World economy

The Great American Heresy

More than a hundred years ago, the brilliant philosopher and father of modern psychology, William James, warned his American compatriots against “scientism”. James saw an increasing tendency to extend the then budding scientific method of controlled experiments in the physical sciences into intractable social and political problems. He warned it would not work, perhaps as much based on his psychological understanding as his philosophical logic, that is, as the old saying goes, people will be people.

Not too many listened to James then — or since. The old logical fault has taken on new vast proportions since the invention of the computer and the incredible ability to accumulate virtually limitless numbers as well as “soft” information. Now the digital revolution has given us the capacity for virtually unlimited mathematical calculations. Listen to that fountain of politically correct wisdom, National People’s Radio, almost any morning or afternoon, and you will hear another long dissertation on some social or political issue, usually foisted on us by the tenuratti, backed up by voluminous, if often irrelevant, statistics.

Nowhere has the disease taken root more than in the business schools, pickled there by management experts, often practitioners of what has been termed “the dismal science” but more accurately, the pseudoscience. A few years ago, I was flattered to be asked to “lecture” a class at the prestigious University of Virginia business school. A professor had somehow learned I had written a popular [not so popular as I would have wished] biography of Soichiro Honda, the Japanese investor and industrialist.

I sat in on the tailend of the professor’s presentation of Honda as “a case study”. I was worried the gentleman might fall off the edge of his lecture platform when, spelling out Honda’s success, writing an algebraic [?] formula across the blackboard, he began to run out of space. Luckily, he left the room after introducing me. I picked up the monologue, telling my young audience I would possibly be going off on a different tangent since I had written an anecdotal book. There were, I must say, a few knowing smirks, indicating I had underestimated the students if not the professors, in their search for networks of future acquaintanceship in these courses rather than “learning” in the classical sense.

I had had considerable exposure to the company and, luckily, despite corporate antagonism toward my project, through a shinseki [a “relative”, the nakahodo, the “in- between-person” who had arranged the marriage of Honda’s eldest son], direct exchanges with Honda, himself. I found Honda a mechanical genius, but no businessman. The evidence was how repeatedly the company had almost bankrupted when he went chasing sometimes valuable, sometimes moonbeam, inventions. [Honda, for example, was virtually the only automobile company to attempt its own automatic gear transmission, later to be abandoned.]

At a certain point in time, as the lawyers say, MITI [Ministry of International Trade and Industry], the all powerful Japanese bureaucracy then overseeing Japan, Inc., intervened. It anointed a production line genius from the wartime Hayakawa aircraft to take over Honda’s “business side”. The rest, as they say, is history. The gentleman in question was an eccentric; e.g., a devoted Wagner fan he annually took a troop of young men to the Bayreuth Festival. But sitting through several drunken evenings in his little gazebo in a palatial house garden hidden away in Tokyo’s Akasakimits’kei neighborhood, I learned many Honda “proprietary” secrets. [I have been amused to see him quoted extensively in more recent books on Honda; he died shortly after our meetings. But then Ouija boards are a common utility in the book writing profession.]

All this was recalled when The Financial Times recently warned of new problems despite all the huffing and puffing over Dodd-Frank , the latest attempted reform of Wall Street by two legislators too associated with political corruption. The FT said “xxx the vast $6,000 billion over-the-counter derivatives market risks being undermined by potential ‘data caps’. xxx”  Hmmm. A good, old and close friend, despite being an economics professor but luckily not in a business school, tells me: “”xxx These models tend to ‘work’ until there is some kind of structural shift. xxx” English? These models tend to work until they don’t work.” Hmmm.

Dr. James, here we go: 2007-08 here we come [again]!

sws-08-26-11

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Outgoing Joint Chiefs Chairman Admiral Mike Mullen’s bumbling replies to questions by “automated” university students during a mid-July Beijing visit were symptomatic of total disarray in U.S. China policy. Instead of clear-cut defense of no military takeover of Taiwan, with its 25 million the only free society in Chinese history, the Admiral backed into a defense of U.S. policy as if the Taiwan Relations Act were an impediment Washington leadership had difficulty overcoming.

He did not forthrightly defend traditional American support for freedom of the seas in the face of Beijing’s outrageous claims on Southeast Asia waters with their gas and oil prospects through which much of world commerce – including China’s vast exports – flows freely courtesy of the U.S. Navy. Nor did he condemn Beijing’s support for the world’s most hideous tyranny in North Korea. For Pyongyang is not only a threat to regional peace with its buildup of weapons of mass destruction but worldwide through its nefarious exports – in league with the Chinese — to pariah states.

Supplicants for months, Washington’s aim with the Mullen visit was facilitating liaison between U.S. and Chinese military to reduce possibilities of accidental clashes and ventilate Beijing’s rapidly escalating but ultra secret military buildup. But Beijing’s generally boorish response – except for a promise of a Mideast anti-piracy exercise where China has been odd-man out in coordinating multinational operations – inevitably promises more misunderstanding.

That was despite Adm. Mullen carrying a major concession in Washington’s continued refusal to meet Taipei’s request to purchase additional fighter aircraft and submarines. U.S. arms for Taiwan’s defense has become the pretext for Beijing’s rejecting military courtesies, while it pursues a double-edge strategy of economic integration with the Island while positioning one of the world’s largest missile arrays opposite it just across the Strait.

Adm. Mullen’s performance again demonstrates Washington’s lack of a strategic framework given China’s centrality in a rapidly changing world coupled with Beijing’s growing arrogance. Minor but indicative: on the eve of his journey, Adm. Mullen publicly accused the Pakistan government of murdering a journalist. Even had he proof, going public in the Obama Administration’s ill-conceived current media campaign against the Pakistanis only further aggravated relations with Islamabad. Essential as Pakistan is for Washington’s pursuit of the Afghanistan War and worldwide counterterrorism campaign, he played into Beijing’s efforts to exploit U.S.-Pakistan frictions in pursuit of its own alliance with Islamabad against India.

