are now located in the Middle East and buy for peanuts our companies, marks and patents.
Does it matter? If 1.3 billion Chinese madly addicted to work produce all the basic needs, it could be like a God blessing! The problem is the balance of power. As China experienced in 1900, you do not resist to predators with Ming potteries, fine philosophers, and antiques. Likely, we will not resist with dividend vouchers, museums, and the exports of Derrida and Bourdieu masterpieces!
Moreover, we observe a growing gap between our average growth rate and those of developing countries . We have calculated the average percent change in real GDP growth over ten year’s periods. The next drawing shows the results:
Of course, it seems correct that the growth rate in developing countries remains superior to those of developed countries. However, the drawing shows that the gap is enlarging since the period 1980/1990, which marks the real beginning of the globalization. Clearly, we are going down while developing countries continue to enjoy high growth rates, even in the present depression. It means that the theory is now working against our legitimate interests.
What is more, since the World Trade attacks , we are confronted to a new war . Since 2002, the US is waging two wars. Huge military spending (about $600 billion) have put in the red the US budget. In 2008, the deficit accounts for $410 billion and 1200 billion in 2009 . This situation has brought a major economic imbalance that is not compatible with the globalization.
By December 2008, the World Bank published its Global Economic Prospects 2009 . The report predicts that global GDP growth would decline from 2.5 percent in 2008 to 0.9 percent in 2009. The United States, Japan and the Euro Area are anticipated to benefit of a gradual recovery during the first half of 2009 and to register 2.0 percent in 2010.
Years- -------------2008------------ 2009------------ 2010.
World GDP ---------2.5%----------- 0.9%------------- 3%
21-Deflation of consumer prices
A recession occurs when the aggregate supply is higher than the demand. Before the financial crisis, we had a demand of 100 composed with 80 in wages an 20 coming from credits. The supply attained 100 to meet the demand. Since the fall of the empire of debts, the demand is only 80 facing a supply of 100. As a result, the prices should fall. However, the law of demand holds that the quantity demanded will rise as the price decreases. As a result, overproduction could be reduced and the business cycle would start up again. In the present situation, this mechanism will not work because there is a shift in the demand due to a change in income and taste.
Firstly, there is a strong decrease of income due to the freeze on credit. The counterpart of the Engel law states that when income decreases, the relative value placed on primary goods ( farming, mining, fishing) increases, the relative value placed on secondary goods (clothing, housing, cars) remains constant, and the relative value placed on tertiary goods ( Services, insurance, education) decreases. Since our economies have a very large tertiary sector, the fall of the demand for the tertiary goods will be deeper than the fall of the income. It is a big difference with the 1930 great depression when the secondary sector was the most important. It means that the tertiary business will be massively hit with large consequences on unemployment
Secondly, regarding the secondary sector, we observe a change in taste. Many products of our industry are now perceived as de-merit goods because they produce negative externalities. For example, when you consume tobacco, the negative externality is the rising cost of health diseases for the entire community. When you use a big car, you extend pollution. Right now, public opinion more and more scrutinizes negative externalities and pollution is everywhere a very emotive topic. This new trend may also affect the cheap Chinese imports, which do not meet our safety standards
This shift means that despite a fall of prices, the demand will not rise and the producers will not sell their over production. The US cars companies give the best example. In the 1980s, with the price of oil down, they invested in the luxury segment of the market. With the rise of oil, foreign automakers provided the market with small and fuel-efficient vehicles. Today, nobody wants to buy any more the huge cars from Detroit.
Moreover, the propensity to consume should remain very low . In most countries, people are worried about their pensions. In the US, retirement savings have been evaporated because of the stock market downturn. In Europe, many people question how the social security system could pay the future pensions since the number of actives is rapidly diminishing. What is more, many people fear riots, social unrest, civil or large wars. This mood brings a strong incentive to save. Finally, these savings will not be channeled through the stock exchange. People would hoard money with gold and silver, notably in countries affected by weak currencies.
