Monday, 21 February 2011

Why Paul Mason Is Wrong

Paul Mason has provided a copy, on his blog, of a talk he gave at the Warwick Economics Summit.
Paul, once more, rehearses some of the themes he has covered, on his blog, over the last year, and concludes that the idea, that the various measures being undertaken by – and forced on - Governments, will result in a resolution of imbalances, is false.

“One school of thought sees this all leading to a resolution of the global imbalances - on capital flows, on trade, on current account. I don't. It is already leading to disorder - in North Africa rising food prices are just one factor in the unrest but they are a factor and they are in part the result of the wall of money flowing from the developed world into the Ems.”

He may be right. As I stated in my blog, A Momentous Change, which examined many of the points Paul Mason raises, and agreed with them, concluding that, if the austerity measures continued, then it would lead to a brutal restructuring of Capital, within the context of something that would, at least, look like A Depression, in Western Europe, and which would carry through the restructuring of Capital within a period of around 40 months,

“This analysis is different, because the kind of change I am discussing is a process that cannot so easily be placed into a timescale, and which is itself still possible of prevention, provided the current austerity measures are reversed. I have heard it said by some commentators that although Ireland, Greece and Portugal can be bailed out, Spain is too large, for example. That is nonsense. The US is a much larger economy, and yet it can and has been bailed out by the simple measure of printing money to purchase the debt. The same measure implemented by a centralised EU State, could overnight bring the economic crisis in Europe to an end, and put in place the basis of a reconstruction of Capital.”

Paul tells us that, over Christmas, he has been playing the military strategy game, “Hearts Of Iron III”, and he seems to have been led to believe from it that there are certain forces at play that govern and limit the range of possible outcomes in historical processes. To a degree that is true, but an important aspect of historical change is precisely what real human beings do, and how their actions change the material conditions, and how that, in turn, enters a feedback loop into human consciousness, so that what once seemed immutable charactersitics, suddenly become transformed.
That, after all, should be one of the lessons drawn from current events in the Middle East and North Africa (MENA). In short, Paul's analysis in undialectical.

Back in 1999, I began writing a novel, a political thriller, entitled “Revolution”. It started by taking some actual events, and facts of the time, and, using my Marxist method, to extend them into the future, to create a possible scenario that would be believable. I had mostly finished the novel by September 2001, when September 11th happened. In truth, although it caused me to do some re-writing, and certainly to weave such an important – and unforeseen – event into the story, it did not change any of the basic outline. I had finished the novel by early in 2002. The first Chapter can be found here. It predicts, in the years after 2000, a period of high volatility on the markets, a massive increase in the price of oil, the price of Gold rising to $1,000 an ounce, a massive global Financial crisis, followed by economic collapse, the outbreak of revolutions in the Middle East and China alongside the outbreak of massive social unrest across Europe, which is turned into a revolutionary struggle for power, in 2009. The only main aspect of the story, which, in fact has not been borne out, is that the Left would get its act together, and establish a new international, revolutionary organisation, which acted to transform those struggles. But, it is a work of fiction, and so even this most unlikely aspect could be justified for the sake of the story! But, it does show the problem with trying to draw conclusions about the future, because even one missing or changed factor, can alter the end result considerably. So for example, Paul writes,

“But by 1936 - if you are a country like France, Britain or the USA you do not have much to worry about: nearly all your trade is with your own currency bloc. Its an affront to the modern mind to propose - as France - a perfectly economically equal trade between Chile and yourself only to be rebuffed with the reminder: "Chile is a puppet of the United States".”

First of all, that makes assumptions about global trade relations, and, secondly, it assumes that, even if those assumptions were valid, they are not changeable in the short term. I don't think that is a valid premise.

Consequently, although Paul, is correct to say that current developments do not automatically lead to the resolution of imbalances, it is not correct to draw the conclusion that this must result in a crisis. It might lead to a crisis, as I have set out in my blogs, A Momentous Change, but, as I have pointed out there, even such a crisis is likely to be short-lived, precisely because of condensing the restructuring into a much shorter time-scale. But, that would probably require that Big Capital was unable to force a change of policy on West European Governments, unable to bring about political changes in the EU etc.
I agree with the comments Paul has made in a number of his blogs, where he talks of the nature of EU bureaucracy, and its inability to act quickly and decisively. But, in a global context, of rising revolutionary upheaval, across MENA, reports that China has itself been led to impose a crackdown and arrest opposition leaders, where this is manifest in other struggles, for example, in Catalonia, and of the possibility of that spilling over into Europe, I think that to work with the assumption, that such dithering will continue, is not justified. Certainly, I think that when the representatives of Big Capital talk on the phone, meet at a Bilderberg event and so on, they may be more exercised to press on the politicians and bureaucrats the necessity of more decisive action.

