Over the past few months the figures being talked about for stimulus packages around the world have started to become more and more outrageous.
The United States has now settled on an US$827 billion package; China is spending US$586 billion; Japan US$276 billion; Germany US$68 billion; France US$33 billion; Britain US$20 billion; Australia US$26 billion; and so on and so forth. New Zealand has recently announced a rather modest US$0.25 billion package.
Looked at sceptically it is hard not to question whether these "stimulus packages" shouldn't simply be termed pork. But that somewhat understates the scale of the undertaking. We are talking a whole new genera of pig. Megasuidons: MEGAPORK. There is money for infrastructure, money for industry, money for new technology, money for climate change. In most cases this is money from Government to be allocated by Government to those Government deems deserving cases.
As President Obama said during the election campaign "you can put lipstick on a pig.." and while he declares he never intended to dole out pork in such vast slices, he clearly feels he has no choice. The alternative is too much pain.
In fact this is a de-facto admission that corporations are fundamentally extensions of the state. Banks, aerospace manufacturers, auto manufacturers, even porn moguls - indeed nearly everyone has their hands out for capital, having unfortunately lost the capital they had been relying on. Why should they get any of it? Why should the people who destroyed so much value be reimbursed by the Government when, when they had money, they spent so much effort avoiding giving any to the State?
In some ways this raises the question:"what is money". Officially it is the medium of exchange issued within sovereign nations. But the monetary value that has evaporated into thin air over the past year was never really issued by Governments. Essentially it was money created by a vast tower of leverage.
Think of it this way. A huge balance. On the left hand side is real sovereign issued money and on the right side another balance representing the banks. On the left hand of this second balance is bank issued money and on the other side - yet another balance, representing merchant banks and large corporates. They issue their debt and stock. Repeat n times. But not with smaller balances (that would be far too sensible) but with bigger ones. Then just for fun cross the towers over between countries so you can make them even bigger.
The creation of money is now no longer in the hands just of Governments. Everyone is at it. And inflation becomes a global phenomena with the Reserve Banks juggling huge towers by fiddling with interest rates at the bottom to try and get through to the guys building for the stratosphere at the top.
Eventually like a game of Jenga, someone builds the tower too high, the whole tower collapses, and takes out balances all the way down the line. It's best described as catastrophic deflation. Asset values collapse and in theory prices would collapse too were they not based on the levels achieved under the previous inflation and people have no stomach to reassess their ideas of their own monetary value - particularly in terms of their own incomes.
In theory, of course, what would happen is that everyone would take a massive pay-cut, all assets would be written down and the currency would plummet. There would be no money around for investment for decades. This is what happened in 1929-32. The result was unemployment, hunger and misery for all. This was thought by some rich aristocrats to be a cure for the immorality of the 20s, although the cure was visited on the poor, rather than the rich who were really the ones up to all the immorality.
Thanks to Milton Friedman and Anna Schwartz what we do now is create money to restore the lost towers of leverage. In effect we are building a bridge from the present over a chasm of doubt which is obscured in fog. We build hoping that the other side (future optimism) will appear sooner rather than later so we can gain support from it.
Of course this created money has to come from somewhere. The state really has two options here. The option of borrowing it from other nations is gone. It can either borrow the money from the future earnings of the economy (ultimately taxes) or it can simply print some more. If it prints money it would normally take a hit in the form of inflation and currency value loss. But in a period of catastrophic deflation it doesn't actually matter because in the absence of inflationary pressures from credit expansion the Government has ample room to move. So states can get away with highly inflationary actions but only for a short time. The question for the Pork sandwiches is whether they are really too large and will end up creating havoc by the time they end up reaching the market.
