Economic liberalism was originally just a synonym for free competition and free enterprise, both of which I am fond of; it meant access to capital, the right to do business without bureaucratic barriers, and transparency. The “liberalism” that predominates in today’s global economy is something altogether different. (Edward Luttwak has termed it “turbo-capitalism.”) There are no examples in world history of such a procedure: business leaders begin by killing off employment in their own neighborhoods in order to transfer it to countries whose low salaries and lack of social rights they like. Then, faced with the growing demands of the host country (whose role is getting stronger on the world stage), they agree to kill off innovation by letting it be seized. This is what the French journalist Eric Laurent describes in his book The Scandal of Off-Shoring: “The Rise of China and India is Built Upon the Future Cadaver of the West.”
The human cost of these tribulations is as great in China and India as in the West. The real violence done to the workers of emerging countries, as well as that inflicted on Western workers whose jobs have been off-shored, is terrible. Workers who have not yet been off-shored no longer feel certain of loyal and predictable employers and are ever more subject to a Darwinian competition amongst themselves. Suppliers are forced to struggle fiercely against one another to survive. All of this is, theoretically, for the benefit of the consumer, who, soon to be out of work or in a precarious situation, will no longer have the means of consuming anyway! In order to obtain a short-term benefit, Western businesses have ruined the citizens and workers in their own countries and furnished future adversaries with the means to dominate them. Only one in three employees who have lost their jobs in Europe and the United States will find a new one, and always with lower pay. The fall in income and purchasing power of Western households and employees is accelerating. This is especially true for the middle class, which is becoming a class of the working poor, obliged to make increasing use of their credit cards to maintain their lifestyle.
Working Longer, for Less
Globalization has been a real maelstrom for wealthy countries, dragging them down, causing and accelerating de-industrialization, unemployment, precariousness, the emigration of capital, off-shoring, and slower productivity. American economist and Nobel Prize winner Joseph Stiglitz says outright:
Playing ostrich by burying our heads in the sand and pretending that everybody will benefit from globalization is madness. The problem with globalization today comes precisely from the fact that few in the West will benefit, while the majority will suffer from it.
All this is decided by strangely-behaved elites. They hold the political, economic, and financial power. They are self-satisfied and devoted to self-worship, endowed with a lack of empathy toward those they place in difficulty. They like to evoke the supposed benefits of globalization, while these accelerate the decline of their own countries. Homogenous, nomadic, cosmopolitan, and working in networks, these elites disdain the human reality of their fellow-citizens and have little care for fates of the nations that host them.
It’s starting to show.
At the beginning of the 1910s, the American banker J. P. Morgan estimated that the capitalist system could not function if the difference between the salaries of the directors and the workers went beyond a factor of 30 or 40. It is presently above 1,000! The 20 percent best-off Americans contribute half of consumer spending. The remaining 80 percent are quickly becoming impoverished, falling into spiraling debt that has entirely removed them from the cycle of investment and savings. Europe will approach the same statistics within a few years. In the world, the richest 1 percent possess 23 percent of the total wealth.
It’s starting to show more and more.
What we’re also starting to see is rising debt levels in Western countries. All are accumulating debt rapidly, and for some, it is dangerously high (Japan, the United States, Italy, France, Germany, the UK, Spain, Belgium, etc.). Take the U.S., for example: we see in the following graph that the growth of its national debt is impressive—17 trillion in 2013. You will notice that the curve looks familiar—it’s exponential!
To understand how much a trillion is—a thousand billion—you must picture it in concrete terms. New hundred dollar bills are roughly one millimeter when stacked. One hundred thousand bills would be necessary to make a one meter high stack, and a hundred million to reach a kilometer. A trillion is a million millions; it would represent a stack of hundred dollar bills one hundred kilometers high.
The graph below shows the public debt of the United States added to household debt, financial debt, corporate debt, etc. The figure is even more impressive: more than 50 trillion dollars!
According to certain economists, debt ought to include banks’ contingent liabilities. With that addition, the true debt of the United States would be 200 or 300 trillion dollars! These are dizzying numbers, and, in the end, mean just one thing: bankruptcy.
This is not only the fate of the United States. It is a situation that stretches all across the West. Indeed, if total debt (federal + financial + household, etc.) is measured as a percentage of GDP, then Japan and some European countries are revealed to have dizzying levels of indebtedness.
Why this explosion of debt?
