Friday, September 10, 2010

Chant Down Babylon

Come we go burn down Babylon one more time
Come we go chant down Babylon one more time
For them soft! Yes, them soft!
So come we go chant down Babylon one more time
-- B. Marley

There's an interesting divide in economics, those who understand the importance of industry to industrial economies in an industrial age, and then the vast majority. Now, the first group tend, though certainly not exclusively, to be old New Deal types. Tom Geoghegan is one of them, and he has a piece in The Nation with some very excellent points on the matter. First, when you are in an industrial era and you have deficits of manufactured goods, then you're going to generate more and more government and private debt. Without addressing the first, you're not going to change the second. Tom addresses the problems this causes for those advocating more stimulus most excellently and succinctly,

When we have a big trade deficit, the feds can't run up a debt just to re-employ Americans. As long as we've so much trade debt, we have to figure that a distressing amount of any stimulus will go ultimately to re-employ the workers in China, Brazil, Japan and even Europe, who fill the gap between the "demand" we pump up and what we actually "supply." When we have a big trade deficit, it means that the more we prime the pump, the more we drain out this distressing amount of our national wealth.

Tom also throws in his hand trying to rescue poor old Mr. Keynes from his supposed disciples writing,

Indeed, for every kind of debt—government, consumer, trade—the Democrats have to be the party that gets the country out of debt. That's the only way to bring back a fair and just economy that lifts the middle class. As debt piles up, even our base is freaking out. Deep down, people grasp that America got into this mess with too much private debt. "Hey, if we're all trying to get our own debt down, how does it make sense for the government to run it up?"

"Oh," some of us will say. "These poor unenlightened ones—they don't understand Keynes." Maybe we don't understand Keynes. Keynes would never have happily urged a serious debtor country to go deeper into debt. This is not your great-grandfather's Great Depression. In 1936 Roosevelt could and should have gone into debt—but didn't. We were the biggest creditor country in the world. In World War II we ran up a colossal debt—but it was a debt to ourselves. We baby boomer kids never even noticed. That's why Keynes was so relaxed in 1936 about our going into debt. But otherwise Keynes spent much of his life trying to get debtor countries out of debt—Germany, his own Britain after the war. If one looks at his career, it is clear that Keynes never told a debtor country to go deeper into debt.

As he would point out, much of the debt we pile up in Washington has little or nothing to do with putting people back to work. Much of it is just to balance the books. Because we buy more than we sell, we have a trade deficit. So the books have to balance, right? Someone has to make up the difference. Under Bush we had consumers go into debt to do it. But they're tapped out. So now Washington has to go into debt instead.

He adds,

And why else did the stimulus run out of steam?

It was probably not big enough, but an even bigger one might have run out of steam. The bigger the trade debt, the less punch there is in running up a deficit. You can't just blame the GOP for cutting the stimulus down.

What's more, on this debt to pump up foreign "supply" we also have to pay out interest to foreigners. The deeper in debt we go, the more likely we are to end up in the clutches of foreign creditors. Don't believe me? The time may come on the left that we'll miss the days when we could rail at Goldman Sachs instead of the IMF.

Yes, in ten or so years the renminbi or even the euro (thanks to Germany) could replace the dollar as the world currency in which we denominate our debt, and our fate will be up to central bankers in foreign countries.

This is no joke: a Babylonian-type captivity for our country is but a presidential term or two away.

He calls for increasing exports, but I'd say at this point, the US doesn't need so much to increase exports, as much as simply produce much more of what it consumes, just as the Chinese don't need to import more as much as they need to consume more of what they produce.

Chant down Babylon.

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