Adm. Mullen’s confusion epitomizes not only the lack of a coherent official U.S. policy toward “a rising China” but parallels increasing difficulties by American entrepreneurs in hot pursuit of the Chinese shirttail. [“If we could only persuade every person in China to lengthen his shirttail by a foot, we could keep the mills of Lancashire working round the clock”, an 1840s British commentator wrote.] Foreign businessmen increasingly must choose between the mythical unquenchable market for investment and trade or eschew exposure to an economy without the rule of law.

As Beijing’s domestic political crackdown intensifies, spurred by fear of contagion from rising popular revolt in the Middle East and Southeast Asia, and the insecurity of next year’s Communist Party leadership generational succession, commercial relations with foreigners are deteriorating. The media focuses on the larger economic issues: China’s perilous growing dollar hoard through its manipulated currency, protected markets and subsidized exports. But increasingly foreign companies are threatened with death by a thousand cuts.

For example, Beijing backed off price blackmail with its rare earths monopoly when faced with sanctions in the World Trade Organization where Washington’s aggressive sponsorship facilitated Chinese entry on unfulfilled promises of compliance. But after announcing exports at last year’s level of its highly contaminating metals production essential for information technology hardware worldwide, Beijing’s arbitrary customs voided contracts.

Even more threatening, suddenly the whole vast, abysmally corrupt, network of foreign investors’ ownership in Chinese companies through local middlemen held corporately in overseas tax havens has come under “scrutiny”. The Chinese had winked at such arrangements for decades as a device to entice but manipulate direct foreign investment. Now these arrangements are being used to freeze out foreign participation in company expansion with transferred technology. Coupled with expanding theft of intellectual property – the latest, French, German and Japanese high-speed rail know-how – Beijing looks to feel there are no holds barred in their seduction of foreign businessmen faced with a worldwide markets slowdown.

sws-07-15-11

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Charlie Chaplin’s suit?

The geopolitical question of the hour: is there a tripwire that will tie together a series of regional crises bringing on another 2007-08 worldwide economic disaster?

Lehman Brothers’ collapse dramatized how enhanced interconnections can tumble through the new world economy with domino effect. But if the world finance mavim know a seminal interrelation of our several bubbling crises, they are not telling us. Meanwhile, the minitheaters percolate:

Europe –There’s growing consensus Greece’s economic collapse is leading to a restructuring of the European Union’s finances with more than 20% of the world’s gross product. Shooting the messenger – the growing attacks on rating agencies which, indeed, are feeding debilitating increases in the cost of debt – doesn’t solve the problem nor do complicated if band-aid solutions. Nor, does it seem likely to this observer, creation of a Eurobond market to absorb growing debt would automatically bring about inspired, problem-solving central European fiscal and monetary direction. [It didn’t with creation of the Euro “common currency”.]

The U.S. – However much the Obama Administration’s stimulus program staved off an even worse crisis – to be argued until the end of the economists’ time, not soon contrary to John Maynard Keynes hopeful prediction the profession would die out – it has run out its string. Public opinion demands curbing deficit spending. But how against pressures of “special interests” [yours’ always are, mine are heaven blessed] is a conundrum taxing the American political system. It‘s a time when parliamentary government – with its ability to bring down a cabinet’s failed strategy instantaneously – is envied. Instead, more than a year’s political mudslinging appears inevitably producing near paralysis. Meanwhile despite widespread denials – including fudging with inventions like “core inflation” – higher prices could couple with stubborn underdemployment/unemployment and an unresolved housing bubble for increasing misery.

China – The cracks, long seen by the few who questioned sustainability of the miracle of “the world’s factory”, are widening. Beijing central planners – despite their rationale only rapid growth could legitimate “Communism with Chinese characteristics” by providing jobs and stability — have curbed unlimited infrastructure expansion which with now slowing exports was the engine of growth. “Creative accounting” takes on new meaning for government banks hiding “non-performing loans” in new set-aside organs now making their own bad loans. Beijing’s inability to “feed” local Party hacks leads them to “squeeze” workers and farmers in turn leading to growing violence. Inflation, especially food where most Chinese live, grows despite monetary devices borrowed from Western systems largely ineffective on what still is a Soviet skeleton.

Japan – The world’s third largest economic power drifts, mysteriously bereft of political leadership, caricatured in its inability to address the destruction of the earthquake-tsunami with characteristic “Yamato Damishi” [fortitude]. In Japan’s hot, muggy summer, only 19 of 54 reactors are operating in the face of anti-nuclear sentiment. With more to shut down, cutbacks of 15% already haunt large electricity customers and boosts expensive fossil fuel imports. Consumer confidence falls to record lows, ominous for Japan’s rapidly ageing population. Government debt, already the world’s highest ratio at 200% of GDP, will rise as Tokyo borrows $100 billion to rebuild and GDP shrinks. Luckily, Tokyo borrows at home at floor-scraping 1.5%. But, Japan, too, has its echo of the American argument: Economy Minister Kaoru Yosano opposes Tokyo selling itself bonds as the Fed and Treasury have done, warning resulting higher finance charges would hit Japanese banks.

But how does it all connect? We saw how Japan’s disaster put a crimp in the manufacturing supply chain from Shanghai to Detroit. But, for example, what call have German and other European banks on their U.S. colleagues if Greece defaults? Japan, which has been lending the world $175 billion annually in investment capital, is out of that business. Nobody wants to talk about the impact on Spain [20% of the EU GDP] if Greece [3% of the EU GDP], followed by Portugal and perhaps Ireland, “goes”. What will that do to Latin America where Spanish banks have invested heavily as the Brazilian boom simultaneously now threatens to go “bust”? Australia’s roaring dollar is already feeling Chinese cutbacks as will all commodities producers, perhaps even the Mideast petrosheikhs.

