Globalaffairs

Issue 12/December-January 2009
By Glen Ruffle

Given the hysterics in the media, one could easily conclude that we are heading towards a new ‘great depression’ and massive global unemployment. Everyone is placing the blame on someone else: the politicians blame the regulators: the regulators blame the bankers: the bankers blame the borrowers: the borrowers blame the politicians: and everyone blames the Bush Presidency. But despite all of this, the US is not technically even in recession yet. So what’s going on?

A new crisis?

To start it is worth asking if this is a new crisis. While it is new for America, Western Europe and Anglo-sphere Pacific-rim states, it’s just another crisis for the rest of the world. Russians simply shrug their shoulders – after all, they’ve had their life savings wiped out twice already in the 1990s, so why should they not expect it again? And what about Latin America, where most of the continent usually has some form of financial problem and where large in-flows and out-flows of investment have helped to destabilize governments? Then in the late 1990s there was the Asian financial crisis. And of course there are still the 30,000 people who die each day because they cannot feed themselves, whilst the EU and the US wonder how to reduce obesity. For the historian Eric Hobsbawm, all of these things are signs that the rest of the world has constantly been in capitalist crisis, and only the structuring of the world economy to serve the interests of Western governments and consumers has protected us in the West from these ‘normal’ events.

Time lags

Economic systems have time lags in them: today’s stock-market crash can be tomorrow’s unemployment. It takes time for the results to work through the system. But one thing is for sure: there is no easy way out of the present mess. Making money more easily available, as central banks across the world have been doing (at the cost of billions to global tax payers) is having little real effect other than wasting money and stopping the inevitable slide into recession. Making money available will not boost the economies. People are already far too deep in their debt. Making more money available for them to borrow will simply not work – they can hardly pay off the money they already owe. Thus the only solution for them is to reduce spending and concentrate on paying off the money they owe. Yet this will have the effect of slowing and stopping economic growth by breaking the chain of money creation the global fractional reserve banking system depends upon. And this is the crucial point.

Marxism’s use

Like it or not, when Communism collapsed, the West threw out the baby with the bathwater. Marx was dead, the West announced, and so were his ideas. This lack of understanding is now coming back to haunt the world. Marx provided a competent model to understand global trade: M-C…P…C1-M1: Money (M) is turned to Commodities (C) which go through the Production (P) process to produce Commodities (C1) with more value than they originally had and to go on to be sold for a higher amount of Money (M1). This higher amount of money is then reinvested into the process and the expansion continues: M1-C1-P-C2-M2.

But in the past twenty years, this process grew out of proportion. It can be seen in charts showing the global money supply (measured variously as M0 to M4): in the desperate race to create ever higher profits, common sense was dropped in favour of the idea that if the banks gave out more and more money, then people would pay back more and more and the bank would beat all its rivals. Figures showing the US money supply clearly show a massive growth in the areas of private bank money, market funds and liquid assets, all of which came about from the Reaganomics and market liberalization of the 1980s.

Initially this was a good thing. The market forces broke the back of crippling trade unions and helped to stop the inflationary pressures that were destroying economies. But instead of keeping the market forces under control, governments discovered that the free market economy is a voracious carnivore. And this is a crucial point to understand.

Morality

Margaret Thatcher passionately believed in the free market, but she also held strong Conservative principles and a rigid belief in the rightness and correctness of the moral guidelines she was brought up with. When she liberalized Britain’s economy, she did not foresee how the corporations and their advertising departments would apply Freudian psychology so effectively. The companies realized that by shocking people, sales could be made, and soon the race was on to attack anything and everything that people held precious. The traditional beliefs and pillars of society such as church and family have all been assaulted and some heavily crippled by the forces of advertising that have replaced society with selfish individualism. Individualism is not necessarily the problem: but the increased focus on the self has turned supportive communities into dangerous neighborhoods where law and order has broken down. Thatcher and Reagan did not foresee this socially destructive force coming. And as traditional values broke down, such as never borrowing money, and never taking on too much debt, and as the social pressures increased to buy and have everything, even if you cannot afford it, so debt became a way of life and the seeds of the crisis were sown.

The Answer?