The conundrum is this. Unencumbered by political expediency the private sector has pursued the logic of profit. By contrast the state pursues the logic of politics. The private sector is bankrupt and the state is in charge. But the logic of politics is a dangerous way to allocate resources. The command economies of Stalin and Mao were ultimate war economies and could not operate in Peacetime. In peacetime profit under social restraint is by far the best way to allocate resources. This applies for both the state and the private sector. Politics without social restraint (eg North Korea or Zimbabwe) is by far the worst way to allocate resources. But profit outside of social restraint is de-stabilising (eg Dafur or the credit crunch).
So do you give money to the people who stole it just because they say they are sorry and they will neeever dooo it agaain? I don't think so.
The problem has been social constraint. For decades now international finance has been working without it. It has wriggled furiously and slipped free of regulatory entanglements every time Governments have tried to catch up. So much so that even George Soros, whose Quantum fund profited from this immensely, started to worry that the whole system was simply unsustainable over a decade ago.
As Soros pointed out long ago in "The Coming Crisis in World Capitalism" the fact is that international monetary arrangements simply don't work. The World Bank isn't the world bank, its just a UN NGO that ruins countries by giving them money on stupid conditions set by Washington. It is entirely possible that this credit crunch will be the best thing Africa has had in decades. Finally its nations will have to put their palms away and get to work. Meanwhile the IMF lost all credibility as an agency for monetary stability a decade ago. The problem has been that since the collapse of the Soviet Union America has simply led an anarchic bumbling based on a hotch-potch of commercial law from various states.
What is seriously needed is exactly what the Robber Barons who are currently sobbing into their hankies for the cameras in the hope that they will get a fat bail-out don't want. What is needed is an international framework for commercial law which limits the ability of large funds to create unstable towers of leverage. Unless the US and Europe and Russia and India and China start work on this, all we will get in another decade is another crash even bigger than this one. Because the simple fact is that capitalism has now found a sure bet - bet all the money in the world and you have to win because even when you lose nation-states have to make more of it. This cannot be allowed to continue.
Pouring money into the top of the capitalist system in the hope that it will get to the bottom seems to me to be pouring gasoline on smouldering embers. It was stolen before and it will be stolen again. Where the money should come from is the bottom. Then it will be allocated by taxpayers to services taxpayers want. Yes, it will mean that some bow-tie wearing types in New York will have to sell their yachts and holiday homes, but frankly I don't really give a damn. Better a few "lords of the Universe" (as Tom Wolfe termed derivative dealers in Bonfire of Vanities) wankers suffer than millions of ordinary workers.
What does this mean? It means nationalising a lot of stuff. Retail banks, large corporations, everything that keeps the flow of goods and services in the high street in circulation. It means building stuff. Contractors are the largest potential pool of unemployment. Keeping them busy provides assets for future expansion. The good news is when private capital structures recover the state will be able to re-sell these assets for a good deal more than they paid for them
All of this is already happening but so far there has been precious little talk about the architecture of a new monetary order. The history of the world war one shows that people are very good at responding to catastrophe in the short term but apalling bad at addressing the deep seated issues. Unless we as a global community come to some sort of understanding about what money is, how it should be traded and what avenues lead to failure, we are sadly destined to repeat the same mistakes we are seeing today.
What we need to do is start laying the foundations for a global currency. Yes it is early days. Yes the world is not ready for such a thing. Yes there are huge issues relating to sovereignty and the ability of nations to use exchange rates as an instrument of policy. But when the Common Market started 30 years ago nobody dared dream that it would be the foundation of the Euro. Ultimately a common set of commercial laws and a common medium of exchange is the only thing which can bring sustainable stability to world trade and without an evolutionary process to get there nothing will happen.
For all his smooth talk we have not yet seen President Obama begin to act as anything more than a local leader in a time when global leadership is called for. The World Bank and the IMF need to be completely rebuilt as international agencies rather than instruments of American imperialism. Trust on a global scale is vital. Now at a time of crisis is the only time these wheels can be set in motion. Its a huge ask but someone has to do it, and nobody else has the momentum or the kudos at this current juncture in global history.
To paraphrase an old movie joke: "ready when you are Mr Obama".
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