In one of his serio-comic sequences, Charlie Chaplin’s little tramp starts pulling a thread from his crumpled suit. Before long, his whole miserable costume dissolves. Is there that kind of loose thread here?

sws-07-08-11

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A vicious circle tightens

The globalized economy’s undertow is ripping all around the world.

Even the economic optimists’ two darlings, China and India, are now troubled. Seen as the world’s growth machine [along with a now overheated Brazil] in a period of advanced economies’ stagnation, their downturn produces a universally grim world outlook.

India, now the world’s largest population, had promise to overtake China – perhaps more stable with its veteran private sector and representative government. But inflation threatens with food almost half its consumer index rising to more than 9 percent last month. Prime Minister Manmoham Singh, after all a graduate of Soviet-style Indian planning, has his foot on the brake and gas pedal at the same time. Reserve Bank of India rates force lending for preferred firms to 13 percent and notorious paper-shuffling babus [clerks] hobble initiative, sending Indian coal companies, for example, despite some of the world’s largest reserves, chasing projects from Australia to North America. A spate of influence peddling scandals, including $16-billion in telecommunications, further clouds the scene.

New Delhi’s geopolitical rival, China, has turned its back on its 25-year strategy to prevent destabilization of one-party dictatorship with maximum growth. With incipient inflation, Communist leadership enters a generational succession next year trimming its investment-led behemoth’s sails. Widespread civil violence – despite enormous expenditures for the most elaborate hi-tech suppression machine in the history of authoritarianism – jeopardizes any new tactics. In fact, all the Chinese boom’s contradictory chickens simultaneously are coming home to roost: vast overexpansion of infrastructure feeding the boom [along with subsidized exports] has produced marvels for photographers but a real estate bubble including, literally, empty new cities. There’s growing resentment over second class citizenship and lack of services among more than 200 million migrant labor from rural areas stampeded to coastal cities employment. Declining foreign markets, roaring imported commodity prices [ironically brought on in part by speculation on “unlimited” Chinese demand], wage pressure, competition from export-led cheap-wage producers, monumental corruption, all now threaten “the Chinese model”. Consumption continues to decline as a percentage of domestic product mocking talk of redirecting a growth strategy. A combination of nonconvertibility and hot money chasing an undervalued yuan demonstrates how empty talk of it as an international reserve currency is. Beijing’s capacity for foot in mouth disease is epitomized in its increasing hoard of dollars and Treasury debt [again on the upswing] while officials continuously publicly denigrate the dollar.

So much for “the emerging markets”.

Turning to the developed world, there, too, crises are escalating.

A bureaucratic hassle over the Euro with divergent views in Berlin, Paris, Brussels and Frankfurt is turning into a dragged out effort to save the 17 European Union members’ common currency. Meanwhile other integration efforts — a free labor market and common defense and foreign policy — are faltering. A Greek default could produce a European banking crisis [even contagion for North America]. In other words, a fiscal and monetary crisis is turning into a major political upheaval threatening accepted European patterns. Half-baked intervention in Libya, dragging in NATO and the U.S., was announced in idealistic terms by Europe’s leaders. But it encapsulates European concerns – unlike the increasingly hot American debate over Obama Administration’s opting for “a war of choice”. For Europe “Libya” is linked directly to falling birthrates and need for imported labor and unemployed North African, Middle Eastern and Black African youth almost literally swimming the Mediterranean at a time Muslim immigrant assimilation is increasingly questioned.

Europe faces, too, the fact the world’s window to the U.S. consumer maw which supplied the post-World War II economy not only with unlimited markets but revolutionary technology has a “closed for repairs” sign with no reopening time indicated. Whatever happens after decades of drunken sailor’s spending, there will be no substantial U.S. economic strategy in place until after November 2012. Current Washington debate, if it can be dignified with that title, over raising the debt limit and reducing government spending, is simply a foretaste of the pain necessary to get the U.S. economy – perhaps now sliding into a double-dip recession — back to its historic miraculous production of jobs and expanding markets.

It’s going to be a long hot summer and a grim fall — despite the American sideshow of political shenanigans with the curtain only temporarily coming down on the first [Weiner] scene.

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To deconstruct or not to deconstruct is no longer the question

Increasingly, however reluctantly, Europeans are bellying up to the Eurozone’s ultimate crisis. Talking heads present a dilemma: either the European Community will pick apart its common currency or take radical steps toward a highly centralized economic command.

That’s because a triangle is strangling the Euro: markets faced with the threat bankrupt members of the monetary alliance will default raise the cost of refinancing; northern European taxpayers warn their elected governments they will not continue bailing out southern neighbors; and a plethora of national and international monetary organs desperately maneuver to protect their bloated bureaucracies’ turf by improvising temporary rescues.

Placing even more power into hands of unelected bureaucrats for economic amalgamation would be a giant step. That’s not going to happen because inauspicious as it is for the monetary crisis, widespread political opposition [most of it constitutional and peaceful] to the growing calls for austerity is evidence of grassroots sovereignties as old as the end of the Roman Empire. How difficult they are to assuage has been demonstrated by a half century of tortured progress of The European Project. More apparent daily is the inadequacy of building “Europe” from the top down – even given the vision of Gen. Charles de Gaulle and Chancellor Konrad Adenauer and their technocratic collaborators. Absence of a process such as the American Continental Congress with grassroots representation painstakingly compromising conflicts has led into a blind alley on the economic front, however much limited success has been achieved politically.

