If you are reading this, congratulate yourself for stumbling across an obscure corner of the internet where truth is spoken. Not truth as in the repetition of slogans concocted by some powerful interest to be repeated by human spam, but truth. So read carefully, because your time is running short.
What you are witnessing right now is the failure of an ideology. That ideology is that heroic free market creatives should run the world. But why this ideology exists as a potent political force, and why it came to power, is what most people don't get. So let me explain: the Red Queen's Race.
In every economy, there are some goods that are the ultimate basis of production. Once these are known, all struggles become out either controlling the root of these resources, or being able to employ them. People institute government and economic systems to distribute these essential resources. This continues until there is a disruption which can achieve the same or better results, with different resources. Iron replaced bronze, for example, not because early iron was better than early bronze, but because it was more plentiful, and not limited by a few outcroppings of tin. Then some users of iron found ways of making better machines of war, and the result was the Assyrian Empire, which lived fast, burned hot, and died young and ugly. Disruptions generally occur when one group has a resource, and discovers how to employ it, or discovers a resource which it did not know it had. America discovered oil in effect, and learned how to employ it. Thus America disrupted the coal based world, because the British, who had coal, had to stick their necks very far out to get oil. So too did the Germans. The winners of the Second World War, were the two nations both distant from the origins of the conflict, who had oil: the USA, and the USSR.
But under the equilibrium, there is a basic cycle between controllers of these key resources, who by and large are not good at employing them, since they spend all their time controlling them, and employers of the resources, who by and large are have burned through their native stock. That is now: America has burned through most of its native stock of oil.
Oil is by far not the only key resource, however it is a poster child for the situation, because oil is the most extreme of the resources, others include rare earths, and certain ores.
The key to resource extraction versus resource employment is that resource extraction does not require very many well developed people to make money. Where as, employment of resources does. Thus it is possible to create a resource state with very few stakeholders.
However, it is not possible to have a prosperous society. Someone someone where, needs to live well. If there are two few stake holders, at some point they consume all the luxuries they can take, and they must spend money on power. And power is a bottomless vacuum. This is how oligarchies fall: either they burn out on luxury, and become decadent, or they go on endless wars of conquest and internal struggles of repression. Or perhaps both, when decadent princes try their hand at failed wars.
It is not mandatory, many resource states are, in fact, very egalitarian, because egalitarianism is the other solution set to an economic situation where one form of activity is much better than all the others: the wealth is shared, to prevent the have nots from breaking the haves. The haves often hire people to break the have nots, in hopes of getting to a very unequal society.
An unequal resource society is said to have the "Dutch Disease," because it hollows out the rest of society. Everyone is attached to the resource, or works for those who are. Nothing else matters, nothing else makes enough of a profit.
The mirror image of the resource state, is the financial state. It too is a product of the same action. The only activities which are as profitable as extracting an unsubstitutable resource are vices, and finance. Each for the same reason: people are willing to pay much more for them than they cost to produce. The finance state mediates the consumption of the key resource, and collects virtually all the profit. This, in a phrase, is the Red Queen's Race: a small group of low stake holder resource extractors, for example, the American South and cotton, and a small group of financiers who turn their society into a model of the resource extractors. Each advance in economic well being in the finance state, brings more money to the hands of the resource creators, who then raise prices. The finance state's job is to temporize: create paper wealth so that the resource states will not buy them up, find a substitute for the resource, often by conquest, and find luxury goods to sell to the resource state, that being the only thing the resource state really wants to import.
The key weakness of the resource state is that its stake holders do not want to develop, because a larger industrial base cuts into their power, and into the profitability of their resource extraction. Competition for labor increases costs, and the live by keeping costs down.
As I alluded to above the economic conflict between the American South, and the American North, and indeed the American South and the British Empire, was of a resource economy against increasingly financialized economies. The British Empire loaned money to the South for purchase of manufactured luxuries. The South, rather than buying or building equipment, bought luxury. It is not that the South was without native industrialism: the cotton gin, the first quality iron forges, American hard porcelain all came from parts of the South. New Orleans had comparable financial power to any Northern city. The South, had it not had the Dutch Disease, could have been on equal footing with the North in industrialization.
Our own Red Queen's Race was first over oil primarily. In 1970, the US began importing oil on net, and the swing exporters were in the Middle East. This was a painful, but manageable, Red Queen's Race, because while oil is highly profitable, the weakness of many of the producers is that they cannot shift to something else, and, by their own design, do not have other industries. Thus the financial state needs to regulate the speed of the economy for long enough to implode the resource state, often in a war. This is how, in our case, conservatism came to power: the only way to regulate oil demand, in the US, is by throwing people out of work.