Of course, the way in which a modern Global Capitalism (Imperialism) works is complex. Not only are there overlapping and conflicting interests of Big Capital itself, but there are certainly such contradictory relations between such multinational Big Capital and its smaller brethren. And, as Paul himself has said, in one of his blogs, this Big Capital, does not have the problem that politicians have. It can set out its interests, and what it wants to do about them, and act accordingly, without the imposition upon it that politicians have – the need to get elected!
And, one of the contradictions that exists within this modern Imperialism, as I have set out in my blogs A Tale Of Contradictions, is that although the logic of Imperialism is the establishment of a World State, just as the logic of 19th Century Capitalism was the establishment of the Nation State, it is incapable of achieving that aim. It has to settle for a series of larger supra-national states, such as the EU, and the establishment of global state structures such as the IMF, World Bank, WTO, G20 and so on, which, in fact, replicate inter state conflict on a larger basis.
Consequently, although Capital, particularly Big Capital, may already operate as a global phenomenon, the “superstructures” as Marx described them, erected on the back of those productive relations, remain locked in a pre-global age with all of the conflicts and contradictions, which flow from that. As I have pointed out, in those blogs, this can be seen within the EU, itself, and the question of how to deal with the deficits of the periphery are an illustration of it.

So there are two main questions that have to be asked here. One is to what extent will Big Capital seek to impose its will on the politicians in order to resolve the current contradictions at least cost to itself, greatest advantage to itself compared to its smaller brethren – for one thing, how much will it see the current situation as an opportunity to bring about greater centralisation within Europe, as has happened in every previous crisis – and so as to minimise the risks from social unrest that could result from contagion from MENA linking up with the existing struggles of workers in Southern Europe?
The other is, to what extent will workers resist austerity effectively, and link their struggles in the way that the masses in MENA have done? The answer to the first is not at all separated from the answer to the second.

The reality is, as I have set out in the blogs above, that the current situation in relation to global imbalances is not at all as intractable as Paul makes out in his talk. Yes, its true that if China revalued the RMB by 40%, which is the extent some analysts believe it would rise if allowed to freely float, then the consequence would be that Chinese exports would tank, and severe disruption would result, including the likelihood of social unrest in China.
But, the Chinese Authorities are talking about a revaluation of around 6% in the RMB in the coming year. Not only will that not tank the Chinese economy, but it will be highly beneficial to it. Firstly, China is suffering considerable cost inflation from the costs of imported raw materials and foodstuffs . A revaluation of the RMB will reduce that imported inflation, taking pressure off wage demands in China. It will also feed through to some extent in its export prices. But, more likely, China will benefit from the so called J-Curve effect. That is, because contracts are already signed for several months ahead, and because importers of its goods will not in the short term be able to find substitutes for Chinese goods, the volume of exports will remain the same, whilst the RMB price of them will rise, providing a profit boost to Chinese exporters. China is also having to increase interest rates, and introduce quantative tightening measures to try to prevent an asset price bubble, particularly in property. A higher RMB, will make such measures less necessary.

A 6% revaluation will not remove the imbalances, but a number of years of such revaluations together with structural changes within western economies can. As I set out in one of those blogs above, one means by which western economies such as the UK, US, Ireland, Spain, etc. could immediately address the problem would be via the housing market, a solution that has also been put forward by Fathom Consultancy. The other day, a Government Minister, talking about the problems first time buyers were having raising deposits to buy a house, argued that the necessary deposit rules should be relaxed, and Banks and Building Societies should lend more!!!! This from a Government that attacked Labour for lack of regulation of the Financial Sector, that has attacked irresponsible lending and borrowing, and which uses a fatuous parallel with household budgets to talk about the country maxing out its credit card!!!!

The problem is not that house buyers cannot save enough to put down reasonable deposits on houses, but that house prices are way too high.
On an historic basis around 4 times too high, and in need of a 75% correction. If that were to happen abruptly rather than dragging on over several months or years as seems likely now, then the pressure on wages would be hugely relieved, first time buyers could begin to buy houses, and bring about a stimulation of the economy, and building land prices would be forced down, meaning that new housebuilding would be stimulated, creating thousands of new jobs. If the Government wants to do something positive, it should raise interest rates, and take other measures to prick the housing bubble, and crater house prices. Over a period of years, other measures, to reduce the Value of Labour Power, in the West, could be undertaken to compensate for the imported inflation that will result from increased costs in China, and the revaluation of the RMB.

