Sunday, October 23, 2011

All this unrest! Hope at last.

     The last few weeks and months have been especially interesting.  It might seem as though very strange things are happening in this country and around the world, but for those who have been waiting for these things it seems very late in coming.  The Arab Spring and the Occupy movements might be a direct result of the most recent demand-side recessions, but they are the in reality the accidental bi-product of almost 50 years of a movement by the wealthiest citizens of this planet to reclaim the wealth which they lost during the Great Depression. It is also the bold face of the reality which many have sought to deny:  the rich cannot become richer indefinitely.  I covered that in my last post, thankfully.  No econ + more hope = better reading. 

     I believe that the Arab Spring actually started with the youth uprising in Iran, in the June 2009 election protests.  I think this because we are seeing a new type of protest: information protests.  Quick explanation: information moves quickly and with almost no entropy in the digital age.  A hundred years ago, finding out what was happening a town over required a good deal of expended energy.  Either your energy or the input of printing presses and news staff.  A thousand years ago, it was worse.  To know what was happening around the globe was nearly impossible.  Today, information moves more quickly than many would like.  When the war in Iraq, the 2003 redux, started; I told everybody who would listen that it was nearly impossible to win.  The core reason was the speed of information.  The populace would know too quickly that they were being duped, that their government was being corrupted and that their oil was the end goal.  In 1990, many Iraqis did not even know that they were at war.  The internet was just out of it's infancy. 

     In June of 2009 I told that I believed sustained war would become almost impossible over the next few decades.  I had seen dozens of Iranian students, soldiers in the Axis of Evil I remind you, say that they loved America and Israel; that they had no desire to be at war with either country.  I was blown away.  Very little news makes it out of Iran, so I just assumed that they were as anti-American and fundamentally Islamic as we have made all the countries we bomb.  Instead, I saw twenty-somethings saying that all they desire is peace and a chance to make a life of their own.  They repeatedly said they barely consider themselves Islamic, and most who do so have taken the superstition out of the religion.  Well buckle my shoes, that was revelatory to me.  It made sense, though.  The youth of the world do not bear the same grudges as their parents and grandparents.  More importantly, they are able to go onto facebook and see that the young in other countries are equally bent on peace.  Studies have shown that to sustain a conflict, an enemy must be created: an outgroup which is unlike you in any way.  Information freedom has killed the outgroup to a large extent.  The Iranian protests was the first which used twitter and facebook to organize and share information instantly.  Suddenly, college-aged kids around the world could see themselves in the faces of Iranian kids fighting against a totalitarian theocracy. 

     Information movement has made it too difficult to maintain a puppet government in America, as well.  This is the reason for the Occupy protests.  When 80% of your elected congressional officials come from the top 1% of the income earners, the other 99% might not feel represented.  Access to information has also made the Tea Party a short-lived phenomenon--they were started by the Koch brother's PAC Americans for Prosperity, and they are largely affluent white persons fighting to keep their own wealth.  That really doesn't engender sustained support.   As revealed by The Atlantic this week, 50% of Americans made $26k or less last year.  That means that half of all Americans, all 150 million if you include protesting babies and toddlers, have a vested interest in Occupy Wall Street.  I was paying a good deal of attention via twitter for the the first week of the protests, because ZERO American news outlets were reporting on the protest.  For ten days, The Guardian and social media were the only way anybody was able to find information regarding the protests.  While that is sad (The Big Four media multinationals own every news, movie, music and television outlet in America) in one respect, it should give us all a sense of hope for the future. 

     Media censorship is no longer within the power of the media conglomerates or governments. 