Liberalism has an abhorrence of throwing people out of work for reasons other than cyclical inflation. However, the Red Queen's Race created a source of inflation that was outside of the control of the liberal state: namely in the hands of the resource states. These states were willing to buy American capital, because they did not want their own public's developing, and say, overthrowing them. Americans took the money and developed, not their own economy, but other, subsidiary economies, to keep wages and oil use down.
This was the paper for oil economy: the US created more and more exotic financial devices to sell to the oilarchies, which, in turn, acted as the world's demand central bank: selling for less when they had to, and for more when they could, but with Saudi Arabia there to prevent runaway greed, and to spike attempts to get off oil, since the Saudis were becoming major stakeholders. Your dealer is willing to give you credit, to buy more drugs.
In the US, Reagan, and in the UK, Thatcher, however saw a problem. In the liberal state, money is spread out over the whole society. Productivity goes up, everyone gets richer. This was LBJ's "A rising tide lifts all boats." However, the problem was that the smaller boats consumed, that ultimately became oil demand, and the large boats had to constantly bid against the oilarchs, who remember had virtually all of the profits from their society to spend, after paying for a military, for control of developed world capital. In the late 1970's it seemed like arabs were buying up everything, there were even jokes about it on late night TV.
So Reagan and Thatcher began the process of making the US and UK economies a mirror of the Saudis. All money flows to the top, the people at the top are tax exempt, and they bid against the oilarchs for control. Because the American economy is vastly larger than the resource economies, this is, remember the weakness of the resource economy, this change proceeded in stages. Tax rates went up for the poor: for example raising FICA taxes in 1983, as they went down for the rich, for example the Reagan tax cut package of 1981. Wages did not collapse all at once, instead, they stayed largely the same, with only a fraction of the improvements becoming available to consumers. Privatization was essential: because government bonds are sold with low interest rates and no risk, but private paper can vanish at any time. This is how financial economies hope to blunt being bought out: by selling paper that goes poof, and managing the paper for the resource economies. In the American South, there was not one financial exchange of any consequence, nor any global bank of any consequence, they used London.
Americans for their part were happy with this, even with grumbling, because for some life got better, for most it stayed the same, and they could convince themselves that the people who were being pushed out were bad people. And because for a generation, they lived much better materially than they deserved: they sold paper, which was almost costless to produce on the scale of the total economy, and got oil and other resources. It seemed like a good racket.
But during this time every single feature of the Saudi state, became a fixture of the American state. This included imprisonment on a vast scale, a gradually bloated military, increasing religious fundamentalism funded by the wealthy elite, and a de-democratization of the country. This is one of the problems of a red queen's race: all the wealth, and therefore all of the investment decisions, are in the hands of fewer and fewer people, but also the system grows more financially unstable, so the more control the wealthy have, the more they need. I've mentioned Hyman Minsky before but this goes well beyond his analysis, since he did not look at the resource spiral.
The Thatcher-Reagan thesis was: let them buy our paper, so long as our rich stay ahead of their rich. Don't believe me, believe Jude Wanninski, who wrote "How the World Works." However, one generation's hack for time, is the next generation's ideology. Jude did not entirely believe in what he said about the wealthy and the creative class, but the people who came after him had no such doubts. Labor was trash, only the people who managed the money mattered.
This brings us to Clinton. Clinton accepted the Red Queen's Race, and accepted Bob Rubin's addition to it: namely that if the United States could reduce its budget deficit, then those seeking returns and absolute safety would have to turn to Wall Street and the big investment banks for it.
This is crucial: risk free investments pay much less than you would expect. The unwillingness to take any risk whatsoever is very costly. Since the oilarchs learned that paper can go poof, they started demanding paper that would not go poof, and that was US Treasuries. Rubin's idea is once they had bought all the treasuries, the oilarchs would need some other form of supposedly risk free paper. That source, was the American mortgage market, and the key was to tear down the wall between investment banking, which sold products, and commercial banking, which held the mortgage loans. Securitization was the process of turning diverse mortgages, into bonds that could be blessed as "risk free." However rapidly the amount of truly risk free cash flow, that is the revenues that would always be there to pay the bonds every quarter, was used up, and so more and more exotic means were used to bullshit investors into thinking that they were buying risk free paper, when, in fact, they were not. Standard and Poors, of today's downgrade, was one of the entities that blessed the risky paper as risk free.