Meanwhile, as so often happens, the helter-skelter of daily events obscures the coming inevitable decision. Those include critical happenings on the dollar side of the Atlantic, too. Evidence of the refusal to face up is a proposal by idiosyncratic economics Nobel Prize winner Robert Mundell to fix the dollar to the Euro to anchor the ever more threatening parallel international currency instability. Mr. Mundell might just be defending his original sponsorship of the Euro, a common currency designed to bounce around a dozen different national economic strategies without an overall guiding hand. But pinning fixed prices for rapidly devaluing dollars to disintegrating Euros would be, indeed, rearranging deckchairs on the Titanic.

Early on as it is, it’s rash and, of course, daunting, at this juncture to speculate in a few hundred words implications of the Euro’s demise. But where angels fear to tred, here are some guesses:

  • Whether or not hard-nosed advocates will win out in fostering surgical cutbacks of American government spending in order to save the dollar from being overwhelmed by domestic and international deficits – a question as large as the Euro’s future – the role of the dollar as the international reserve currency is willy-nilly being strengthened. Any talk of massive huge East Asian dollar holdings shifting into Euros – never a real possibility – is now out the window. Talk of a non-convertible Chinese international reserve currency is too idiotic to discuss. We have already been through a failed “supracurrency” experiment of creating the International Monetary Fund’s “drawing rights”. And there may not be enough gold to cover ever-expanding liquidity demands.
  • The attenuation of the Euro crisis unfortunately has elevated its role in the total project for a stable, prosperous, unified Europe. It was, originally, if always highly important, only one of many unification efforts – a common trading market, a common labor/migratory zone, financial, environmental and health regulatory unification, a common foreign policy, a common defense. These have been, at best, only partially achieved just as only 17 – notably excluding Britain with its world finance hub in The City — of 27 EU members adopted the Euro. Always important, the Euro has been exalted to the touchstone for success of unification and its demise therefore now made increasingly catastrophic.
  • The coming Euro breakup coincidentally will partially rehabilitate the U.S. superpower role despite Washington’s obvious economic and geopolitical-military overextension, persistently exaggerated by Pres. Barack Obama’s determined campaign to deflate the American image. That will be coupled not only with hedonistic Europe’s continuing lack of determination to tend its own military defenses but its continuing reliance on the U.S., for example, an American intercontinental anti-missile shield which Washington has no option but to build in pursuit of  its own security.

So, accept: the Euro construct is dead! long live European diversity — the wellspring of Western civilization!

sws-06-03-11

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Soap opera, funds and economic decision-making

Soap opera, funds and economic decision-making

{In the interests of transparency: the writer was deputy chief of mission for the World Bank, Tokyo, 1970-72.]

Whatever the outcome of the bizarre fall from grace of Dominique Strauss-Kahn, the International Monetary Fund’s controversial role has been thrown into sharper focus.

Had Mr. Strauss-Kahn departed voluntarily for loftier climes as French president, he would have been instrumental in choosing a successor. The tradition of a European, chosen by country rather than as an individual, balanced against an American at the International Bank for Reconstruction and Recovery [the World Bank] — often a used politician or bureaucrat put on the shelf — would have been maintained.

Now the Europeans, led by Chancellor Angela Merkel heading that continent’s leading economy, will have to scrabble to retain the “European” sinecure. Growing squawks come from “the developing world” led by the two fastest growing economies, China and India, for more say. Sharp-tongued French Finance Minister Christine Lagarde, with even Chicago law practice in her c.v., is the logical choice to “de-testerone” the Washington headquarters — even though a scandal hovers over her intervention in a Paris tax scandal — after both Bank and Fund  heads have recently been dumped for improper liaisons. In the end, Afro-Asia will probably be assuaged with rejuggling the complicated voting rights, perhaps at U.S. expense with its unencumbered 17%. And the Fund will take on a new persona.

Whatever John Maynard Milord Keynes envisioned in his reorganization of post-World War II world economy, the Fund — he said it should have been called a bank – transmogrified into the international “enforcer”. When regimes, even more successful economies, stumbled, the Fund raced to the rescue with temporary financing. But in the good old days — insulated from the bevy of largely corrupt and useless UN “specialized agencies” – it was a Dutch uncle spooning out bitter medicine with tough love. Coincidentally, the Fund kept Washington from taking on still more onus as overwhelming aid-giver, and therefore recipient of sticks and stones benefactors usually get. Still, attacks came from both left and right, from the remnant “dirigistes” – believers in government intervention if not increasingly discredited Soviet “planning” – and American supply-siders who saw Fund strictures smothering long-term growth.

But just as its twin, the World Bank, increasingly became little more than a soft touch for corrupt third world regimes and purveyor of often questionable research [for example, on China], the Fund’s reputation, too, eroded. It took a nosedive under Mr. Strauss-Kahn, even if he positioned himself on the far right of French socialism [including his well publicized splendiferous lifestyle and his wife’s huge personal fortune]. Contrary to Fund tradition, he voiced more forgiveness for sins of economic governance.

In a sense, the Fund followed the Bank – particularly with the Robert S. McNamara [1968-81] presidency. McNamara, in expiation for his perceived Vietnam War role, shanghaied it from its original financing of long-term infrastructure into “soft” balance of payments lending [a former Fund monopoly] and ephemeral “social” goals. Both bureaucracies, as used to be said of 19th century Hawaiian missionaries, increasingly came to Washington to do good and did well — an overpaid, tax free, highly ideological, self-annointed “priesthood”.

In any case, in a new world of megabillion investment lending through all sorts of new combines – at least before the 1007-8 meltdown – the Bank grew increasingly irrelevant. That was not true of the Fund — as the Euro crisis has proved. European politicians, initially rebuffed Fund participation. They feared, despite Washington’s own problems, it would bring America directly into their family fracas. And they suspected Mr. Strauss-Kahn would try to mitigate North European pressure on their Southern European profligates to straighten up and fly right. In the end, with the hodgepodge of band-aid solutions requiring constant renegotiation for all the myriad European political reasons, Mr. Strauss-Kahn would play a major role. And he publicly did call for more slack when Greek politicians were endangered by austerity many in northern Europe already thought too little and too late.