Since the 1980s, Western economies, especially those of the U.S. and U.K., have become excessively financialized and excessively service-oriented, no longer producing as much real wealth (raw materials, industrial, or agricultural products). By not remaining competitive on an international scale, they have become, above all, gigantic debt-generators. The fractional-reserve system has allowed public and private banks to over-leverage their creation of credit (which means, for you and me, debt). The monetary system today is no longer founded on a standard commodity such as gold or silver, but, numerated in paper and digits, could potentially be expanded infinitely. The American Federal Reserve has generated money and credit at a rate never before attained in its history. This growth in the money supply does not correspond to any real new wealth. Worse, for 60 years, politicians have not stopped creating spending programs to finance their electoral promises: more welfare and entitlement programs, more subsidies to appease various pressure groups, more allocations and “pork” of all sorts for interest groups, more foreign-policy adventures. . . It doesn’t matter that the real economy cannot generate enough reasonable tax revenue to finance them all. Debt is there to make up for the loss. The abundant offer of all sorts of easy credit is what allows the citizens to accumulate so much private debt. Gone are the days when you had to save first in order to spend. In the age of “everything right now,” it’s easy to get credit to buy real estate, to meet current consumption or even to play the stock market; when the resulting speculative bubbles pop, new ones are created.
This shocking belief—that the important thing economically is to get people to spend more—could be presented to the world as a new social philosophy. British economist John Maynard Keynes (1883-1946) and his disciples blame what they consider unsatisfactory about the economic situation on the insufficient tendency of people to spend. To make people prosperous, it’s not an increase in production that’s necessary, but an increase in spending. The idea of “propensity to consume” allows Keynes to consider savings as a remaining balance, a residue, what’s left after consumption, a passive act.
This way of thinking is so universally accepted that our usual way of measuring a country’s Gross National Product does not take the effect of debt into account. It completely ignores it. If, for example, it was necessary to borrow six dollars to invest in a venture, and thus create one additional dollar of profit, which would and should be added to the GNP, bizarrely, only that one dollar is counted and not the debt required to obtain it. For any individual or company, the debt must be listed as a liability on pain of fraud. But not when governments do it!
GNP also takes no account of the impoverishment resulting from the exhaustion of natural resources. That impoverishment should be deducted from the amount
to obtain the real wealth. In any case, you can see that growth is zero or even negative, since all raw materials and all natural forms of energy being consumed today are essentially lost to future generations. Much like a compulsive gambler in a casino, debt begins in an ad hoc and seemingly acceptable manner. One must invest in productive assets like new roads, bridges, and other infrastructure. Then, social programs must be put in place (retirement funds, unemployment benefits, etc.) or public interest programs (primary education, universities, hospitals, etc.). Sometimes a war must be financed. Then one goes further into debt to finance a permanent national defense system. Then preventive wars must be fought, since strategic industries (or those supposed to be strategic) must be subsidized. Finally, a complex bureaucracy is needed to manage all these programs and activities. The political and economic decision-makers are so caught up in this mechanism that no one has a personal stake in changing the system. There are careers at stake, habits and, above all, the fear of disturbing something that seems to be working so well. Every time, experts comfort us in our daily habits and explain that this time, it’ll be different. “Have confidence in us!”
This process is not peculiar to our modern societies. The citizens of Imperial Rome got free bread every day. It was a pledge of social stability, but for the Roman state it involved colossal purchases of Egyptian grain. Soon, to protect the grain, it was necessary to mobilize great navies and armies. It became impossible to resist the temptation of using these forces to conquer, occupy, and secure for themselves the source of supply.
In history, every time a nation has tried to live beyond its means through debt creation, it was unable to control it—which caused the collapse of its economy. When you inject ever more colossal sums into an economy at an ever accelerating rate, you get an artificial boom effect, which ends as soon as further fiduciary resources are no longer available on the loan market. The flight to the remaining real resources (gold, silver, land, productive assets) accelerates. Then the entire system may collapse, as happened in Weimar Germany, in Uruguay, in Argentina, and recently in Zimbabwe. The Austrian economist Ludwig von Mises (1881-1973), Keynes’s adversary, thought that “debt [was] everywhere and always the antechamber of bankruptcy.”
Let’s now look at how this debt functions, and what its impact on the economy really is.
First, let’s define “inflation”: inflation occurs when monetary growth is greater than the production of goods and services. Higher prices are, ultimately, a consequence of inflation (even if these don’t show up immediately).
Now let us agree on a simple and down-to-earth definition of “debt”: a debt is a claim on future wealth. Now, all wealth is the fruit of human labor. A debt, therefore, is a claim on future human labor.
Debt operates on the principle of the future repayment of principle and interest. Since a creditor can reinvest his interest payments (i.e., turn them into more debt), he can, in essence, earn interest on interest. Debt expansion thus follows a non-linear function, which, as we have seen before, is . . . Anyone? Anyone? . . . yes, exponential. (Those in the back of the class, please pay attention!).
So, if debt is not paid or cannot be paid, it’s necessary to work forever and, in this case, debt is slavery.
With every increase in debt, the creditor presumed that in order to be able to pay the debt and the interest, the future is going to be bigger than the present. And not just a little bigger, but exponentially bigger. More cars bought and sold, more houses constructed, more salaries paid, more taxes and duties collected, more oil consumed, exponentially more. Always MORE!
Well, if more and ever more is needed, and we are certain that nothing can grow forever, how do you think this is going to end?