22-Increase of inputs prices
In the classic recession model, we observe a parallel fall of consumer prices such as house, appliances, cars, clothes and of the input prices such as wages, oil, coal, metals, and so on. As the margin between the two falling curves remains constant, there is always a room for profit. At the down of the curves, it becomes easy to enter in the market with less capital thanks to cheap inputs or machinery. Moreover, the established business can also benefit of low wages and raw materials. New business opportunities appear and finally the business cycle starts up again. Consider the next drawing
For example, in the 1930 all the input prices fell and notably the wages. By 1931, wages in the US were half the value of 1925. On the other hand, the great powers controlled raw materials thanks to their colonial empires. The fall of the inputs prices favored the recovery.
In the present situation, the input prices will not fall. As we have said, the wages are everywhere very low and cannot decrease anymore. On the other hand, the commodities prices will not go down because a company has only interest to produce and to sell an additional unit as long as its selling price is above or equal to its marginal cost. Indeed, the marginal costs of most commodities are on the increase because of a growing scarcity. Therefore, when the market price becomes lower than the marginal cost, a firm must stop to produce and to selll. It means that whatever the fall of the global demand, the input prices will continue to rise on the long run. Let’ us examine the situation of the main commodities
Oil and gas
Regarding oil, the proven reserves account for 1300 billion barrels. Considering a medium production of 100 millions barrels per day over the period 2007-2030, the “reserves to production ratio” gives 36 years (The “reserves to production ratio” describes the number of years of remaining production from current proved reserves at current production rates). It means that your children will see the last drop of oil in 2044! This situation does not look much better for the natural gas. The “reserves to production ratio” attains 50 years. It means that we have enough natural gas until 2060. Because of this expected scarcity, oil prices climbed by 320 % , between 2003 and mid-2008. Then, with the fall of the demand, crude oil prices rapidly dropped.
However, despite a weakening demand, the price drop will stop. This stabilization, whatever the expected fall of the demand, results of the marginal cost of barrel. This marginal cost, defined as the average of the highest cost producers attains $80 in 2007. It means that if the prices were dropping below $80, the companies would have better to close some high cost oil fields such as the Canadian oil sands. Whatever the weakening of the demand, the oil price are likely to average $80 a barrel and is expected to rise sharply until the last drop of oil in 2044.
Between 2003 and mid-2008, metal prices climbed by 300 %. Then, they have plummeted in recent months due to slowing global demand. Just like for oil, prices have fallen below the marginal costs of high-cost producers, and some plants are being closed and new projects delayed. The index of metals is projected to stabilize after 2010 due to marginal cost and the delaying of new capacities.
Between 2003 and 2008, food prices have raised by 180 %. Presently, they decline because of favorable crop prospects. However, food prices will remain high because of a strong demand and a more and more limited supply.
Demand will remain very strong for two reasons: Firstly, the world population is expected to attain 9 billion by 2030. Secondly, the growth of the middle class in Asia that represents about 800 millions (that is to say the equivalent of the entire population of USA and Europe) introduces a drastic change in the feeding habits. This new middle class consumes more and more meat and milk. For example, the Chinese meat consumption per capita has risen from 20 kilos to 50 per year over 20 years. Therefore, you need 7 kilos of grains and many cubic meters of water to produce one kilo of meat. Then, it is easy to imagine the huge pressure on natural resources such as soils and water.
On the other hand, production cannot follow and could suffer of bottlenecks. Firstly, the average annual cereal yield growth is yet slowing down: consider the next drawing:
Period----------------------- 1966-1985-----------------Period 1986-2005
Advanced economies---------- 2.5% ---------------------1.8%
(Figures from IMF)
Until now, the production has surpassed the growth of population and the famine has decreased. However, the yields are now slowing down notably in developing countries and they could level below the annual growth of population. Many causes explain this situation: Soils are more and more exhausted and the deforestation diminishes the water availability. In advanced economies, the agricultural progress is connected with oil prices . Since oil prices are expected to remain high, the cost of fertilizers will be high too. Secondly, Maize used for ethanol in the United States will increase. According to these facts, production for food could slow down in developed countries such as US and Australia. As a result, the food prices will increase on the long term.