Paul also refers to the rising cost of food, and how this has played into the current social unrest in MENA. But, there has been a lot of Malthusianism about the talk of a global food crisis. Marx set out why the Ricardian notion about diminishing returns was wrong.
Settling the US, and more importantly settling the mid-western plains, was very costly. But, ultimately, when population had grown, and demand had risen sufficiently, then this new production of grain and agricultural products, from these areas, could be undertaken not at a higher Marginal Cost of Production, but at a much lower one. The sharp rise in food prices is causing immediate pain, but the same cause is leading many African countries – and some MENA countries to buy land in Africa so as – to develop vast new areas of cultivation, using the latest techniques, and industrial scale farming that will lead, in the medium term, to a vast increase in Supply and reduction in the price of foodstuffs. That has been the case in every previous Long Wave cycle with every kind of primary product.

In a discussion a few months ago, on TV, Joe Stiglitz, argued that economies, such as the US and UK and Germany, could address their crises by fiscal stimulus.
Indeed, they should do so, he argued, in order to stimulate the global economy too. But, he argued, there were some economies such as Greece, Ireland, etc. who could not do that, because their economic future was not in their own control. That is true, and Paul is correct to say that some Governments have attempted to push some of the cost on to others i.e. Greece, Ireland and so on. But, this is why the EU has to operate as a whole rather than as competing national blocs, or else it will collapse. The reality is that the leading economies of the EU, rather than seeing social unrest spread throughout the EU, and the possibility of the EU break-up will have a considerable incentive to try to bring about a greater degree of political and fiscal union, and from there to act to reflate the EU economy.

If I were writing my novel today, and focussing on the immediate future, it would go something like this. The election in Ireland results in a mini political and economic crisis. Fine Gael has already said it wants to renegotiate the bail-out. After the election, in February, Fine Gael is pushed to take a harder stand by Labour, and Sinn Fein. The EU cannot agree to a renegotiation, because it would send the wrong message to others, and because Germany and France, and Austria seek a more centralised control system. They recognise they have a strong bargaining position.

Political revolutions continue to spread across MENA, and the problems already being faced by Italy, in relation to an influx of refugees, become replicated across Southern Europe. The contagion of revolt spreads, as those refugees link up with their compatriots in those countries, who, as immigrant labour, are facing similar economic and social problems, and also feed into rising social unrest from workers in those countries opposing austerity, as well as those who see a solution to their problems in greater regional control over their destinies, such as those in Catalunya.

The economic and social unrest along with the effects of austerity in the UK, Ireland, Greece, Spain, and Portugal drives down economic activity, which as inflation continues to rise, worsened by a rapidly falling Euro and pound, causes a rise in Bond Yields and risk premiums. Depressed housing markets in the UK, Ireland, Spain and Portugal are undermined further due to uncertainty and rising interests rates. Sharply falling property prices by the Summer further undermine economic activity, and in Spain lead to the firest Cajas going bust. The Spanish Government, like its foreign counterparts, seeks to resolve the problem by getting the Spanish Banks to take over the Cajas as part of a restructuring. The Banks, already having large chunks of the Cajas debt on their books, agree to step in. As with their counterparts, in other coutries, those Banks find that the Balance Sheets of the Cajas are a fiction, and more so as property prices continue to tank. The previously sound Spanish Banks, need to be bailed out by the State, which in turn needs to be bailed out by the EU. Even an expanded EFSF is not large enough to do the job. The EU, cannot respond in the way it should – by issuing EU Bonds – because of bureaucracy, inertia, and national interests. Germany essentially says, if you want us to pick up the tab, we want an EU state and central control. In the meantime, to prevent a complete collapse, the ECB is forced to print money, and buy sovereign debt in the secondary market on a huge scale.

The Bond Markets respond by seeing inflation and risk down the road, and Bond yields rise, and there is a flight to Gold, which hits $5,000 an ounce by year end. The asset prices – property and shares – that have bubbled up over the last 30 years, on the basis of huge amounts of liquiidty pumped into the global economy, collapse – a return to the mean, and more, a 75-90% collapse as happened in the 1930's, or as happened with the NASDAQ in 2000. Faced with economic meltdown, and widespread social unrest, the EU eventually agrees to the establishment of some form of political union short of the establishment of an EU Federal State, but enough to also establish Fiscal Union to work alongside the Monetary Union. It begins to issue EU Bonds, and to reflate the European economy within the context of a restructuring of Capital possibly along the lines of German post-war re-construction with an attempt to incorporate Labour through the Trades Union bureaucracy, via Works Councils and so on.

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