The plain and inevitable result will be that a vast amount of what is considered wealth is going to disappear, go up in smoke, because there is too much debt upon a future whose potential for growth is too limited.
So how does one get out of debt? There are three ways:
1. Pay it off.
For this, more productivity and growth are needed, which will be difficult in a world with finite resources. Alternatively, state revenues can be raised by raising taxes, which is rarely popular, especially if it is used to pay the interest on the debt rather than for an investment that will directly benefit the electorate. Another way is to reduce state expenditures by implementing an austerity program, a measure which will also not be very popular. Russia, for instance, did pay off its debt after 10 years of painful sacrifices.
2. Do not pay it off (default on it).
Defaulting is easy: you simply no longer pay your debts. It is extremely effective. Let’s take an example: a pension fund owns 10 billion in claims upon the debt of a company such as Nestlé, L’Oréal, Coca-Cola, or Siemens. If these companies go bankrupt, they default on their debts and, once the productive assets have been liquidated, the claims are no longer worth anything. In that case, the retirees have 10 billion less to divide among themselves. Presto! Their incomes and standards of living sink. Sometimes it is necessary for companies and individuals to go bankrupt and renege on their obligations. But this is a very difficult policy for any country to follow: the process entails sacrifice, which politicians and populations want to avoid.
With a default, there can be no more refinancing of public debt, and thus there will be no more liquidity; the country will come to a stop (at least temporarily). In the beginning, the nation will become a pariah and others will fear lending it any more money. No other choice will remain but to reestablish the currency (or establish a new one) at a very low exchange rate. Politically, default is often a non-starter, since it risks creating unemployment and enormous poverty; governments also likely fear that it paves the way for extremist politics.
That said, default is an honest option and, in many cases, can establish a new basis for a productive economy after the initial pain subsides. Argentina defaulted in the early 2000s and eventually recovered. Iceland, too, defaulted after the 2008 subprime financial crisis and recovered quite quickly (thanks to the help of some significant investments and bailouts from Russia.)
3. Print Money.
This is the easiest short-term solution. It also involves the worst long-term consequences. Because the destructive effects of this policy are deferred until they become someone else’s problem, this is what the great majority of nations saddled with a large debt have done, and will always do, all the while claiming that this time it will be different! But since the laws of economics, like the laws of physics, are the same wherever you are, whether in Washington or Zimbabwe, things do not turn out differently. Massive money printing always causes a wave of inflation (eventually). This is what happens when artificially created liquidity is diffused through the economy, when states are forced to monetize their debts because no one wants to finance them any longer. Interestingly, the money and credit created by the Federal Reserve in its ongoing “Quantitative Easing,” as well as in similar programs by Japanese and European central banks, is also used to buy equities—and thus inflate the stock markets. This has created a synthetic and uneasy sense of euphoria among those with investments, without any change in the real economy to justify these levels. At the time this book was being prepared for publication in mid-2013, America’s Dow Jones Industrial Index was at an all-time high . . . just waiting to have the rug pulled out from underneath it.
The first dire effect of money printing is, paradoxically, a fall in the price of certain assets (or “deflation”). This is caused by the harsh competition between producers and distributors to stay afloat. Assets are sold off: cars, equipment, stock, etc. There are year-round sales. At the start, the effects on purchasing power are positive (with prices falling, each dollar can buy more), but soon, as the money supply continues to grow, you get galloping inflation. The cost of staple products in particular rises quickly. As happened in Germany between 1921 and 1923, people traded their cars for food. There is usually a risk that this will coincide with
a phase of “stagflation,” during which the economy experiences weak or negative growth, while monetarily-induced inflation is raging. In the final phase, you get the big plunge into hyperinflation—a paroxysm of inflation—characterized by money losing all its value and ceasing to act as a medium of exchange; people don’t just want to spend money as soon as they get it—they refuse to use it for their transactions or to save it. In this situation, truck and barter, as well as the “black market,” are substituted for monetary exchange as the economy collapses. Analyst Pierre Leconte, president of the Monetary Forum of Geneva, commented on this subject, 20 December 2010:
Over these last few decades, central bankers have been the greatest counterfeiters in history; governments no longer have any way of avoiding hyperinflation, depression, and the collapse of all forms of paper money, one after the other. This will precede, coincide with, or follow the collapse of paper assets (stocks and bonds) founded on a pyramid of unsecured debt. This process is just now beginning in the West. Keynesian measures cannot stop it, but only postpone it for a time—all the while worsening the final outcome.
The result of credit expansion is always general impoverishment. The therapeutic treatment for hyperinflation is that the state takes over the economy by nationalizing it. This therapy often fails because of the nature of bureaucracy and the state’s lack of experience in managing enterprises. Meanwhile, the population forgoes its savings and investment to simply stay alive. Ludwig von Mises offers a good image of the situation: “Having recourse to inflation to overcome passing difficulties is like burning one’s furniture to warm one’s house.”
Survive- The Economic Collapse Page 8