Considering the main commodities (oil, metals, food), there is a coming scarcity with growing prices. As a result, we shall face a new economic situation: a large deflation of consumer prices and an increase of input prices. The opportunity for a recovery should be annihilated. Consider the next drawing:
As you can see, after their present fall, the inputs prices will level at their marginal costs. At the crossing of the two curves, there is no margin for a recovery. In fact, such a situation could last a long time! The business machine seems broken!
231- Economic consequences
The industrial index during the great depression fell from 100 in 1929 to 54 in 1932. Thanks to massive monetary policy and injections of money, we do not expect a so rapid fall in the present crisis. However, 2009 could be a bad year. Firstly, the public will become aware that Obama is unable to prevent a new great depression. Secondly, worldwide unemployment will dramatically extend. Thirdly, people will realize that the present crisis will be longer than in the 1930s. Another shock could also occur with a massive terrorist strike killing hundred thousand. This event can be graded with a high probability and high impact.
Clearly, we do not believe that a recovery could appear by the beginning of 2010. In the US and Europe, the duration of the depression could last a decade. Thanks to social safety nets, the crisis would be less harmless in the euro zone than in the US and UK. We cannot forecast a rapid recovery in India, China and South America because they are very dependant of the US economy. On the other hand, the situation could be stabilized in countries producing oil and minerals. However, their currencies may come under pressure with many outflows of private capital.
Considering the massive injection of printed money from the central banks and the growing deficits of most big states, many analysts predict a huge inflation like in Germany before the war, a new bubble of the US treasury bonds and finally a complete monetary chaos with the fall of the dollar. We do not endorse this scenario for many reasons. Firstly, such a scenario could appear if the recovery were occurring by 2010. A strong and soon recovery boosted by these massive injections could effectively generate an uncontrolled world inflation. Since we do not expect this recovery, we may posit that these injections would compensate the massive losses on the market. Secondly, in spite of the growing deficits and debts of the great powers, the defiance in currencies will affect in first the developing countries and isolated currencies such as the sterling and the Swiss franc. Therefore, we may expect that much capital will flow out of these countries to feed the US or the euro zone deficit.
232-Social and political consequences
In the US, the median income for the household will probably be lower in 2010 than it was a full decade earlier. The 26.% percent of U.S. workers already on poverty wages will know many difficulties. Another consequence will be the meltdown of the pension funds. According to OECD, “Private pensions have been severely affected by the financial crisis, with pension fund returns falling by over 20% on average across the OECD between January and October this year, or a loss of over USD 4 trillion in pension assets ».
The 1930 great depression had had large political consequences notably with WW2 However a same event (the great depression) led to the left in the US and to the Nazism in Germany. As we have said, there is no comparison with the present situation. In the 1930, the nationalism was higher than today. Thanks to massive migrations, most of the political consequences could occur into the national territories. The more vulnerable countries could be in Western Europe. With the crisis and a reduction of handouts, the migrants could provoke ethnic riots. On the other hand, we may be anxious about China. A "floating population" of some 80 million to 130 million people, has left their rural homes in search of work in cities. Millions of these workers will loose their jobs and have to return to their villages. Some people think that China could implode and disintegrate like the former Soviet Union. However, the Soviet Union was a patchwork of ethnic and nationalities. On the contrary, China is a homogenous country.
Globally, political consequences are hard to predict. Presently, we can only observe that the people are bored with the ruling class. There is everywhere a lack of confidence.