Human greed caused the crisis, but human greed will also ensure the survival of a form of capitalism. As Adam Smith wrote, “All the toil and bustle of this world” is but the pursuit of wealth, power and pre-eminence. Only Capitalism successfully allows this craving for power and individual gain to flourish. But even Smith recognized that the implications of economic liberty would work against building a moral and cohesive society, which is why he advocated a vigilant and strong state to guard against the attempts by different sections of Capital to dominate society.

Thus a return to Keynesian economics, which brought inflation and crippling trade union activities, should not be an option for politicians. Instead, a variant of Thatcherism, based on the market but with a very strong and vigilant state, which must be rigorously kept separate from banking pressure, and which can act as the markets conscience, is a better solution. Thatcher believed in a strong state, but as companies became too big and governments allowed this (to serve their political ambitions), they actually lost power and weakened themselves in comparison to the companies.

Perhaps a financial constitution, drawn up by key political, religious and economic leaders, which could be untouchable by central banks and politicians, is the way forwards. Such a document would provide a clear set of rules and stop governments using populist methods to boost economies (as Britain’s New Labour has done by borrowing far more than the country is earning) at the expense of sound economics.

The great economist Friedrich Von Hayek would sound a note of caution to these plans though: giving the state so much power would be, for him, a step down a road to totalitarianism. So it is essential for the so-called ‘democracies’ of the West to properly embrace democracy as the Swiss have done and to make their political elites really accountable to the people.

The Future…

So what can we expect? The crisis is due to the break in the cycle of reinvestment. Bank won’t lend to each other, and so the system grinds to a halt, and we fall into recession. But this has been caused by banks throwing too much money at each other and at customers earlier on. So ultimately, the present problem is just a market correction – as Martin Gilman, former senior representative of the IMF in Russia said, “few would contend that we face a 1930s-style depression or the dangers of a 21st-century equivalent of World War II”. The nasty part of this ‘economic correction’ though is that debt became such a way of life for so many people, that the effects of this correction are going to hurt large parts of society. And that is what worries politicians – because they will get the blame.

In the wider international context, there will be a significant movement continuing the general trend we have seen away from US dominance to a multipolar world order. The Washington consensus economic model is in real danger now – free market liberalism is likely to be under great threat. China and Russia will find many allies as they seek to refashion the international architecture into a more representative model of today’s world. At the G20 meeting in Washington, Britain’s Gordon Brown has already said the IMF should represent the modern world and previously has talked about a United Nations that has a wider set of members at the Security Council. The Russian President is also pushing to have many global reserve currencies, instead of the Dollar being the dominant reserve currency. All these proposals will weaken the United States if they go through. The world will take another step towards a multipolar order with many centres of power: but as the US will resist these changes, this new world may be one with greatly increased tensions.

Glen Ruffle
Worked in British politics for two years and is now teaching in Moscow.

References/Bibliography
Nick Allen (2008) Gordon Brown calls for new world order to beat recession, The Daily Telegraph, 10 November 2008.
Larry Elliott and Dan Atkinson (2007) Fantasy Island, Constable books.
John Gray (2008) A shattering moment in America’s fall from power, The Guardian, 28 September 2008.
Friedrich Von Hayek (1944) The Road to Serfdom, Routledge Press.
Eric Hobsbawm (2008) in interview with Alastair Bruce, UK MSN Money Editor “Global financial crisis is the ‘end of the era’ for capitalism”, November 7th 2008.
‘Century of the Self’ – a BBC TV production, directed by Adam Curtis. For more information see: http://www.bbc.co.uk/bbcfour/documentaries/features/century_of_the_self.shtml
Nigel Lawson (1992) The view from No.11: Memoirs of a Tory radical, London, Bantam.
John Robertson (1984) Adam Smith: the Enlightenment and the philosophy of society, page 135-147 of ‘Political Thought from Plato to Nato’, Ariel books, BBC.
Dmitry Trenin (2008) How Medvedev will rule the world, page 1 of ‘Russia: beyond the headlines,’ Thursday 31st July 2008, Rossiyskaya Gazeta, distributed with the Daily Telegraph.

Clive Webb (2008) Haunted by History The Guardian, Friday October 3rd 2008.
David Willetts MP in interview with Roy McCloughry (2007) Right Thinking, pages 16-20 of Third Way, Summer 2007, Volume 30, Number 6.
Wikipedia (2008) Money Supply , accessed at: http://en.wikipedia.org/wiki/Money_supply

Global Affairs is not liable for author’s opinion

 Print Economy | Permalink | eva