Thursday, December 2, 2010


You pays your money and you takes your choice.
-- Aldous Huxley

In this era of neo-bipartisanship, the one thing we could get Mr. Obama and the new congress to agree on is a re-branding effort. Let's be officially called USA INC. A few decades from now, people will look back at 2008 as the year of the official start of state capitalism. It is the year, mega-corporate dominance became unchallenged. You could pick a couple events of that year that best illustrate the dawning of corporate rule, most importantly the subservience of all our democratic institutions, but the most obvious were the actions of the Fed.

The Fed was giving money to everyone and everybody with some sort of ranking in the Fortune 500, and then some. The big banks, investment banks, foreign banks, foreign governments, GE, and Harley Davidson. Everyone who was anyone got money, all done with no democratic oversight. The most important thing to understand is the precedent the dumping a bunch of money into the system created -- a system of too big to fail. If you're above a certain size, you are now perpetual, there is no ability for the system to correct. Following this precedent, the ECB announced today, it will pump euros, estimates of two trillion and up, to keep the present European system perpetually operating.

Many schools of thought think this will inevitably lead to inflation, but that's never seemed quite right. Mr. Greenspan proved long ago, that you can keep asset prices inflated, while the resulting "trickle" into the economy wouldn't cause larger inflationary pressures. This was especially true if you could keep pressure on wages and deflate manufacturing costs with a massive off-shoring of production to lower wage areas of the planet. In turn, this allows the great pool of money floating in the asset markets to seek greater growth, thus, higher profit areas of the planet, outside the old industrial eras of Europe, the US, and Japan, after all, this is very much still an industrial capital system.

With all the dumping, or if you prefer transference of money by the central banks to the top of the system, the trick for state capitalism in avoiding inflation is to keep too much of the money from seeping to the bottom. In Europe, as demonstrated by Ireland and Greece, this is done by cutting the public sector, the social safety net, and increasing unemployment. In the US, it has been done with high unemployment and what will soon be with Mr. Obama and the new Congress a no doubt vigorous cutting of government spending.

I couldn't figure out how this was all working and where it leads to, but Ames in an email last night gave me the precedent from Russia in the 90s stating,

Well maybe Russia offers an explanation. Let me think: in the 90s, especially 92-96 or so, something like this happened: Almost everyone's wages went to worthless, everyone's savings and pensions were definitely worthless, connected banks and industrial outfits and bankers wound up getting shitloads of Central Bank-printed rubles pumped their way, and an oligarchy class grew out of that, but at the same time, there was so little PHYSICAL money in most parts of the country that by the mid-90s, barter was I believe more common than money for goods. This went on until Putin took power, or shortly after he took power (and oil started rising too). He rationalized the corruption.
The result though was that assets bubbled out of control a few times and collapsed spectacularly twice plus once somewhat spectacularly in 1995, before Yeltsin stole the '96 election (which sparked the big final bubble of that era). Inflation for consumer goods was a nagging problem, but that was largely because a) Russian industry collapsed and everything was imported, and b) the government rolls grew massively with bureaucrats who all wet their beaks at every stage of the distribution/sale. Still, I think inflation was kept in check from total hyperinflation by a classic monetarist policy, in fact that was the condition of each succeeding World Bank/IMF loan: that the money wasn't distributed to the people, only to the financial system.
OK, yes, a bit more extreme then where we are, but all the processes are the same. I guess the lesson here is state capitalism will end the same way as state communism did, with eventual systemic insolvency due to an inability to correct though the protecting and institutionalizing of an unsustainable status quo.

We need to get on a different path, the future lies in part with restoring and reforming this republic.

1 comment:

  1. This whole corporatist scheme relies on a stable or declining real wage so that rent-seeking can replace fair return on productive investment. This means that either the government has to be in deficit to the rent-seekers, or the private sector has to become increasingly indebted to the rent-seekers. The only way out is to make up the difference through a trade surpuls, but that would result in a rising real wage, so forget it. Moreover, it is just not possible with free trade, free capital flow, and global labor arbitrage.