According to our diagnosis, the first step of a recovery should be to change some ruling elites . Many people thought that the “change” promoted by Obama during his campaign was in accordance with that goal. In fact, they have been misguided. The elite invented and pushed obama to offer a fake change. The people will experience a great disappointment. Anger could succeed to hope. However, the social unrest could lead to a real change in certain countries. We do not need dictatorships. We need a direct democracy through referendum and a massive involvement of the citizens in the public affairs.
On the IMF website, you can see a survey of Charles Collyns: « The first and most important lesson from every financial crisis since the Great Depression is to act early, to act aggressively, and to act comprehensively to deal with financial strains. The priority must be to quench the fire, even if unorthodox measures are needed that would not be applied other than in the context of a systemic event ». I agree regarding our financial system. It was threatened by a cardiac arrest and in this circumstance, the therapy was not to advise dieting and exercise but to restart the heart. The bailout of the banking system was safe because we have to save the deposits. On the contrary, the bailouts of the commercial companies should be prohibited. The Business class has favored a massive indebtedness of the households to compensate the stagnation of wages. Right now, the same business lobby asks for cash and loans to compensate the fall of its revenues! Clearly, the governments must not oblige the banks to provide with easy credit the firms going to bankrupt! Too much credit was a cause of the crisis. Too much credit to the commercial firms would just enlarge the crisis.
Indeed, the IMF and many economists recommend Keynesian policies. Our examination leads to a mitigated judgment. It appears that the Keynesian solutions are not compatible with the present globalization. However, we propose a massive public investment in Science in order to end with the coming scarcity of major inputs (oil, gas, food, and so on)
311-Increase of consumer demand
Keynesian recommend massive spending to increase the demand and to compensate the fall of income. They advocate for providing the poorest with handouts and for raising the wages of the labor force. At first glance, the proposal sounds right. Firstly, it has an immediate effect. Secondly, such a policy is in accordance with the compensation principle posited by free trade economists . Thirdly, it does not imply a larger deficit and just requires a fiscal policy. Finally, such a policy should replace the massive indebtedness forged by the ruling class to compensate the stagnation of wages.
Unfortunately, this policy cannot work because of the distorted globalization. Firstly, the handouts are already very high in many European countries. Their increase could attract more and more millions of immigrants from the third world. Secondly, a massive wages increase would immediately result in more and more relocations. Thirdly, a large part of the additional demand will benefit to the imports.
312-Increase of investments
Usually, Keynesian recommend massive public investment in order to reduce unemployment. They mainly focus on the multiplier as a tool to fight the recession. (Go to macroeconomy for the definition of the multiplier). The multiplier looks like a magic wand but it only works under specific parameters.
Firstly, the multiplier needs idle resources. Without idle resources, it results in inflation. As we have seen there are not idle resources regarding the main inputs such as oil, metals, food and so on, because of the growing scarcity. Secondly, it needs a high propensity to consume and we have seen that we expect a high propensity to save! Thirdly, it needs a low propensity to import. Otherwise, the additional spending is realized overseas. Unfortunately, our consumers are addicted to cheap imported goods. In fact, the multiplier implies some protectionism.
Moreover, the growth rate is not only related to the amount of the investment. It depends also of its yield: the capital output ratio. It means that you have to invest in the sectors that bring the higher yields: I doubt that the building of bridges, tunnels and roads could bring a high yield. Moreover, an investment such as a public road has not an immediate effect. Between the decision and the opening of the road, the feasibility studies and the new constraints about environment could last several years.
313-A Manhattan project to reduce scarcity of inputs
There is only one field where Keynesian recipes could work. As we have seen, there is a growing scarcity of commodities such as oil metals or food. According to our new growth theory (go to www.freeworldacademy.com/globalleader/ecodev.htm) the scarcity should not exist thanks to the technical progress. Therefore, the best solution should be to invest in big science through the public sector.