Selecting a new IMF director is likely to be more than usually messy in always sordid multilateral organization leadership selection. As though the world financial policymakers needed one more problem, l’affaire Strauss-Kahn has injected new indecision into the long goodbye to the European Union’s common currency, postponing getting on with the closely related but perhaps more threatening problem of massive East Asian currency imbalances.

sws-05-20-11

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Keynes, Keynesianism — and Keynesianitis

By William T Alpert and Sol W Sanders

Few would dispute the claim that John Maynard Milord Keynes was a genius.

He was one of a long line of British writers on the political economy, who revolutionized the sport. He was brilliant if sometimes torturous in seeking to explain the riddle of human economic life. Like his British [mainly Scots] forbears, and like their offspring on the Continent who continued the tradition after it had died in Britain, he was a savant of political, repeat, political economy. For they understood as successive generations of practitioners of “the dismal science” often have not, that it is not a science. They also knew that those who use statistics and, may the Lord help us, the new digital revolution, to build their “constructs”, not only to examine but to predict human behavior, will usually fail. Keynes, certainly, understood the “political” part of political economy well before James Buchanan received his Nobel Prize in public choice theory for its “discovery.”

Torturous? Well, at least more than a bit Machiavellian. He rather quickly left his Cambridge colleagues behind, including a homosexual lifestyle, when he ventured into the world. He had minimum truck with the leaders of the chattering classes of his time, the inbred Bloomsbury Set, and even less with the Fabian Society. The latter, of course, thought they had found the ultimate formula for a several hundred years search in utopian, Christian, anarcho, syndicalist, Marxian and other European socialisms. But unhappily, they were completely derailed by the Soviet heresy. For example, H.G. Wells would write a pamphlet not only endorsing but calling Stalin “beloved” on the eve of the Moscow Trials.

Torturous, too, if you are a layman and have tried to struggle through his General Theory of Employment, Interest and Money, generally acknowledged as his magnum opus or through an incredible array of writing — some of it surprisingly good. See for example his The Economic Consequences of the Peace, in which he predicts the disastrous outcome of the Treaty of Versailles.

Machiavellian? Keynes not only put his stamp on the academic world and excelled in the vicious infighting of government bureaucracy but he made a fortune gambling in commodities. A fund he set up for his Cambridge alma mater despite taking a massive hit during the Stock Market Crash of 1929, produced an average increase of 13.2% compared with the general market in the United Kingdom declining by an average 0.5% per annum until 1945.

His contempt for many if not most of his bureaucratic contemporaries was monumental. After the Bretton Woods agreements were signed, the attempt to reset the world’s economies after World War II over which he presided, he snidely told one of his gophers: “The clerks have got it wrong again. The Bank [International Bank for Reconstruction and Development, latterly to be called The World Bank] should have been called ‘fund’, and the Fund [International Monetary Fund] should have been called ‘bank’.”

In his own way, Keynes could be called the father of Europe’s post-World War II miraculous reconstruction. This time his proposal that modest reparations should be sought, that all the powers should unite in rebuilding and with American credits under the Marshall Plan was accepted. They had been rejected when as a young rising star in the British Treasury he had proposed them as early as 1915 and at the Versailles Conference. But Keynes, alas, was not by any means always right!

“The day is not far off”, he wrote, “when the economic problem will take the back seat where it belongs, and the arena of the heart and the head will be occupied or reoccupied, by our real problems/the problems of life and of human relations, of creation and behavior and religion.”

In 2010 we are still waiting.

His reputation, however, has become omnipresent – – spreading even to his self-acknowledged opponents. In 1999, Pres. Richard M. Nixon, having thrown his own primitive economic prejudices to the winds and instituted disastrous wage and price controls, said, “We are all Keynesians now”. But however politically wily domestically or brilliant at international strategy, it’s unlikely that Nixon knew much about what Keynes had in fact argued.

Things haven’t changed. A Greek chorus of the kind of economists who believe econometric models can predict social and political events is once again invoking the Old Boy’s name to bless profligacy.

It is true that Keynes was an interventionist, that he believed government had a role and should employ it, to curb and limit the business cycles which have dominated modern economic life since The Industrial Revolution began with the advent of capitalism — and perhaps before. But Keynes set strict limits on how governments might borrow and toss capital into the machinery to get it up and going again.

Keynes did believe in something he called “socialized investment”, that is public funds/borrowing that had to be made for the general good beyond the normal functioning of the capitalist system. And, if not lick the business cycle, to at least ameliorate it.

He wanted to set up separate budgets — for current accounts and for longer term capital projects which might require government assistance if not sponsorship. That’s something, by the way, that most corporations do today but which the Congress, which so far hasn’t produced this year’s budget. has never undertaken for one of the largest commercial enterprises in the world, the U.S. government.

But he neither believed in general funding of an amorphous public debt through public borrowing and spending, nor of using the tax tables to work out solutions to social problems.

For a man who could twist the English language until it screamed for mercy, he actually made this point very clearly:

The more socialised we become, the more important it is to associate as closely as possible the cost of particular services with the sources out of which they are provided even when a grant-in-aid is also required from general taxes. This is the only way by which to preserve sound accounting, to measure efficiency, to maintain economy and to keep the public properly aware of what things cost. [CW, vol. XXVII,p p. 224-225] As early as 1931 [although it was hardly early for the British who already had endured a painful decade of restoration of the pound to its pre-war status,], Keynes, in a radio address, said:

“[At] the present time, all Governments have large deficits. For government, borrowing of one kind or another is nature’s remedy… for preventing business loses from being, in so severe a slump as the present one, so great as to bring production altogether to a standstill. It is much better in every way that the borrowing should be for the purpose of financing capital works, if these works are of any use at all than for the purpose of paying doles [or veterans’ bonuses]. But, so long as the slump lasts on the present scale, this is the only effective choice for the one purpose or the other [or a diminished Sinking Fund, which has the same effect] is practically inevitable For this is the case, fortunately perhaps, where the weakness of human nature will, we can be sure, come to the rescue of human wrong-headedness.”