     We are turning a corner.  What was impossible for the poor twenty years ago is now easily accomplished, and what was possible for thousands of years is now beyond the reach of the power elite.  Edward Herman and Noam Chomsky, who penned "Manufacturing Consent," have lived to see technology pry information back from the hands of the richest and most powerful.  Not only can angry, young citizens arrange a protest on the fly, they can also film and disseminate that information instantly.  Thousands of protesters in hundreds of cities, each with a printing press and worldwide audience in their back pocket.  This is a monumental change, quite possibly the most important in human history.  The speed of information is only growing, which means that clamping down on information is more difficult and more expensive.  Egyptian citizens were able to leverage the cost of shutting down many information outlets against the loss of business which accompanies the loss of information movement.  Hundreds of millions of dollars in revenue were lost because companies could not make internet sales or receive online payments.  Syrian businessmen are currently beginning to fear that their business will collapse due to the massive cost increases of imports and exports as their government fights off revolution.   3,000 Syrian citizens have been killed by government forces, but it is the loss of business which will likely be the end of Assad's regime. 

     Since information is traveling so quickly, that means citizens around the world are supposed to be calling on their local representatives to draft legislation to ask the U.N. to impose sanctions on Syria.  They have so far been stopped by Russian business interests, but how long will we be able to allow the rich to massacre the poor now that it is instantly brought to our doorstep?  Not much longer, I think.  People reading this might just be inclined to call their congressperson and demand that they take this case before both houses of congress.  After all, ignorance is no longer an excuse.  We have seen that the middle class and poor are the same around the world, and we bear no ill will towards those who struggle with the same burdens as ourselves.  We see that nationality is irrelevant, that the youth of the world are angrily expecting a chance to succeed and that stifling change is no longer an option.  These are all great things.  Hope is a great thing. 

Why is our economic engine such an old model?

     Hello all!  I hope everybody is as excited as I am for the imminent collapse of the world oligarchy.  You are witnessing the death throes of Milton Friedman's neoliberal (nothing to do with liberal politics or the democratic party) economics, whose math was proven psuedoscientific by Imre Lakatos in 1972.  Not many people realize that, and no economics student I have ever met has even heard of the genius and mathematician Lakatos.  His legendary work in the philosophy of science broke new ground.  Even fewer people realize that the model of economics currently used in all developing nations was shown to be nonsense by such a renowned scientist.  If 1972 sounds familiar in an economic sense, that is because it was the last year in which the American worker, otherwise known as you, saw a wage increase.  Who would ever have thought that the failure of an economic model would look like the Arab Spring and Occupy movements?  I thought for sure it would be resource wars, so let's all hope we don't get that far. 

      In 2009-2010, I argued incessantly with my economics professors that the world economy is on the brink of collapse due to the physical limits of our planet and it's workforce.  They agreed to a point, but invariably rejected the idea of collapse.  The economy is too large to collapse, they all said.  If you re-read that last sentence, you will see the irony and error in their thought.  My argument is precisely that the economy is too large and inflexible to exist in it's current form.  We must all decouple from the world economy, and it will be messy and painful.  We began this process in the near-collapse of world banks in 2008, but fear of change lead us down a different path.  We instead forced trillions of dollars (and pounds sterling and euros and dinar and renminbi) into a dead system.  Follow me, here. 

     I will draw a simple and effective metaphor.  Economies are often referred to as engines; engines of commerce and engines of growth.  Let's use this idea.  If the American economy is an engine, it must slow at times.  Those are recessions, and they are a natural way to weed out failed businesses and move forward with more effective ideas.  (See: )  Not anymore, though.  We have reached a point of such extreme diminishing returns, that any slowdown is catastrophic for massive banks and businesses.   They are the queens of the food chain:  they have grown so large that they require nonstop feeding or they will fall.  With this in mind, we see an alarming trend.  The overseers of our economic engine cannot allow it to slow down and cool off.  As our economy was racing along, the engine began to overheat and fail.  Most people know that this is a time when you need to pull over and fix something; or at least give your engine a break. What did our new captains of industry do, instead?  They essentially hammered a supercharger into place while the engine sputtered.  The engine has blown and we have been forced to cobble together a Mad Max vehicle.  We got a trillion dollars of dollars of stimulus spending, although most of it was in the form of feeding the queens of the food chain.  The banks, bless their poor hungry souls, also got $1.2 trillion dollars in shadow loans to keep them afloat.