Clinton also accepted the idea that we could engage in labor arbitrage: ship jobs out of the US to places where less oil was consumed by ordinary workers, but control the profits. Find companies willing to work for less. In the end, that meant China, which, you will note, is not part of NAFTA. The real collapse of Clinton's trade policy was not shipping jobs out, but failure to understand the resulting internet bubble gold rush. It seemed like a thing to be encouraged: paper that would go poof, leaving the oil hear, and effectively lowering the price of oil. Oil hit $19/barrel. That is 1/4 of what it is today, and 1/7 of its peak.
Clinton's mistake, blunders really, were on doubling down in 1998 with the repeal of Glass Steagal, and and the failure to raise tax rates to prevent people from fleeing the market. The second mistake was political, not economic: leaving a nominal surplus. Glass Steagal was the wall between commercial and investment banking, out it went. Euphoria was everywhere, and "Dow 36,000 was a slogan." This time, it was different.
The Rubin dollar drought policy was to do the following: create a shortage of dollars, this would mean that those who had dollar denominated debts, which was almost everyone, had to export to the US. This would hold down costs not only of oil, but of manufactured goods in general, and of wages in the US. Americans could not work for more than Wal*Mart could buy from China, and Wal*Mart set prices in every market it entered, often by being allowed to violate the law flagrantly in development, wages, and working conditions. The costs of inexpensive goods from China were used to cut prices on everything else. In the old days this kind of predatory pricing would have been illegal, and stopped, under a variety of laws that dated from the 1890's and 1900's. Clinton, the Democrat, was economically to the right, of McKinley, a Republican elected in 1896. Wal*Mart's control of wholesale and retail trade was, by 1999, one of the few key drivers of American productivity. Economist Solow joked: the rates they made were peanuts, but as the biggest player in the two largest sectors of the American economy, that was an awful lot of peanuts.
Thus when there was a dollar drought, the US would step in, print dollars to "bail out" the temporarily trapped country, make a profit when things recovered, and then go back to squeezing. Essentially, it meant everyone was under pressure all the time, but any place that blew up would be bailed out, however, often with hard conditions attached. This, was the Washington Consensus. The target, was Russia, the great swing producer of resources. If Russia had to sell gold and oil and anything else at whatever price they could get, then it would depress resource prices. For about 4 years, the liberal economy of cheap resources attached to real wage gains returned. It was the best 4 years that most of you will ever seen in your lives.
Then, it blew up. The Down stopped making real upward progress, and the various leveraged schemes to produce fake risk free paper started quivering. Then the NASDAQ tanked, swooning from 5000 to 2000. The three years from 2000-2002 were the most sustained contraction of the financial markets, since the outbreak of World War II. But even as it was coming, the Red Queen's Race had another card to play.
That card was this: both the resource rich, and the developed world rich had doubled and tripled and more on the stock market. Even by November of 2000, the pain was enormous, because the leveraging doubled and more the losses. They needed, needed, to bail themselves out. However, their candidate was not all that good, people still felt good about the Democratic Party, and it was coming close.
So they stole the election.
Let me repeat that: they stole the election. George W. Bush did not get more legal votes in Florida in 2000 than Al Gore. This is not a supposition, it is, in fact, legally true. The Republican Party stipulated to, in criminal proceedings, to enough misdeeds to swing the election, including hand filling out missing absentee ballots. However, they could not have stolen the election if the Democratic Party, and Al Gore in particular, had not allowed them to. In the ultimate irony, President of the Senate Al Gore ruled that Al Gore, Presidential candidate, would not get a hearing.
What could it hurt? Well, everything. And not in a very short time.
But, I must return to my regular work. The Dow is off 3.59% as I post it, and tomorrow will be another bad day, so there is plenty of time to explain what Bush did, and what Obama did, and then draw some economic and political conclusions.
So why should you read? Because I wrote in 2001 that Bush would bail out the rich with tax cuts, and the poor with a housing bubble, the housing bubble would collapse, taking the economy with it, producing a massive recession. That is, I predicted this. In 2001 I told people that Ben Bernanke would be the next Chair of the Fed, because his life's work was how to prevent a liberal moment in an economic downturn like this. However, because of pure incompetence, that recession was larger than even what I, a noted pessimist, thought possible, in part, because the left went from being a coherent critique of the Red Queen's Race, to a racist fan club. Yes, racist. But that's for tomorrow.