“… My own policy for the Budget, so long as the slump lasts, would be to suspend the Sinking Fund, to continue to borrow for the Unemployment-Fund, and to impose a Revenue Tariff. [Author’s note: Few recognize that his The General Theory was written with the assumption of an economy closed to foreign trade – – unlike our own today, but that is the subject for another time.] To get us out of the slump we must look to quite other expedients. When the slump is over, when the demands of private enterprise for new capital have recovered to normal and employment is good and the yield of taxation is increasing, then is the time to restore the Sinking fund and to look critically at the less productive state enterprises.” [Essays in Persuasion, Norton 1963, pp. 161 and 162]

Perhaps even more to the point:

“I should aim at having a surplus on the ordinary Budget, . . . thus gradually replacing dead-weight debt by productive or semi-productive debt. . . . I should not aim at attempting to compensate cyclical fluctuations by means of the ordinary Budget.” The collected writings of John Maynard Keynes, 1971 by Macmillan, St. Martin’s Press, for the Royal Economic Society in [London], [New York] vol. 27 pp 277 – 278.

Maybe Keynes wouldn’t have been a Tea Party-er. But there is little doubt that his mind and heart would not have been with the Dodd-Frank-Geithner spend-until-we- recover crowd who have taken his name in vain. Pres. Barack Hussein Obama’s stalwarts may think they know what they are doing, throwing “stimulus” about – – mostly in the form of supporting and expanding government through national and regional public sector employment. But their claim that it is all following the philosophy of one of the last of the great political economists [rather than today’s econometricians pretending they are] is false.

His ghost must be screaming about the downs at Tilton in Sussex where his ashes were scattered in 1946.

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William T. Alpert, Associate Professor of Economics University of Connecticut is co-founding managing partner of FIDES, Philanthropic Management and Advisory Services, LLC. Formally, Senior Program Officer of the William H. Donner Foundation, he publishes in labor economics. He is Executive Director of the Connecticut Council on Economic Education and Director of the Center for Economic Education at the University. He serves on several not-for-profit boards of directors. Alpert previously taught at Lehigh University (1981-83), Washington University, St. Louis, (1977-81), and Columbia University (1973-77). Alpert earned his Ph.D. M. Phil. and MA degrees (Economics) Columbia University and AB from Lehigh University.

Sol W. Sanders A 60+-year career in writing and political analysis for a wide variety of media and corporate entities, currently columnist THE WASHINGTON TIMES  [“Follow the money $£ € ¥ “], website http://www.yeoldecrabb.wordpress.com Author: A SENSE OF ASIA,  HONDA: THE MAN AND HIS MACHINES, MEXICO: CHAOS ON OUR DOORSTEP, THE COSTA RICAN LABORATORY,  LIVING OFF THE WEST: GORBACHEV’S SECRET AGENDA AND WHY IT WILL FAIL, A MEDIA GUIDE TO THE CANADIAN CRISIS,  THE U.S. ROLE IN THE ASIAN CENTURY, [Ed.], TV documentary “The Silent Invasion” (illegal immigration), MITSUBISHI ELECTRIC: THE CHALLENGE OF GLOBALIZATION,executive editor, GLOBAL AFFAIRS, over the decades op‑ed articles in THE WALL ST. JOURNAL, THE CHRISTIAN SCIENCE MONITOR, THE STRATEGIC REVIEW, ASIAN AFFAIRS, THE NEW LEADER, CONFLICT, SURVEY.

Institutional Risk Analyst

April 20, 2011

http://us1.irabankratings.com/pub/IRAStory.asp?tag=476

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Back to basics: food

Brace yourself: the neo-Malthusians will soon be in full cry, warning population is outrunning the world’s food supply. Like Washington dealing with China, there’s no cool approach: either experts tell us we are drowning in surpluses, or humanitarians warn eminent starvation awaits because of diminishing cultivable land, water shortages, unsustainable/unhealthful hybrids, or “peak oil” eliminating cheap petrochemical fertilizers.

Whatever long-term arguments, it’s clear that rather suddenly, rising food prices based on short-term shortages, have become political dynamite. And fiscal policies – “quantitative easing” as the Fed calls it, printing money for the rest of us – have exacerbated the problem by detouring investors and speculators into bidding up commodities, not least food.

You don’t have to be an economic determinist to see geopolitical results:
Mexico, facing near chaos in its effort to control narcoterrorism, last week dived into corn futures. It’s no secret other countries – China, if sneakily – have bought grain futures to assure an adequate supply. But that Mexico announced it was obviously an effort to add propaganda to its insurance against the possibility of a “tortilla crisis”, which almost totaled earlier administrations when corn shortages for that basic Mexican foodstuff pushed inflationary price levels.

India, whose fragile coalition government under that old planner turned marketaraian, Prime Minister Manmohan Singh, under fire for a series of mega-trillion-rupee financial scandals, now faces rising food prices – and an onion shortage! Mumbai’s roaring markets continue producing near double-digit gross domestic product [GDP] growth. But on Indian development’s dark side is 600,000 villages – many of them hardly monetized – still facing food insufficiency. Eleven out of 19 states have more than 80% anemia with children under five suffering stunting and brain damage.