During WW2, the Manhattan project gave the nuclear bomb to the US in a quite short time (5 years). Today, we recommend the launching of a new scientific “ Manhattan project” in order to ban scarcity on major inputs . This project should focus on nuclear fusion, the replacement of oil, new artificial metals, and new ways to improve food productivity. This great project could associate all the advanced economies. However, it implies a unique commander and a precise agenda.
Most scholars wrongly compare the present situation with the experience of the world during the 1930. By this time, the US imposed the Smoot-Hawley tariff and 60 countries retaliated with similar increases in their own tariff barriers. As a result, these policies contributed to the length of the economic depression. Today, policymakers repeat everywhere that we must avoid protectionism and that we should pursue a greater economic integration. We agree that protectionism cannot be a solution and would certainly worsen the depression. On the other hand, we cannot go on with the present distorted globalization. The solution should be a limited and intensified globalization between countries sharing the same values.
Consequently, we propose to establish a common market based on the model of the European market and including the US, the European Union, the Eastern Europe ( Russia, Ukraine Armenia Georgia Belarus) and some OECD countries such as Canada, Australia and New Zealand. Firstly, all the tariffs and residual protectionism will be abolishing into the common market. Secondly, the move of capital and people will be authorized : no border, no visa, and no rules preventing relocations. Thirdly, the participating countries will pave the way to a common currency based on fixed parities between dollar, euro, sterling, Swiss franc, rubles and so on.
On the other hand, a tariff wall will protect the common market. The tariff should be discussed according to bilateral agreements with other countries. The idea should be to get a balanced trade with a zero debit credit balance with each country . Of course, the application of this policy will follow a prudent, progressive and pragmatic road. Relocations outside the common market will be forbidden. Immigration from outside the common market will be also forbidden. As a secondary consequence, the foreign migrants already present in the common market will return to their countries.
This new concept offers many advantages. Firstly, it will have a psychological impact on the population. Globally, the common market members will share the same cultures and values. This limited globalization should satisfy the people willingness to preserve their identities. People will enjoy the feeling to be better protected and respected. Secondly, the common market will include countries representing a huge population (nearly one billion), vast raw material reserves (For example, the permafrost is melting across the Northern Hemisphere and this phenomenon will add new availabilities for crops, breeding and untapped raw materials reserves in northern Canada and Siberia) and great labor force coming from Eastern Europe. These complementary economies should benefit of free trade and free circulation while avoiding the invasion of third world populations, which causes many troubles because of too large cultural differences.
This scheme can preserve the assets of the present globalization and avoid its liabilities . Look at the next drawing: instead of a global village at the exclusive benefit of the nomad elite, we will get a common market where globalization is intensified. On its borders (in green), we find the balanced trade area regulating the relations between the common market and other countries such as China or India. By the end, we see a black planet inhabited by the dictatorships (mainly Islamic countries) orbiting all around. Sure, the relations between the common market and the black planet should be closely supervised in order to avoid any contamination (corruption, terrorism, massive immigration and so on)
Regarding the financial system, the common market should be the appropriate framework to implement our remedies to the financial crisis (go to New financial order and
Regarding the specifics, this common market could reduce the dreadful depressive mechanism described above. Firstly, the repatriation of foreign workers will reduce the labor force and then the stagnation of wages. On the other side, the business will not react against the wages increase because relocations will be forbidden outside the common market. Moreover, thanks to the tariff protection, the business owners will see their profits increasing . This situation could improve the global demand and stop the deflation of consumers prices. Secondly, the principle of compensation advocated by the free trade theories could be engaged with the redistribution of handouts for the native losers. A better coordination in fiscal policies could be implemented among nations sharing the same values. Some public infrastructure will find their sense with a good multiplier (higher propensity to consume, lesser propensity to import). Thirdly, the consumers will continue to benefit, on a lesser extend, of cheap goods. The tariff wall should be managed in order to maintain a fair competition on a worldwide scene and to avoid the wrong consequences of a rigid protectionism. The next WTO summit could offer the opportunity to pave the way for these reforms.