     My metaphor makes perfect sense to everybody but economics professors, unfortunately.  They invariably say that the economy is not a true physical entity; it is not a real engine.  However, it is bound by the same laws of physics which explain the working of any machine.  From an economy, to a horse to a Bugatti Veyron; physics works the same.  Another example!  The Veyron is the fastest production car on Earth, far faster than any F1 or Indy race car.  In order to get the car to reach 150mph, the engine needed to produce almost 300 horsepower.  To get the car from 150mph to 253mph, the engine needed to be brought up to ONE THOUSAND horsepower.  That is diminishing returns in it's most obvious form.  And the American economy?  To keep producing at the levels of GDP we had in 2000 required extra input of about three trillion dollars from the Federal Reserve in 2008.  As we grow increasingly large, we grow increasingly complex.  Complexity means higher cost.  If you think that increasing complexity and cost can go on forever....well, you are a neoliberal economist. 

     If you think that my examples, thus my idea of economics as a whole, is wrong and/or just too simplistic; here is my proof.  Vindication is lovely.  Thankfully I didn't have to do the research myself, as I have grown to despise economics and it's painfully zeitgeist-driven orthodoxy. 

     This paper is by Michael Kumhof and Romain Ranciere, two economists at the International Monetary Fund.  Dr. Ranciere is an econ PhD from NYU, and Kumhof from The University of Maryland.  They show exactly what I have explained, and they observed it's part in the current banking crises around the globe.  Essentially they show that as the wealthy accrue more wealth, there is less to go around.  This happens alongside growing bargaining power of the wealthy with policy makers.  The wealthy cannot invest in their businesses forever, so they increasingly place their money into banks.  As the wealth distribution grows past it's reasonable maximum, diminishing returns sets in. The plutocratic elite, as they really should be known, see that demand is stagnating because the working class has less and less money to spend into the economy.  They then begin to lend money to workers in order to fill the demand gap.  This comes in the form of:  home loans, credit cards, auto loans and a myriad of other ways which the middle class has borrowed to keep up their standard of living. 

     Inevitably, these loans become increasingly shaky.  Why?  The workers have less money every single year; their wages are stagnant but prices continue to increase.  As a whole, there is roughly the same amount of money being spent into the economy.  From a reasonable perspective, it is not money from the middle class.  This is money that the middle class has borrowed from the new Robber Barons:  Corporations.  Followed to an inevitable conclusion, we know that each year the loans are more speculative and the banks will have less stable borrowers on their balance sheets.  The banks are now holding loans which would never have passed muster when the middle class had wealth.  The paper by Kumhof and Ranciere found that the same amount of bad loans and leverage existed in banking prior to the Great Depression as before the great recession; and the income inequality is almost identical.  As the engine of economy sputtered in both eras, those who own the wealth and the policy makers decided that slowing down was not an option.  They spent decades loaning money to the poor to fuel the economy in both cases, but only in the 2008 collapse did they have the political clout to steal trillions of dollars from the taxpayers to keep their banks afloat.  The researchers show that we have the same systems in place and are making the same mistakes, only with more money and less insight this time.

     I thought that this post would be much quicker, so I apologize.  I would love to say that I am shocked to see greedy people making the same mistakes as they did 80 years ago, but greed is very near-sighted.  In conclusion, I just want everybody to keep an eye on the economy.  Our model failed in 1928, was reinvented by Milton Friedman in the late sixties and is failing us again now.  Our ever more volatile economy is not due to the business cycle and crises, it is a result of a misunderstanding of the limitations of growth.  If you keep in mind the image of an engine which is getting older, bigger, more complex, slower, less nimble, less effective, etc; you will view our economy with far greater clarity.  You'll also be more knowledgeable about economics than most all professors in that field.