China, too, has had to turn away, from its monomania for creating jobs. One high official [if now retiring] has written what the rest of us knew: among other follies, municipalities just dig holes and fill them in to boost their “required” GDP contribution. Beijing acknowledges an inflationary spiral may be taking hold, led by food prices. And no one remembers inflation’s threat to past regimes as vividly as Chinese officials [and the Germans]. China has been forced to draw down food reserves. Beijing planners’ dilemma is opening up food imports – perhaps by unleashing the undervalued yuan – would help solve the problem. But having starved the agricultural sector of resources, freeing imports would bring disaster to remaining impoverished farmers. [Their Japanese neighbor spends 5 trillion yen –$63 billion — annually to stockpile over 2 million tons of domestic rice with a 778% blocking import tariff; it’s unlikely a new “rice bread” will help with consumption dropped by half over the last 40 years.]

Then there is North Korea [with its miniscule pampered elite] diverting resources to the military. Whatever else Pyongyang’s rambunctious actions are intended to achieve, renewing a magnanimous South Korean, Japanese and American food dole would be part of any bargain – assuming one is possible – to halt their weapons of mass destruction production. Meanwhile, after famine starved more than a million people in the 90s, more than six million of North Korea’s 23 million now exist at near starvation.

Nearer home, any American housewife [or her househusband] will tell you food prices are rising. It’s true most Americans can – if they would avoid obesity – eat better than ever. [My rural Virginia Walmart has everything from Kosher salami to Greek phyllo and I count on their fabled inventory control to know they can sell it along with questionable Chinese frozen fish.] But with no “banana war” between the EU and Central American exporters, our local prices went from 32 cents to 42 cents over the summer. Is rising food prices a harbinger of incipient inflation from gigantic “stimulus” outlays – continued in the Lame Duck Congress despite the cautions of Nov. 2nd elections?

Nor is there sweetness and light on the supply side. Wheat prices on the Chicago grain market advanced 47% this year. That’s because Russian drought spurred the Kremlin to ban exports. Ukraine is dragging its feet with grain export quotas. Weather in Argentina whittled down the corn crop [world’s No. 2 exporter] and soy beans [world’s No. 3 exporter]. Australian wheat production will be half normal because of rains and floods. Market trackers say it’s too early to call but predict an allover “mixed” harvest in the 2011-12 cereal season but guestimates already are affecting 2010-2011 prices.

Insane food subsidy politics, of course, continue. Nothing is as idiotic as the U.S.’ effort to supplement fossil fuel with ethanol, alcohol from corn. Imports rise, of course, because Washington slaps new restrictions on drilling. But one year’s ethanol for the average American car requires 11 acres of farmland, otherwise feeding seven people. Adding injury to insult, some of the new hypereconomical engines reject ethanol as an inadequate fuel. Yet Washington subsidizes ethanol including exports to Europe while maintaining high tariffs against Brazil’s subsidized bagasse [sugar cane byproduct] ethanol imports.

Food problems, like death and taxes, apparently will always be with us – but at times contributing mightily to existing problems.
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Unholy international economic alliances or just hook-ups

While the G20 world’s largest economies yammered through the night in Seoul, the European Union’s common currency headed toward a new crisis. These Euro developments threaten “the European project”, continental unification to prevent war and encourage prosperity. They could also frustrate worldwide recovery, crippling the world’s largest [$20 trillion] 27-country market and $4 trillion trans-Atlantic sales. For all the hyperbole about “emerging markets” and intra-Asian trade, Europe and the U.S. represent half the world’s gross domestic product even if recently they have not spurred growth.

But it’s clear why no G20 palliatives were forthcoming. What Seoul exhibited was a cat’s cradle of interest crosscurrents unlike post-World War II working alliances. Only temporary congruities do not encourage long-term strategies. And, to continue our metaphor, there will be no flip of the wrist to bring the strings back into geometric order.

Of course, there were lots of G20 coteries. One based on belief in international payments imbalances as the root of all current world economic evil found the deficit countries, led by the U.S., naming China as public enemy No. 1. But other export-led surplus economies — Japan, South Korea, and even Germany — were having none of the remedy proposed by Sec. Timothy Geithner for curbing record-breaking dollar hoards. The U.S. was leading the pack, too, for greater market access – especially against Beijing’s restrictions. And Washington found allies in hypocritically protectionist India [its rapidly increasingly bilateral China trade stung by cheap imports], and German, French, and British exporters. But it ran up against the great stonewall of China, with Beijing going into the meeting recording a new record trade surplus despite dimming foreign markets.

It was the Fed’s efforts to reverse domestic deflation with another $600 billion “stimulus” that made it the butt of all and sundry. They feared any American market growth would be offset by a cascade of liquidity into their coffers. China worried about “hot money”, sitting in real estate, waiting for an “inevitable” reevaluation Beijing now adamantly rejects. South Africa feared inflows would produce inflationary noncompetitive prices for exports. Brazil already threw up surtaxes to fend off speculators, punishing investors.

The Fed Chairman Ben Bernanke might be poopoohing inflation possibilities. But the People’s Bank of China [with questionable success] was trying to stave off higher prices, particularly in food, as was India. The Mideast oil producers worried Fed action would reduce further the value of petrodollars as speculators bid up oil along with gold and copper — and grain in what looks like a world shortage. And that worried China as its “world factory” was the second biggest oil importer and largest customer for iron ore and other raw materials.

But Beijing, already grimly engaged in 2012 succession struggles inside the Forbidden City, unfathomable to “long noses” outside, nevertheless exhibited hubris unheard since the Japanese were perceived as 10-feet-tall in the 1970s. China’s boasting over continuing growth and stability was contagious: a Hong Kong bank analyst suggested the yuan – a non-convertible, overvalued, nonmarket currency under no monetary controls worth the name – might blossom into “redbacks”, a new international reserve!

Meanwhile, the EU had its own little incestuous currency war. After breathing a sigh of relief with last spring’s successful Greek bailout, bankruptcy had new wrinkles. Chancellor Angela Merkel, head of a shaky coalition playing to her ultraconservative German polity, plotted for a new emergency. But she unnerved the markets by publicly demanding commercial banks should take some of the “hit” — if and when — with a preordained “haircut” for their bond holdings. Fair dinkum, as the Australians say; why shouldn’t the principal beneficiaries of speculative lending take their losses too [along with taxpayers] when the game collapses? But the rub was her talk of new banking risks raised costs for struggling Ireland, Portugal, and a politically unstable Spain, already desperately trying to refund their debts to stay in the Euro.

