11/25/2008, 00.00
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The way out of the crisis is neither Left nor Right

by Maurizio d'Orlando
Stake-holders and decision-makers are failing to see that the crisis of 2008 is worst and more complex that the crisis of 1929. Solutions trumped so far benefit only the banks, but do not generate wealth. The US dollar could become junk paper.
Milan (AsiaNews) – The current crisis and that of 1929 share several similarities. And political leaders and economists are trying to find a bipartisan consensus over a solution to the crisis to avoid the errors made almost 80 years ago when Wall Street collapsed. However reassuring it may be, the illusion is that we can try to think our way out today on the basis of the past. But we can do this only by forgetting that a lot has changed between 1929 and 2008. For instance, the gold standard is no longer the reference point for domestic and international monetary circulation. In addition, today’s crisis is much broader and deeper than that of 1929.1 To think that we can find solutions that follow those based on past experiences will not help us that much. If anything, they run the risk of plunging the economy into a more dangerous downward spin.

Solutions “left” and “right”

It seems that political leaders around the world have not realised that today’s problems are not those of the past. Almost like self-possessed men and women they are rehashing and concocting solutions with ingredients taken from left and right.

On AsiaNews we already noted how Paulson’s bipartisan plan2 is useless and harmful. Since we first came out his 700 billion dollar plan has ballooned into 2,000 billions and this without any prior authorisation by the US Congress.3 So much for democracy. With total disregard for transparency the Federal reserve has even refused to provide details about who got what.

In our opinion measures announced in other countries are equally useless and detrimental. Neither demand-stimulus recipes from the left, nor supply side proposals from the right can achieve any result in terms of economic growth.

So far leftwing state-centred Keynesian or Rooseveltian New Deal-like solutions are the preferred choice. Under such schemes governments will bail out banks and big industry, make them solvent and then re-sell them to private business.4 They also include higher spending on infrastructures—roads, bridges, “new” sources of energy as planned by Obama—and a politically-driven cut in interest rates.5 In particular, this last measure is ostensibly meant to appeal the ordinary people because they will have lower mortgages to pay. However, for the jobless without an income or those who are just scraping by, lower interests will not provide any relief, nor will they help companies with an empty orderbook.

A cut in interest rates right now will not jump start economic growth or create new jobs. In fact it will likely have an undesirable deflationary effect on circulating capital because so many consumers and companies that do have money are already up to their neck in debt in all major economies, especially in the United States. Any money saved from interest rate cuts is likely to go to debt reduction rather than more consumption or investment. Only banks or financial institutions operating on margin trading will benefit.6 Given the fact that rate cuts will not be put to productive use, they cannot ensure a healthy recovery but can only pump up the economic bubble. Conversely, if governments opt for more spending on infrastructures, they can only dope economic growth and spark inflation. Similarly, rescuing obsolete and uneconomical industrial firms to save jobs will just magnify the problem by increasing the use of resources that have not been produced.

The lack of real growth, untouched or distorted by high finance, is the problem, not the solution. Going for it would be irresponsible because it will not make a dent in the prevailing recklessness. This is even more so when it comes to rescuing financial institutions.

Rightwing recipes are no panacea either. All they do is rehash supply-side Reaganomics with its upshot of tax cuts and privatisations.

For the United States and in principle European Union, tax cuts7 would have little impact. Taxes have already reached the point along the Laffer Curve where cuts in tax revenue are no longer possible.8 More cuts can only undermine an already shaky government balance sheet.

Similarly, many privatisations have already been carried out in developed countries, some badly, so that that route does not offer much.

An increase in public spending in the United States to meet declared needs cannot be funded from domestic sources—US personal savings rate is either zero or negative—, nor from abroad since the dollars has lost its function as a reserve currency.

It is doubtful that the European Union and Japan can raise public spending without causing inflation because of the state of public accounts in the EU zone and Japan’s huge monetary bubble, especially in terms of M3. In any event the New Deal that is inspiring Obama was a failure. The United States came out of the Great Depression of the Thirties only during the Second World War.

Snipping at defence and bureaucracy

Of course something has to be done to free resources in the developed world. In the United States defence spending, the highest in the world, can be reined in; if nothing else, because of enormous waste. In the European Union and Japan action ought to be taken to change institutions that squander resources and stifle initiatives. These have morphed into a bureaucratic nightmare with a stranglehold on everything, smothering anything that has any dynamism, creating a legislative jungle that not only produces waste but also distortions.

More generally, we must increase the system’s productivity. In spite of expensive and massive research institutions, such gains can be achieved through product innovations that meet real needs.  

But above all the existing economic model must undergo a complete paradigm shift. Only this way can the legitimacy gap that plagues our monetary and political systems be closed. This can be done responsibly, without harming anyone’s rights, helping those who are today’s have-nots.

Sadly, this is not on the agenda. There is a real risk that whatever measures are adopted, the back of public budgets might be broken so that the initial frost caused by monetary deflation could turn instead into a blistering inflationary upsurge.

The precedent that comes to mind is the final decoupling of the US dollar from the gold standard when its convertibility into gold was ended. Stagflation and economic stagnation followed characterised by bland recession linked to double-digit inflation.

“Converging” views between Federal reserve Chairman Ben Bernanke, the newly nominated Secretary of the Treasury Timothy F. Geithner, a former resident of the Federal Reserve Bank of New York, and President-elect Barack Obama could lead to something like it, but on a bigger scale.

Saving banks, financial system and big companies comes with a humungous price tag and will inevitably have repercussions on the economy and our society.

If this is the case, and it would seem so on the basis of recent announcements, the economy will go into a tragic tailspin. The US government, followed by others, will increase the amount of dollars in circulation, causing public debt to explode, reaching levels that can never be repaid. At that point the US government will be forced to declare its financial insolvency with the US dollar demonetised, just worthless paper.


1.   The total value of financial derivatives is a thousand times the initial value of the Paulson plan and equal to 15-20 times the world’s GDP. See “Paulson plan: useless and harmful to democracy,” by Maurizio d’Orlando, in AsiaNews, 6 October 2008.

2.   See previous endnote and “Depth of the abyss of economic, social, political chaos,” in AsiaNews, 20 September 2008. See also “Subprime lending to trigger world’s worst financial crisis since 1929,” ibid, in AsiaNews, 19 September 2007.

3.   See “Worldwide Fed Defies Transparency Aim in Refusal to Disclose,’ by Mark Pittman, Bob Ivry and Alison Fitzgerald, Bloomberg News, 10 November 2008.

4.   Few remember, for it is politically awkward, that the New Deal followed earlier initiatives undertaken by Italian Fascist dictator Benito Mussolini. One example is the Istituto Ricostruzione Industriale (Institute for Industrial Reconstruction) or IRI, which bought shares from big banks and companies that had gone bankrupt. Today’s measures are a throwback to those of Italy’s Fascist regime and not many people in the United States like to remember them. For the Left it is a historic precedent that must be completely removed from memory.

5.   In many cases, in Japan for example, interest rates have plunged in negative territory because they are lower than the real inflation.

6.   They use borrowed resources to multiple their own capital.

7.   In reality Obama’s tax cuts are conceptually different from those of Ronald Reagan.

8.   Economist Arthur Laffer was informed by a well-known law described in classical financial science handbooks. According to the law there are two tax rates that provide maximum tax revenues, an upper one and a lower one. Any tax increase that goes above the latter is both useless and detrimental.

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