However, two hurdles remain on the road to recovery. Firstly, these measures will take a lot of time before their empowerment. Secondly, the common market does not solve the scarcity problem. Consider the next drawing:
All observers agree that rearmament was the main driver of the recovery ending the 1929 great depression. Similarly, a new war could be the best way to cure the present depression. Let us examine the entire situation.
Firstly, we have explained that the coming scarcity of the inputs was the main hurdle preventing a recovery in our countries. Sure, our proposal about a Manhattan project could abolish scarcity. On the other hand, the scientific progress could take a long time. Can we support an endless depression during ten or twenty years? Secondly, consider the next drawing that gives a global vision of the oil and gas market (Oil reserves in billion barrels, oil production in million barrels per day, gas reserves in trillions cubic feet).
T he main producers (in red) enjoy low marginal costs but sell at high prices because of royalties. Thirdly, these countries are already waging a war against us because they are the sponsors of the terrorism: Iran, Saudi Arabia, the Gulf States and generally speaking, the Islamic states.
Now, let us suppose that we endure a new strike like the 9/11 (maybe with biological weapons, nuclear devices and so on). It should be the opportunity to deliver an ultimatum to these countries, asking them to dismantle their secret services and allow western inspections into their countries . Let us suppose that they refuse. Well! It should be the opportunity to invade these countries and to seize their oil fields. Such a war could last a matter of weeks (except Iran). It will end the oil blackmail and the sponsoring of terrorism.
This war would have for unique goal to confiscate the oil and gas fields and to make them exploiting by a public consortium including all the major countries (US, Europe, Russia, Japan, China, India etc). The consortium would drill for all the oil and gas. It could provide the participating countries with oil and gas at low cost (no royalties). Then, the recovery could start and the depression will end. This policy would give us enough time to develop new technologies. The next drawing explains this policy.
As the global demand raises, the commodities prices could also rapidly increase. Then, the war and the confiscation stop this increase. Thanks to fixed prices by the consortium, all the input prices fall . As a result, the margin between demand and inputs constantly increases, opening the road to a strong and immediate recovery.
Considering the present terrorist threat, the war should apply our legitimate defense. Moreover, the sustainability of our economy is a more important issue for the entire world than the comfort of the princes, emirs and mullah.
This survey has shown that the failure of the present globalization was responsible of the coming depression. The pause should be used to better preparing a future step. In this view, we can vision three great challenges.
Firstly, education remains a world challenge: In poor countries, the bulk of young people will far exceed the financial and human capacities of traditional education. In developed countries, despite large financial resources, the traditional education gives more and more bad results. It means that the present education has to be completely reviewed. Moreover , among most all-human activities, education is one, which has never taken advantage from technical progress. We teach and we learn nowadays as in Socrates’ century. Clearly, we need a revolution in educational affairs. Go to global learning process.
There is also a medium term challenge. Many companies do not produce what the consumers really want. For example, people are bored to move in cars on crowded paved roads. Maybe, a new innovative revolution will develop individual helicopters replacing cars, just as cars replaced old horse charioteers. On the other hand , many people remain deprived of the basic stuff. In the 20th, this observation led Henry Ford to invent a new car adapted to the purchasing power of the workers. Similarly, we can say that poor people in the third world are awaiting new goods adapted to their low purchasing power.
Finally, there is a long-term challenge. We may expect that all basic requirements will be saturated before 2030 in the civilized world. The only solution to avoid a new depression is to induce right now a change in consumer habits. We can expect that people will consume more and more spiritual goods that satisfy Reason, Ethics, or Esthetics: It can be a book, a fine painting, a music festival, and any increase in knowledge and Ethics. (Go to New growth theory ).
In spite of the present depression, we may forecast a future abundance . However there are two prerequisites: firstly, to overcome the present dangerous situation and secondly, to reinforce education .