Furthermore, the severe austerity nanny governments were now plying [as in Athens] might not be enough even though they were perilously close to endangering their officeholders. That old leader of Continental fads, French mobs, were again playing out Frederick Engels’ saw about Louis Napoleon and the repetition of history, “the first time as drama, the second time as farce”, trying to repeat the 1968 student revolution. More seriously, there had always been the threat cutbacks would not only trim fat but with higher taxes [or just collecting from notoriously recalcitrant Greek taxpayers] might stunt growth. Growth, after all, would be eventually the only way out of the morass.

It was all very well for The Financial Times always politically correct interviewers to quote a young Portuguese on why he “could not imagine life without the Euro”. But increasingly there seemed a choice: either the southern Europeans would drop back to national currencies gaining an ability to maneuver separately from Germany’s Euro interests, or some sort of two-tiered Euro monstrosity might be cooked up by the ever clever-by-half — but seldom realistic — Brussels bureaucrats that concocted the Eurostein in the first place.
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Trade, technology and security

After the Pearl Harbor catastrophe, a sardonic joke made the rounds: “Well, we did get the Third Avenue El back!” The dismantled elevated railroad along Manhattan’s Upper East Side had been sold as scrap, part of a roaring bilateral trade – and Tokyo’s armaments building.

An often repeated cliché holds thriving commercial relations ultimately produce mutual understanding, preventing wars. Its most obvious refutation is France and the German states, Europe’s most interlocked economies, went to war in every generation for 1,000 years. Escalating trade frictions partly led a stubbornly isolationist America into World War II on Dec. 7, 1941.

In contrast, the U.S. generally had accepted Beijing’s affirmations that it was entering the world arena cautiously. [Old Deng Hsiaoping, China’s Maximum Leader, warned his comrades to take it easy until they had achieved his four modernizations, including the military.] Not to do so, it was argued, would be a self-fulfilling prophecy producing a belligerent China. There was Taiwan which Mao Tsetung once said should determine its own destiny. Beijing now claims it and Washington promised to prevent an armed takeover. But American optimism was, counter intuitively, dominant even in Navy circles at Pearl. [One admiral said “Taiwan is the *x/&% in the punchbowl”; another suggested since operating an aircraft carrier was a very complicated business, the U.S. Navy would be willing to lend the People’s Liberation Navy a hand in learning the ropes.]

But rapid expansion of Beijing’s military against an undesignated enemy has now to be taken into account. Chinese Communist spokesmen have abandoned public assurances that – unlike Germany and Japan’s late aggressive emergence in the 19th century as world powers – China’s would be “a peaceful rising”. Instead, its military throws down aggressive public challenges. And there appears a campaign to test the waters: the fishing trawler “bumping” Japanese coastal patrols in the Senkaku [Diayou] Islands was too near U.S.-Japan Self Defense Treaty bases in Okinawa for comfort. And Washington finds itself begging for “routine” communication between the two militaries to avoid just such untoward incidents.

But U.S. rhetoric, too, has changed. Sec. of State Hillary Clinton has sided with the Southeast Asians against Beijing claims in the South China Sea – some are 3,000 miles from Mainland China athwart one of the world’s most important commercial arteries. Finessing a bit, Washington said it recognizes Japanese occupation of the uninhabited Senkakus [under the U.S. reversion to Japan of Okinawa] but not necessarily sovereignty. However, Washington has reiterated its protective nuclear umbrella covers Japan against all comers, including China.
Increasingly these Pacific strategic problems are indistinguishable from trade issues. China’s “world factory” provides cheap merchandise to the advanced economies and gorges on imported raw materials. But Beijing’s subsidized exports threaten other countries’ manufacturing bases. Its retrograde consumption [7% of this year’s first nine months growth compared to 25% in capital plant expansion] lies behind its discombobulating role in international payments.

There is new drama in the U.S.’ growing dependence – along with other industrial partners – on Chinese components and raw materials, not only essential to consumer products but critical for military hardware. Beijing has blocked rare earth shipments to Japan, after threatening to slash total exports. Rare earths, minerals used in electronic gear, are not all that rare but production elsewhere had closed down in the face of costly environmental constraints. China throws caution to the winds on that score as in other industrial waste problems. And there is “dumping”, below cost sales undercutting other producers, later to bound back with a monopoly and higher prices. This time Beijing just may have shot itself in the foot for even the Congress is bestirring itself to get old production going – if need be with subsidies.

Equally worrying is China’s ability to use its stock of growing dollar debt to invest and trade, including in the U.S., sometimes aimed at critical infrastructure. [The trade surplus is again on the upswing with the $65 billion for the third quarter more than the two earlier quarters combined.] A Chinese telecommunications company, using an American front, is bidding for transmission towers including those servicing national security agencies. With their rapidly improving technology and subsidies, Beijing could undercut other bidders. Since the firm emerged from the Chinese military, the suspicion that it might be more than a commercial venture is at least plausible. The possibility of imbedded “spyware” had long been a concern with increasing dependence on China for PCs and chips, even before “the Stuxnet worm” – allegedly spearheaded by Israeli technicians — sabotaged the Iranian nuclear weapons program, initiating a new era in cyberwar.

When a government-owned oil company – there is, in fact, little distinction among China’s major firms – buys into a U.S. company with new shale gas technology in what could be the coming major fossil fuel, is it just another commercial transaction?

These examples highlight a whole new set of questions which will dog the Administration and cut across currents in the new congress, already facing the momentous Chinese trade conundrum.
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